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Considering a 1031 Exchange for your Investment Property? 8 Things Real Estate Investors Need to Know - Boston, Dedham, MA

Joseph Coupal - Wednesday, September 14, 2016

By Steven J. Brooks

We get asked about so-called Section 1031 exchanges all the time. Section 1031 of the Internal Revenue Code is a valuable tool that allows you to defer payment of taxes on a gain from the sale of investment property, if you reinvest those proceeds into a new property and adhere to the code’s requirements. If done properly, real estate investors are allowed to retain the gains from their investments, and defer their capital gains tax liability (potentially forever).

1. 1031 Exchanges Are Tax Deferred, Not Tax Free. When you transfer the basis from one investment property to another, you preserve the gain for recognition later. When the replacement property is eventually sold (not part of a later exchange), the original deferred gain plus any additional gain from the sale of the replacement property, is subject to capital gains tax.

2. Taxes May Be Deferred Forever. There is no limit on the number of 1031 exchanges you can do. So, you can roll the deferred gains on an investment property over and over again, and can eventually even pass the real estate investments to your heirs. The total of all these capital gains properly accumulates, and would of course be due if you were to sell the asset during your lifetime. But if the property passes to your heirs, they receive a step-up basis (meaning that their inherited basis is the fair market value of the asset at the time of your death), and will never have to pay the accumulated gain. Depending on the amount accumulated, this method could be used to lawfully avoid paying a significant amount to the IRS.

3. Section 1031 Does Not Apply to Primary Homes.  You can only use a Section 1031 for investment and business property. But it is not limited to real estate investments. It may be used for personal property, like a valuable painting, or gold coins. Certain types of property are specifically excluded from Section 1031 treatment. Examples are stock shares, equity securities in a corporation, partnership interests, and shares of trusts.

4. Exchange Must Be “Like-Kind.”  Properties swapped in a 1031 must be of “like-kind,” but the definition is broad. It refers to the use of the properties — both the old and new must be used for investment or business purposes. You don’t have to exchange an apartment building for another apartment building — you can swap for undeveloped land or an office building (or multiple buildings), as long as they are investment properties.

5. Beware of Strict Time Limits. While sometimes a 1031 exchange is a simultaneous closing on the sale and purchase, this is not required. But you must meet two strict time limits or will be required to pay taxes on your gain:

(a) Within 45 days of the date you sell your property, you must identify potential replacement properties in writing to the qualified intermediary who is holding the proceeds from the sale of the old property; and

(b) You must complete the replacement property exchange transaction (that is the closing on the purchase) no more than 180 days after the sale of the exchanged property, or the due date (with extensions) of the income tax return for the tax year in which your relinquished property was sold, whichever is earlier.

6. You Cannot Touch The Cash from The Sale of Your Property. Taking control of the proceeds from your asset sale before the exchange is complete will likely disqualify the entire transaction and make the gain immediately taxable. The best way to avoid the receipt of proceeds is to use a qualified intermediary to hold those proceeds until the exchange is complete.

7. Size Matters. The size or value of the investment in the replacement property must equal or exceed the net proceeds received from the sale of the property you give up. Any net proceeds you receive that are not reinvested are treated as capital gain for tax purposes. The value of liabilities you assume with the replacement property, such as amount of the mortgage on the replacement property, must equal or exceed the value of the liabilities you relieve yourself of when you dispose of your old property.

8. You May Name Multiple Replacement Properties. IRS rules allow you to name more than one replacement property. You may name up to three properties, without regard to their fair market value, so long as you close on one of them within the 180-day time period. Alternatively, you can name any number of properties as long as their fair market value at the end of the identification period does not exceed 200% of the fair market value of the old property as of the transfer date.

The 1031 Exchange has been described as the most powerful wealth-building tool still available to taxpayers. Given that capital gains taxes typically run between 15% and 30%, it is easy to see why its use has been a major part of the success strategy of numerous investors. If you have questions about this for a real estate attorney, or about any other aspect the buying or selling process, check out our website www.brooksandcrowley.com, or contact us.

What Real Estate Brokers Need to Know About The New Drone Regulations - Boston, Dedham, MA

Joseph Coupal - Monday, July 25, 2016

by Steven J. Brooks

Aerial photos are becoming commonplace in real estate listings and promotional materials.  Drones are an inexpensive way to take great aerial shots for publication, but next month the government’s new commercial drone regulations take effect.  If you’re going to use drones for real estate listings, here is what you need to know about the new regulations in order to make money and stay out of trouble.

Drones, officially known as “Small Unmanned Aircraft Systems” (sUAS) are going to be regulated by the Federal Aeronautics Administration beginning August 29, 2016.  The new regulations have three sections which cover (1) Pilots, (2) Aircraft, and (3) Operation of the drones.

Pilots. Pilots must be at least 16 years old, complete a sUAS online training course provided by the FAA and pass an initial aeronautics knowledge test, and be vetted by the FAA in order to be issued a Remote Pilot Airman Certificate.  The cost for this testing at an approved testing center will be around $150.00, and the certificate process is expected to take several months. There are 9 testing sites in Massachusetts. Here is a link to the list.

The knowledge test covers:

  • Applicable regulations relating to small unmanned aircraft system rating privileges, limitations, and flight operation
  • Airspace classification and operating requirements, and flight restrictions affecting small unmanned aircraft operation
  • Aviation weather sources and effects of weather on small unmanned aircraft performance
  • Small unmanned aircraft loading and performance
  • Emergency procedures
  • Crew resource management
  • Radio communication procedures
  • Determining the performance of small unmanned aircraft
  • Physiological effects of drugs and alcohol
  • Aeronautical decision-making and judgment
  • Airport operations, and
  • Maintenance and preflight inspection procedures

Aircraft. The new rule covers all drones that weigh between .55 and 55 pounds.  All such vehicles must be registered with the FAA and bear a registration number. The registration fee is $5.00. Failure to register an unmanned aircraft may result in regulatory and criminal penalties.

Operation.  To comply with the rule, the pilot:

  • Must fly in Class G (uncontrolled) airspace
  • Must keep the aircraft in sight (visual line-of-sight)
  • Must fly under 400 feet
  • Must fly only during the day
  • Must fly at or below 100 mph
  • Must yield the right of way to manned aircraft
  • Must NOT fly over people not directly participating in the operation of the sUAS
  • Must NOT fly from a moving vehicle

Not surprisingly, there are various penalties attached for failure to properly operate drones, and severe criminal sanctions for serious offenses, such as interfering with a flight crew. The complete text of the new regulations may be accessed here.

In order to avoid problems, a real estate agent should obtain written permission before flying a drone over a client’s property (at a minimum, have a clearly-written email exchange with the owner).  Always stay as close to the client’s property as possible so as not to surprise or discomfort neighbors, and avoid any drone photography if you expect to have people visiting the house around the same time.

Although no businesses want more regulation, it does appear that the new rule is straightforward and fairly easy to comply with.  Once the registration and certification process is complete, it’s up and away!

Steven J. Brooks is a partner with Brooks & Crowley LLP, a real estate and personal injury law firm with offices in Boston, Dedham, and Norwood, Massachusetts.  Steve may be reached at 781-251-0555 or stevenbrooks@brooksandcrowley.com.

Solar Panel Leases: What You Don't Know May Slow or Stop Your Real Estate Sale - Boston, Dedham, MA

Joseph Coupal - Thursday, July 07, 2016

by Steven J. Brooks

Every year, more homeowners install solar panels for their home's energy.  Harnessing the sun's energy to help power your home certainly seems like a positive thing.  But having a leased solar panel system or Power Purchase Agreement (“PPA”) could hamper or defeat the sale of your property.

How Solar Leases Work

Solar leases and solar PPAs are similar to renting a solar panel system for the home.  The owner enters into an agreement with the solar leasing company that entitles the owner to the benefits of the system (the energy that the solar panels generate) for the term of the contract, which is generally around 20 years.  Under these arrangements, the solar leasing company owns and maintains your solar panel system, so it, not the homeowner, is entitled to all the rebates, tax breaks, and financial incentives that are available for the solar panel system.  Consumers may indirectly benefit from those savings through lower electricity rates.

While the terms “solar lease” and “solar PPA” are often used interchangeably, there is a difference between the two arrangements.  With a solar lease, the lessee agrees to pay a fixed monthly lease payment, which is calculated using the estimated amount of electricity the system will produce, in exchange for the right to use the solar energy system.  With a solar PPA, instead of paying to rent the solar panel system, the lessee agrees to purchase the power generated by the system at a set per-kWh price.  Many of these agreements call for zero money down, with an expected average savings of 10-30% on utility bills. In most cases, the rate will increase by 1%-3% every year.  All of this is fine if an owner is planning on staying in the home until the end of the lease term in 20-25 years, but what if the owner wishes to sell the home?

Issues with Buyers

Despite the advertised benefits, many buyers will want the seller to buy out the remaining lease for them. This could cost $20,000 or more, depending on the contract.  When the solar panels are leased and not purchased by the homeowner, many buyers will view this as a negative feature rather than a positive one.  Like any leasehold, the solar panels are the property of the lessor and not the lessee, so the buyer must now assume the lease payments for the remainder of the term.  Buyers are often worried that the equipment will have maintenance costs or will become obsolete over time, or simply believe that the leases are really bad deals.

If an assumption is agreed-upon, the buyers need to qualify for their own lease, meaning having a high enough credit score to do so.  Many buyers with credit scores in the 600’s won’t qualify to assume the lease, regardless of their desire to.

If you are listing your house, it is important to contact the leasing company ahead of time to learn about the transfer and/or buyout options. This way, you can be ready with a copy of the agreement and the options, rather than being caught off-guard later.

Given the significant difference in seller cost between buyers assuming the lease and the seller having to pay it off at closing, it is important for the listing agent to note the existence of the solar panel system and whether it is leased or owned, in order to avoid misunderstandings later. The obligations of the parties regarding the solar panels should be addressed in the offer or purchase and sale agreement. If the buyer is assuming the lease, the mortgage lender will typically include the monthly payment for the system in the buyer’s qualifying ratios for the mortgage. This is because, even though the property does not belong to the homeowner after closing, it is an ongoing obligation. However, the value that the bank would loan on is not increased because the leased panels are personal property owned by someone other than the homeowner, so they are not included in the appraised value.

Issues with Lenders

In 2016, Fannie Mae came out with new requirements for its mortgages where solar panels are on the property. If the owner of the property is the owner of the solar panels, standard eligibility requirements apply for the appraisal and the insurance coverage etc. If, however, the solar panels are leased from or owned by a third-party under a power purchase agreement (PPA), the requirements are:

  1. The solar panels may not be included in the appraised value of the property;
  2.  The property must maintain access to an alternate source of electric power that meets community standards;
  3. The monthly lease payment must be included in the debt-to-income (DTI) ratio calculation unless the lease is structured to (a) provide delivery of a specific amount of energy at a fixed payment during a given period, and (b) have a production guarantee that compensates the borrower on a prorated basis in the event the solar panels fail to meet the energy output required for in the lease for that period.  Payments under power purchase agreements where the payment is calculated solely based on the energy produced may be excluded from the DTI ratio;
  4. The lease or PPA must indicate that any damage that occurs as a result of installation, malfunction, manufacturing defect, or the removal of the panels is the responsibility of the equipment owner and the owner must be obligated to repair the damage and return the improvements to their original or prior condition (for example, sound and watertight conditions that are architecturally consistent with the home);
  5. The owner of the solar panels agrees not to be named loss payee (or named insured) on the property owner’s property insurance policy covering the residential structure on which the panels are attached.  As an alternative to this requirement, the lender may verify that the owner of the solar panels is not a named loss payee (or named insured) on the property owner’s property insurance policy; and  
  6. In the event of a foreclosure, the lease must state that the lender or its assignee has the discretion to either terminate the lease agreement and require the third-party owner to remove the equipment, become without payment of any transfer or similar fee the beneficiary of the borrowers lease agreement with a third-party, or enter into a new lease agreement with the third party under terms no less favorable than the prior owner.

Given these underwriting requirements, it important that the lender obtain a copy of the lease or PPA agreement for the underwriter to review during the mortgage approval process.  The good news is that, while most solar lease agreements written before 2016 did not meet all of the above requirements, the solar companies we have dealt with have been receptive to amending their agreements. In every instance where we have asked, they have sent lease amendments within a day or two.

Bottom line is, if you have an existing solar lease or are considering one, it is very important that you understand the long-term obligations involved. Many homeowners are being convinced that leasing solar panels is a great deal because they don't have to put any money down. The problem is the long-term effect of the leases on the ability to sell the property. It is very important to read all of the details of the contract. And if you don't understand them, have someone explain them to you. Given the various plans that are available, taking the time to compare your options is crucial.

For more information about real estate matters, check out our website at www.brooksandcrowley.com, or contact us.

FHA MORTGAGE: THE RULES GOVERNING MINIMUM PROPERTY STANDARDS COULD PREVENT YOU FROM BUYING THE HOME YOU WANT - Boston, Dedham, MA

Joseph Coupal - Monday, June 06, 2016

by Steven J. Brooks

Homebuyers who are financing through a Federal Housing Administration (FHA) are often surprised to learn that the property they are hoping to buy does not meet FHA requirements. The most common question that loan officers hear is why can’t buyers can purchase the homes they want, as long as the appraised value is high enough?


All of this relates to protection for the mortgage lender.  Since the property is furnished as collateral for the mortgage loan, if the borrower defaults on payments, the lender will eventually foreclose. Since it takes the house for sale to a third party, it needs to recover as much money as possible to replace the funds that it lent out.

Requiring that the property meet minimum standards protects the lender because it typically means that the property is easier to sell, and at a higher price in case of a foreclosure. The FHA requires that properties that it guarantees mortgages for have minimum standards for safety, security, and soundness.

Once the loan is applied for, an appraiser is sent out to observe and document the property's condition in a written form.  The appraiser describes the basic features of the property, such as the year it was built, square footage, number of rooms and the like.  The appraiser must "describe the condition of the property (including needed repairs, deterioration, renovations, remodeling, etc.)" and asks, "Are there any physical deficiencies or adverse conditions that affect the livability, soundness or structural integrity of the property?"

The FHA does not require the repair of cosmetic or minor defects, deferred maintenance and normal wear if they do not affect the safety, security or soundness. Examples of such problems include missing handrails, cracked or damaged exit doors that are operable, cracked window glass, minor plumbing leaks (such as leaky faucets), defective floor finish or rugs, and worn out countertops.

But there are many areas where the FHA does require problems to be remedied ahead of time in order for the sale to close. Here are some of the most common issues that will require correction before the closing:

Peeling paint
This is the most common issue.  For all homes built before January 1, 1978, the inspector will check all interior and exterior surfaces for chipping, peeling, and flaking paint. These surfaces must be scraped and repainted with a minimum of two coats of paint that closely matches the surrounding areas.

Exterior
There must be proper drainage away from structure (1% slope for 5’ from building)
Minimum clearance of 6 inches from any wood to soil
Facia / soffits must be free of wood rot (treated, repaired & painted)
Gutters and down-spouts must be functional
Air conditioning compressor (if present) must be expected to last at least two more years

Electrical and Heating
The electrical box should not have any frayed or exposed wires.
All habitable rooms must have a functioning heat source

Roofs
The roofing must keep moisture out.
The roofing must be expected to last for at least two more years.
The roof cannot have more than three layers of roofing.
If the inspection reveals the need for roof repairs and the roof already has three or more layers of roofing, the FHA requires a new roof.
The attic must be properly ventilated.

Basement or Crawl space
There must be proper access and ventilation, with a minimum of eighteen inches of clearance from floor joists to soil).
No evidence of major moisture build-up
Wood rot, mold and fungus must be removed, treated, and the areas repaired.

Water Heaters
The water heater must meet local building codes, and must convey with the property.

Hazards and Nuisances
Contaminated soil
Proximity to a hazardous waste site
Oil and gas wells located on the property
Heavy traffic
Airport noise and other sources of excessive noise
Proximity to high-voltage power lines
Proximity to a radio or TV transmission tower

Property Access
The property must provide safe and adequate access for pedestrians and vehicles, and the street must have an all-weather surface so that emergency vehicles can access the property under any weather conditions.

Structural Soundness
Any defective structural conditions and any other conditions that could lead to future structural damage must be remedied before the property can be sold. These include defective construction, excessive dampness, leakage, decay, termite damage and continuing settlement.

Asbestos
If an area of the home contains asbestos that appears to be damaged or deteriorating, the FHA requires further inspection by an asbestos professional.

Bathrooms
The home must have a toilet, sink and shower.

So, what is a homebuyer to do if they want to buy a property that has one of these problems?  Try to work something out with the seller, and ask the seller to make the repairs. If the seller cannot afford to make the repairs, the purchase price may be adjusted so that the seller will recoup the repair money back at closing. Another option is for the buyer to address the repairs before the closing. We see this primarily with peeling exterior paint, where the seller allows the buyer to come onto the property and scrape and paint areas flagged by the appraiser in order for the deal to go through. Obviously, there’s the risk that the buyer will lose out on the time and expense dedicated to address the issues if the purchase does not happen, but if the buyer wants the house this sometimes is the only option to keep the deal together.

If the seller is the bank (an REO sale), they may not be willing to make any repairs. In this case, the deal is likely dead, and the property will have to be sold to either a cash buyer or a non-FHA buyer whose lender will allow them to buy the property in its existing condition. The only remaining options would be to apply for a FHA 203(k) loan, which allows the purchase of a fixer-upper with significant issues, or to keep looking.

At Brooks & Crowley, we close dozens of loans every month, and have relationships with some of best lenders in the business.  We can answer your questions, and put you in touch with the right lender for your needs.  Call us anytime.

REAL ESTATE BROKERS BEWARE: MASSACHUSETTS LAND COURT RULES THAT A TEXT MESSAGE FROM AN AGENT IS A WRITING, CREATING AN ENFORCEABLE CONTRACT FOR AN OFFICE BUILDING SALE

Joseph Coupal - Tuesday, May 31, 2016

by Steven J. Brooks

A Massachusetts Land Court judge has ruled that a text message can satisfy the Statute of Frauds and seal a real estate transaction.

As reported in Massachusetts Lawyers Weekly, the parties spent a month haggling over the sale of a Danvers office building.  The seller believed it was free to accept another party’s offer and proceeded to enter a written purchase-and-sale agreement and set a tentative closing date.  But the first purchaser thought it had a binding contract to acquire the property, based on a text message that the seller’s agent had sent to its own. The text message said that the buyer just needed to sign copies of a letter of intent and deliver a deposit check, which it did, only to learn that the seller later signed a purchase and sale agreement with another party.

The first buyer filed a complaint with Land Court seeking to enforce what it felt was a binding contract, along with a restraining order to block the other sale. The Land Court judge agreed, and entered an indefinite restraining order blocking the subsequent sale.

In deciding whether a text message could satisfy the longstanding Statute of Frauds requirement that a real property deal be memorialized in writing, the judge relied on precedent from cases involving email.  In the intervening decade, the use of email “has advanced immensely and become commonplace,” he noted.  In the case before him, the judge said, the text was “a writing,” and similarly, when “read in the context of exchanges between the parties, it contains sufficient terms to state a binding contract.” The case is St. John’s Holdings, LLC v. Two Electronics, LLC.

The lesson for attorneys and real estate agents is to take great care when sending text messages and emails during negotiations.  Where attorneys and agents can add written disclaimers to their email signatures stating that that electronic communications will not create a binding contract until a formal offer is executed, this is not possible to do with simple text messages.  So, especially where parties have been in negotiations for a time, and the material terms of the deal have been discussed, agents need to pay significant attention to this relatively informal means of communication that may unwittingly seal the deal.

For more information, contact Steven J. Brooks at Brooks & Crowley, LLP.

IN THE MARKET FOR A NEW HOME? THE TEN MOST COMMON HOME INSPECTION PROBLEMS YOU NEED TO KNOW ABOUT - Boston, MA

Joseph Coupal - Wednesday, May 04, 2016

By Steven J. Brooks

Spring is finally here, and more home inventory is coming on the market.  Unless you are a contractor or intend to tear the house down, it makes sense for you to hire a professional home inspector to check all the systems in the house. By attending the inspection (everyone should), you will learn a great deal more about the house. Once the inspection is done, the findings will be provided to you in a written report. If there are big issues, these often serve as the basis for either the seller to have them addressed prior to the closing, or to agree to provide you with a credit at the closing.  Sometimes, in the case of severe issues, you may decide to rescind the offer entirely.  Here is a list of the most common issues that professional home inspectors find:

1.  Improper Grading and Drainage. This is the most frequently-found problem. It is responsible for many common problems with cracked slabs and water penetration of the basement. Sometimes the property needs re-grading, and/or correcting gutters and downspouts so that they drain farther away from the foundation.

2.  Improper and Undersized Electrical Wiring.  Another common problem is electrical wiring issues.  These include insufficient electrical service coming into the house, outdated aluminum wiring, inadequate overload protection, improper grounding of outlets and dangerous amateur wiring connections. Sometimes there are so-called “double taps” within the electrical breaker box, which is when there are two electrical circuits or feeds attached to a single breaker. These issues often come up with do-it-yourself renovations, and can be a serious safety hazard. Other common electrical problems are the lack of GFCI outlets in bathrooms, kitchen, garage and the exterior.

3.  Older or Damaged Roofs. Asphalt shingle roofs only last about 15 to 20 years. Roof leakage caused by old or damaged shingles or improper flashing around chimneys or in valleys is a frequent problem. It can be easy and inexpensive to repair damaged tiles and shingles and to re-caulk the roof penetrations. But if maintenance is deferred, this can lead to major roof repairs.

4.  Deficient and older heating systems. Heating systems should be serviced and maintained annually according to the manufacturer's instructions.  Common problems include broken or malfunctioning controls, blocked chimneys, unsafe exhaust flues and cracked heat exchangers. These can be a health and safety hazard.  Many homeowners do not have their heating systems serviced annually, so a common inspection finding is a dirty heating system.  Home inspectors will normally recommend a cleaning and inspection of the heating system in this instance.

5.  Plumbing problems. Included here are old or incompatible piping materials, faulty fixtures and waste lines, and improperly strapped hot water heaters.  Leaks in the plumbing underneath sinks and around toilets is a common finding.  This can be due to the incorrect type of plumbing material, a broken seal around a toilet, or even rusted/corroded plumbing.  Older homes often have a galvanized water main.  This can lead to poor water pressure due to the corrosion of the inside of the pipe. Newer homes are now utilizing copper water main lines which eliminates the water pressure problem.

6.   Structural Problems. As a result of problems in one or more of the other categories, many houses sustain some damage to structural components such as foundation walls, floor joists, rafters or window and door headers. These problems are more common in older homes.

7.  Exterior Issues. Flaws in a home's exterior, including windows that may be rendered inoperable, doors and wall surfaces are responsible for the discomfort and damage caused by water and air penetration. Inadequate caulking and/or poor weather stripping are the most common culprits of a drafty house.  Other exterior concerns are missing fascia boards, lack of weep holes in brick and stone veneer surfaces, lack of and/or improper deck flashing, mortar missing in between the brick/stone of exterior chimneys, and improper or missing handrails and balusters on porches.

8.  Poor Ventilation. Due to overly ambitious efforts to save energy, many home owners have "over-sealed" their homes, resulting in excessive interior moisture. This can cause rotting and premature failure of both structural and nonstructural elements. Ventilation in a home can greatly affect the lifespan of the home’s roof.  Fan ventilation systems should be vented to the exterior of a home.  A common finding relates to bathroom vent fans not vented to the exterior of the home, but rather into the attic or crawl space.  The moisture from the bathroom vent fan into the attic can potentially cause mold problems.  Thankfully, proper venting of a bathroom fan can be done fairly easily and inexpensively.

9.  Termites and Other Pests.  Once termites and pests enter a home, the problems never get resolved on their own, and they only get worse. While ants and mice are not a huge concern because they can be addressed fairly easily, termites can destroy the structural integrity of a home.  Sometimes inspectors will find damage that is so severe that carrying beams need to be replaced.  

10.  Miscellaneous Items. This category includes various interior components, such as sticky windows, peeling paint, and environmental concerns such as lead-based paint, asbestos surfaces, radon, and mold. These issues can have varying degrees of concern for the homebuyer.

It has been said that most people take better care of their cars than they do their homes. That's the opinion of many home inspectors, who often come across scuffed or dirty painted surfaces, crumbling masonry, makeshift wiring or plumbing, broken fixtures or appliances that haven’t worked in years. Although some of these problems may seem more cosmetic than serious, they can reflect the overall lack of care that has been given to a home and should cause a buyer to think carefully about what years of inherited deferred maintenance will mean for them.

While this is not a comprehensive list, is contains the most common issues that home inspectors come across. If you have questions about any aspect of the home-buying process, contact www.brooksandcrowley.com, or give us a call. 

WHY YOU NEED TO RECORD A HOMESTEAD DECLARATION FOR YOUR PRIMARY RESIDENCE IN MASSACHUSETTS - Boston, Dedham, MA

Joseph Coupal - Thursday, March 31, 2016

By Steven J. Brooks

Anyone who owns real estate and occupies it or intends to occupy it as a primary residence in Massachusetts needs to take advantage of the protections of the homestead law. The homestead statute, set forth in Chapter 188 of the Massachusetts General Laws, protects primary homes from being taken away by unsecured creditors.

The current law, which took effect in 2011, provides an automatic estate of homestead of $125,000 for primary residences. This protection occurs automatically by operation of law and without having to record a homestead declaration. But by taking the extra step of recording a declaration with the registry of deeds, the protection is dramatically increased to up to $500,000, or even up to $1,000,000 for anyone who is elderly (defined as age 62 or older) or disabled.

What this basically means is that, for a minimal recording fee ($35.00 to $37.00 depending on the county), a written homestead declaration exempts up to $500,000 of the equity in your property from attachment, seizure, and sale for payment of debts to third parties.

Of course, there are notable and obvious exceptions to this exemption.  A homestead declaration will not protect you from:

  • The lender that financed your mortgage loan
  • Federal, state, or local taxes and betterment assessments
  • Court-ordered spousal or child support
  • Executions, or attachments recorded against the property prior to the recording of the declaration of homestead (subject to the automatic $125,000 exemption)  

In order to take advantage of the law, a declaration of homestead needs to be filled out and signed by each owner (the grantees on the deed to the property), and listing their occupying spouse if the spouse is not already listed on the deed. The declaration must be notarized, and recorded with the registry of deeds for the county where the home is located. The good news is that, if you have previously recorded a homestead declaration, the new statute extends the protection for you without having to refile anything. And while the previous version of the statute did not specifically grant homestead protection to trust beneficiaries, the updated law does so. In that case, the trustee signs the homestead declaration and lists the trust beneficiaries who occupy the property as their primary home, thus covering them fully.

At Brooks & Crowley, we handle dozens of real estate closings every month throughout Massachusetts, and we want everyone to have this extra protection. This is why, when we handle your real estate closing, we always include the drafting of the homestead for no additional fee (you only pay the registry recording charge).  And if we did not handle your closing but you want to file a homestead declaration, we’ll be happy to assist you for a nominal fee. If you have any questions about this or any other real estate issues, feel free to contact us.

6 CRITICAL MISTAKES TO AVOID FOLLOWING YOUR MORTGAGE PREAPPROVAL - Boston, Dedham, MA

Joseph Coupal - Thursday, March 10, 2016

By Steven J. Brooks

Congratulations – you’ve received a preapproval from your mortgage lender, and are out looking at homes!  This is no time to mess things up.  Experienced loan officers will always admonish borrowers to keep things the same as they are as of the time of the preapproval, but every once in a while a borrower will ignore the loan officer’s advice and make one or more of these critical mistakes as they move toward the closing.  Keep in mind that a mortgage preapproval has no value – and won’t bind the bank- if your financial picture changes between the issuance of the preapproval letter and the formal application is processed.  So here are the six biggest mistakes to avoid once you have been preapproved for a mortgage:

1.  Late Payments

Be sure that you remain current on any monthly bills.  If you have bills paid automatically paid out of your checking account or by credit card, by all means continue to do so.  Your preapproval only relates to a snapshot of your financial situation, and you need to keep this the same or better as when the preapproval snapshot was taken.

2.  Applying for New Lines of Credit

Mortgage lenders are required to do a later credit check before the loan closes.  They typically do what’s called a “soft pull” of your credit, which tells them if any new lines of credit have been opened.  Any new credit account could negatively impact your credit score.  This could lead to a higher interest rate or even result in delaying your closing.  People looking to furnish their new homes often will be looking to buy new furniture and to time the furniture delivery to coincide with their closing.  The stores offer deals with no payments due for months or even years on the new furniture.  While seemingly a good financing offer, opening up this new line of credit could jeopardize your mortgage loan.

3.  Making Large Purchases

Buying expensive furniture or appliances with credit could change your debt-to-income ratio, which could result in a delayed closing or denial of your loan if your ratios were tight to begin with.  Even if you use your own cash to make big purchases, you'll end up having less cash on hand for reserve requirements, which could also negatively impact your loan.

4.  Paying Off and Closing Credit Cards

Credit scores are impacted by a variety of things.  One of them is paying off and closing credit cards.  Although it seems counterintuitive, paying off and closing credit cards often negatively affects credit scores.  Also, depleting funds in your bank account to pay off credit cards also means lower cash reserves.

5.  Co-signing Loans for Others

Especially when it’s a new loan, co-signing a loan for another means that the loan is a debt for the borrower and for the co-signer.  It will go into the debt-to-income ratio mix.  So, think twice before helping your child or sibling buy a car at least until after your purchase closes.

6.  Changing jobs

Even if it’s a higher paying job, changing jobs after receiving a preapproval could cause a delay in closing due to verification requirements.  Your new salary must be proven, so two paystubs will be requested and the new job verified before the loan will be cleared to close.

The bottom line is that it is very important that you stay in touch with your loan officer before undertaking any significant financial moves, since even seemingly beneficial changes could have a negative impact in the days and weeks leading up to your closing.  For more information about real estate matters, check out our website at www.brooksandcrowley.com or contact us.

THE 9 CRITICAL THINGS YOU NEED TO KNOW IN ORDER TO OBTAIN A MORTGAGE IN 2016 - Boston, MA

Joseph Coupal - Tuesday, March 08, 2016

By Steven J. Brooks

At Brooks & Crowley, we close dozens of mortgage loans every month.  In talking with borrowers, a common complaint that we hear is how much documentation had to be supplied to the lender in order to have the loan approved.  Some folks who have not applied for a loan for many years, or who are helping their sons and daughters with their first homes, will talk about the “good old days” of limited documentation and even stated income loans which required little or no documentation from the borrower.

In response to the “good old days,” of lenders making loans to anyone with a pulse and a job, the mortgage lending landscape has changed considerably. The new Qualified Mortgage rules took effect in January, 2014.  Gone are the days when lenders would ignore certain underwriting requirements if the deal otherwise seemed promising.  Now, your lender must be able to fully document that you can afford your monthly mortgage payments.

The document requirements for mortgage preapproval vary by lender and your individual circumstances, but typically, you'll need to provide documents which show your monthly income, your assets and any regular deductions out of your income.  The process does not need to be onerous, as long as you gather what you need ahead of time.

Here are the basic documents you'll need to provide to your lender for your preapproval:

1. Tax Returns

Complete tax returns from the last two years, including all W-2’s and schedules.  This is so the lender can verify that your household income was consistent.  Income fluctuation makes underwriters nervous, and too much fluctuation could lead to the denial of your loan.

For self-employed applicants, the bank will likely want copies of your 1099 forms, which show how much money you received from various clients during the prior year.  Combined with your last two years of tax returns, the 1099’s are used to show that your self-employed income is steady over time.

2. Pay Stubs

Thirty days of most recent pay stubs from your employer. This is to establish your current salary, so they must be current.

3. Account Statements

Sixty days of most recent monthly statements from all bank accounts, retirement account and investment accounts (retirement and investment account statements may be quarterly). The bank statements are used to establish how much cash you have on hand to pay for extras, and the investment account statements are used to show the bank that you have emergency funds available to use to pay the mortgage if necessary.

Once your offer is accepted, here is the additional documentation that the lender will need:

4. Contract to Purchase

The signed purchase and sale agreement lays out the operative terms and dates concerning the closing. If there is to be any seller credit for closing costs, this must be included in the purchase and sale agreement so the lender is made aware of it in advance of the closing.

5. Evidence of Homeowner’s Insurance

A homeowner’s insurance binder with coverage running for one year after the closing that lists the lender as mortgagee.

6. Verification of Employment

If requested, verification of your position and salary by your employer on company letterhead.  As the closing draws near, the lender will also obtain a VOE (verification of employment) where they contact your employer to verify that you haven't lost your job since the time you applied for your mortgage.

7. Rental History

A year’s worth of canceled rent or utility checks, especially from first-time buyers to prove you have a history of on-time payments.

8. Proof of Down Payment and Closing Funds

Documentation for your down payment must always be given. You can’t use any undocumented funds for your down payment, such as gambling winnings or mattress money. Similarly, you can’t use funds from credit card advances for either your down payment or cash to close. If you have any unusual deposits into your account, they will need to be documented with deposit slips and an explanation. For example, if you sell your motorcycle and deposit the funds into your checking account, the bank will want to see a copy of the bill of sale (and the deposit amount and date had better match the information on the bill of sale). In a nutshell, any sudden change in your finances (for better or worse, but especially better) will need to be explained, and if you cannot document it, it likely will not be counted toward your available assets to close.

If someone is giving you a financial contribution to help pay closing costs or down payment, you'll need to provide the lender with a "gift letter" from the donor. Lenders want to avoid any possibility that there is a secret mortgage on the property, so the gift letter states that the funds were a gift and do not need to be paid back. Additionally, the donor will need to provide documentation, such as a bank statement, as to the donor’s source of the funds.

9. Other Explanatory Documentation

If you have any unusual income or circumstances, you'll need to provide other documents. For example, if you have rental income, copies of the leases will need to be provided. If you're divorced, the separation agreement and/or divorce judgment will need to be supplied. If you filed bankruptcy, copies of the discharge order needs to be submitted.

Simply put, during your mortgage application process, your finances will be under a microscope for a period of time. But if you take a little time to gather the necessary documentation beforehand, you will avoid having to scramble at the last minute or risk delaying your closing. For more information about real estate matters, check out our website at www.brooksandcrowley.com or contact us.

ARE YOU CUT OUT FOR LIFE AS A CONDO OWNER? - Boston, Dedham, MA

Joseph Coupal - Friday, February 26, 2016

by Steven J. Brooks

In the Boston area, new condo developments appear to be springing up all around us. Traditionally, owning a condo instead of a detached home has allowed more people to purchase real estate that they could not otherwise afford, or in a location where detached homes do not exist, such as in Boston’s Back Bay or along the waterfront. There are upsides and downsides to condo ownership, so this article will help you to decide whether you are cut out for life as a condo owner.

Condo Fees

In addition to your mortgage, condo owners must also pay condo fees, which are the owner’s proportionate share of the common expenses.  Depending on the condo, the fee might only be to cover the master insurance policy and a reserve fund for maintenance of common areas.  For others, however, the fee goes toward landscaping, snow removal, and a swimming pool for the complex.  For luxury condos, the additional share of fees for amenities such as doormen, swimming pools and health clubs can bring your condo fee into the thousands of dollars.  And unfortunately, unlike your mortgage interest, condo fees are not tax deductible.

Oftentimes, the master insurance policy does not contain what’s known as “walls-in” coverage.  If this is the case, then in addition to paying your share of the master policy, you will need to purchase a policy for your unit contents (called an HO6 policy).  This will provide coverage for damage or theft within the unit.

Social Aspects

In addition to the above budgetary items, it’s important to consider the social aspects of condo living.  Trying to learn a few things about the people who already live there – your future neighbors- can help you determine whether it will be a good fit for you.  Certain condo developments can have a personality, depending upon location, attributes and other factors such as its owner-occupancy rate (a big issue for mortgage lenders).  If you’re a person who works from home, requires peace and quiet, or likes to go to bed early, you might not want to buy in a building occupied predominantly by undergraduate students.  Walk around the complex, knock on some doors and try to engage your potential neighbors in a discussion about living there, the responsiveness of the trustees or management company, and their likes and dislikes about the development.  Spending some time poking around a little will help you develop a sense of whether this is the right fit for your lifestyle.

Reviewing the Condo Documents

In Massachusetts, the common areas are typically owned in a condominium trust.  The trust, recorded with the local registry of deeds, spells out the management structure, i.e. whether it is managed by owner-trustees, a smaller board of trustees, or an outside property management company.  Condo trusts have by-laws and/or rules and regulations that govern things such as parking assignments if the spaces are not deeded, storage areas, the size, types and number of pets allowed, remodeling restrictions, and even rental of units to tenants for minimum lengths of time.  Some trusts contain detailed rules and regulations, and list the types of fines that may be levied against unit owners who violate the rules.  Within the last few years, some large condo management companies have begun requiring pet owners to pay $80 for DNA samples to be taken of their pets’ waste and added to a database.  If an owner does not clean up after his or her pet, DNA from the offending sample may then be taken and fines levied in case of a match!

It is very important to review any condo’s budget, and to get your hands on the records of the last few annual meetings of the condo association.  This will give you a sense of the financial health of the condominium.  You can see whether a sizable proportion of owners are delinquent on their condo fees or assessments (a big issue for mortgage lenders), and whether a large repair or construction project is contemplated.  You can usually also gain insight as to other issues, such as whether there are any pending lawsuits involving the association, by looking at the financials and meeting minutes.

Condos can be great places to live, but taking the time to consider the financial aspects as well as how life will be like in your future complex will avoid surprises down the road.

For more information, contact Brooks and Crowley.


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Brooks & Crowley LLP serves clients throughout Massachusetts, and has offices in Dedham, Boston and Norwell


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