BizLawBuz …. The Power of Know

First thing this past Monday morning I opened my email and read a request from a friend, asking that I help a friend of hers with a real estate purchase. The closing was scheduled for early that same Monday afternoon. While last minute requests like this are not unusual, what was unusual here was that the purchase agreement for this transaction was signed the preceding Sunday evening, within the past 12 hours!

I contacted the friend-of-my-friend (I’ll call him “Fred” for the sake of convenience) who told me that he lived in an apartment, saw this home while walking through a nearby neighborhood on Sunday afternoon, and, figuring that it might be time for him to consider home ownership, he called the phone number on the sign. Within hours he met with the real estate agent for the seller, went through the home and signed a purchase agreement which provided for a closing the next afternoon. He had never bought or sold a home before and just figured that this was the way these things were done; after all, that’s what the seller’s real estate agent told him. And, like all of us, he has heard the ads exclaiming the unbelievable bargains that can be had in real estate these days.

The purchase agreement that he faxed to me, although identified as a “Standard Form Purchase Agreement” was unlike anything I have seen in my many years of practice. Once the double spacing was eliminated, it amounted to a half-page of text. There were three companies identified in the form, but their exact role and involvement in the transaction was not specified. There were no addresses or contact information for any of them. The price was specified, as was the fact that it was to be paid in cash at the closing which was set for the next afternoon. Fred would not receive a title insurance commitment before the closing but might receive title insurance at the closing through some unidentified company (this provision was really fuzzy.) Fred had no right to conduct a structural inspection of the property and title would be transferred by means of a quit claim deed.

We then spent the morning researching the companies identified in the purchase agreement and finding out what we could about the property. Insofar as the companies were concerned, we found a maze of interconnected companies and individuals, with the particular “seller” and real estate agent in this transaction legally formed and licensed just within the past few months. The property, we learned, was a foreclosed home that had been sold to the selling company about the same time that the selling company was formed, just a few months ago. The selling company did have a rudimentary website which listed a number of properties that it was offering for sale to “investors” for cash, pursuant to quit claim deeds.

I ultimately told Fred that based upon the research we were able to do in the few hours available to us, this deal had, at worst, all the markings of a scam. At best, this transaction was not for him. Fred was looking for a home, his home; he is not a sophisticated real estate investor who could afford to lose his investment as a cost of doing business, with the prospect of bigger returns elsewhere.

I’m finding that there are a lot of “Fred’s” out there who have the money and desire to get into homes of their own. Internet, radio and print ads would have us believe that the deals are incredible and the risks minimal or nonexistent. Buying foreclosed or “distressed” properties presents substantial issues that transcend a “typical” real estate transaction. In fact, the first thing I tell clients who are considering buying these types of properties is to forget everything they know about buying real estate. While a detailed explanation of those issues is beyond the scope of this article, I thought that a reminder of some of the basics might be in order.

1. Inspection. The opportunity to conduct, or, to have a professional of your choosing conduct (at your expense) a physical inspection of the property is absolutely essential, as is the right to terminate the purchase agreement if, in your discretion, you don’t like what the inspection reveals. Here in Michigan we are coming off one of the coldest winters in memory. In most foreclosed homes, the utilities have been shut off. That means no gas, no electricity and no heat-none. As a result, roofs have leaked over the winter, causing structural damage and mold. Much of the damage is hidden from view, intentionally covered up cosmetically, or, the buyer just doesn’t know what to look for. A physical inspection is a must.

2. Title Insurance Issued by a Reputable Provider. Like everyone else, the downturn in the economy has adversely affected title insurance companies. I don’t have the exact figures at my finger tips but I seem to recall reading that as a result of the recent failures of title insurance companies, as well as acquisitions and mergers involving title companies, that there are only a few nationally based companies that continue to handle the nation’s title insurance needs. Title insurance agencies, on the other hand, seem to be springing up on every street corner (the agency identified in Fred’s purchase agreement was one I had never heard and one for which I could find no information whatsoever.) Title insurance does a lot of things, most important of which is protecting the buyer. For a fee (the title insurance premium) the title company will research the condition of title and insure that the buyer is actually getting “good title” to the property (subject to any specified exceptions or exclusions in the policy.) Although this can all get pretty complicated, what every buyer needs to remember is that they need title insurance, provided by a reputable company, through a reputable agency, and that they need to see the commitment before the closing. They also need the right to terminate the transaction if they don’t like what they see in the commitment.

3. Deeds. Deeds conveying ownership of real property come in many forms and are identified by many names. Here in Michigan deeds basically fall into two categories; quit claim deeds and warranty deeds. A quit claim deed says “whatever ownership interest I have in this property, I am hereby selling to you.” That ownership interest could be all encompassing, or none at all. For example, I could legally sell the Brooklyn Bridge pursuant to a quit claim deed. Admittedly, this example is simplistic and ignores a lot of ancillary issues (such as fraud), but, the analogy works; that is, irrespective of the fact that I have no ownership interest in the Brooklyn Bridge, I have not acted illegally if I find someone who is willing to pay me for it and receive nothing more than a quit claim deed in return.

Warranty deeds are different. The seller of real property by means of a warranty deed is representing that he or she (or it) owns the property, has the right to sell the property and will defend the title against anyone who claims that they have an ownership interest in the property. Admittedly, and, particularly in the case of a foreclosed home being purchased from the foreclosing lender, it may not be possible to get a warranty deed for any number of reasons. In these situations, title insurance becomes even more important, likewise the form and language of the deed being offered by the lender. But, Fred, was not buying his home from a foreclosing lender. By agreeing to accept nothing more than a quit claim deed, he could have ended up paying his money and getting nothing in return. Or, nothing but a whole lot of problems.

So, how did this all turn out for Fred? Well, he was able to stop payment on his sizeable deposit check and, citing some provisions of Michigan law, we were able to legally declare the purchase agreement terminated and avoid the closing. Fred was happy that the seller and real estate agent “agreed” to this. On the other hand, we became even more convinced that this was a scam, that seller knew he had been caught and was happy to let this one go, knowing that there are many more “Fred’s” out there.

Duane L. Reynolds