Will a Short Sale Leave You Feeling Shortchanged?

We are now about three years into the recession, and there’s no denying that property prices in the U.S. are still at affordable lows. As winter creeps up on us, many Canadians are likely researching just how much a nice little vacation home might cost.

I applaud that line of thinking (as soon as winter hits, I drink Vitamin D drops almost as quickly as the snow falls in a blizzard), but I urge caution on one major issue: if you come across a short sale property and decide to put an offer on it, make sure you have legal counsel to guide you through your real estate transaction.

Short sales occur when a homeowner needs to get out of a mortgage because they are in financial trouble, and they can’t pay off their loan. The seller will put their house on the market, price it attractively and then cross their fingers and hope that their lender will approve the sale and accept its proceeds as full payoff for their loan – even if the seller will fall short of paying back everything they owe.

While Altro & Associates, LLP is known for cross border estate and tax planning, we are also experienced at guiding our clients through real estate purchases in the U.S. We specialize in advocating for our clients throughout their purchasing process, which becomes even more important when a property is being sold short.

I’ll use a real example from our practice to illustrate my point. Earlier this year, Jacques and Alice found a beautiful condo in Miami Beach that caught their eye. Their realtor notified them that the sellers had two mortgages on the property from a bank and a private lender. The sale would have to be approved by both lenders because it would be a short sale.

Jacques and Alice decided to go forward – but they called us as soon as their offer was accepted, knowing that it would be a long road to their closing date. It’s not only been a long road, but an incredibly bumpy one too. Below is a long list of the short sale troubles that Jacques and Alice have had to endure:

  • Short sales often close at the last minute; the lender takes its time approving the sale and then demands a quick closing date with very little notice. This is what happened to Jacques and Alice. We advised the seller that we could meet the closing date deadline when they proposed it to us, but that our clients’ realtor in Florida would have to do a walk-through of the property before we would release any funds to the seller.
  • When the realtor showed up at the condo to make sure it was still in good condition, the locks had been changed and there was – wait for it – a squatter inside!
  • Needless to say, instead of celebrating a closing, eviction proceedings began. While the court proceedings dragged on, we needed to get multiple closing date extensions from the bank and the private lender.
  • Of course, to complicate an already complicated deal, our contact for the private lender was on vacation during this time, so it was extra difficult to obtain sign-off on the closing date extensions that we needed to save the deal.

  • The eviction proceedings went on for so long that the bank notified us that they were going to foreclose on the property, which would effectively kill our clients’ deal. They eventually changed their mind on this, but not before the mention of a foreclosure created heartache for our clients.

  • The eviction proceedings eventually ended, and once again, we were ready to close. This time around, however, we were notified that our clients would have to pay thousands of dollars extra in condo assessments that had become due.

  • Even though the purchase contract clearly states that the sellers were responsible for all such assessments, they were unable to afford the assessment payments, so those payments fell to our clients, if they chose to accept them as their burden.

  • Before agreeing to this extra cost, we advised our clients to review a draft settlement statement, also known as a HUD. A HUD is a document drafted by the U.S. title company in charge of creating the closing documents for a transaction. The HUD outlines the financial breakdown of a real estate transaction for both parties.

  • When we received the draft HUD and compared it to the previous one we were using before the discovery of the squatter, we noticed that the amount owing by our clients was actually LESS than before – even though they were apparently being charged more for the assessments!

  • If Jacques and Alice had reviewed this HUD and agreed to pay for the assessments, thinking they were somehow SAVING money, they would have been pleasantly UN-surprised upon receipt of the final HUD at closing, which would undoubtedly include the thousands of dollars in assessments that they would have “agreed” to paying after reviewing the incorrect draft HUD.

  • We noticed the error in the draft HUD, however, so that potential problem was avoided. We requested a revised HUD, which came with several more errors in other sections. Further drafts were also incorrect.

  • Once we received a HUD that was correct, we agreed to move forward with closing, but not before requesting that the title company do an updated lien search to make sure the property was free from any encumbrances.

  • Lo and behold, the night before closing, a federal tax lien came up on the title search, and we were once again delayed!

Not surprisingly, Jacques and Alice have still been unable to close on their property.

During the winding road described above, we advocated for Jacques and Alice by ensuring that the title company provided correct, up-to-date information at all points. We caught errors that could have easily gone unnoticed by reviewing all documents with a fine-toothed comb and knowing exactly what to look for. We coordinated and corresponded with the various parties involved in this complicated transaction so that our clients didn’t have to be the quarterbacks on so many moving pieces.

In short (no pun intended!), title companies create closing documents, but they don’t work on behalf of buyers. A really great realtor is a huge asset in a transaction like the one detailed here, but he or she doesn’t review important closing documents to make sure that you are legally protected.

Real estate lawyers are there for you, and you alone. When Jacques and Alice finally close on their dream home in Florida, we will be there with them, and they will have the peace of mind that comes with knowing that they weren’t alone, navigating the muddied waters of a short sale without a compass to guide them to legal safety.

Probate & Incapacity

Tom, 45, lives in Toronto, ran into a number of unforeseen roadblocks in the process of selling his parents’ condo.

Twenty years ago, Tom’s parents, Susanna and Maurice, purchased their condo in Naples, Florida for $250,000 USD. His parents, both Canadian citizens and residents, wintered there religiously (getting away from the dreary Canadian winters whenever possible). Over time, the condo appreciated in value to approximately $1,000,000 USD. Unfortunately, Susanna passed away last year. Susanna held title to the property solely in her name. With her husband as the main beneficiary of her estate the condo was left to him. According to Florida law, the property is subject to Probate in Collier County, Florida, where the property is situated. Probate is the legal procedure required to transfer legal title to the beneficiaries upon death. As per Florida statutes, Probate may cost up to approximately 3% of the value of the Florida estate, which in this case translates into approximately $30,000 USD. As well as being costly, Probate is time consuming, lasting approximately 8 to18 months and freezes the estate. After completing a long, expensive and demoralizing probate process, Tom came to see us. The situation had become further complicated by the fact that 6 months ago his father was diagnosed with Alzheimer’s disease. With his father unable to travel, and having his own place in Miami Beach, there was no longer a use for the condo and Tom was keen to put it on the market. It was at this point that Tom began to run into more trouble. Legally, the title still remained in his father’s name and only he could sell the condo. With Maurice mentally incapacitated and Tom no longer sure of his options he came to us again. In order for Tom to sell the property he needs to be appointed guardian of his father by the Florida Court. In Florida, a Guardianship proceeding is a legal proceeding under which a person who lacks the ability to manage certain functions of daily living is declared by a Court to be incapacitated. He loses the legal right to make certain decisions including the sale or mortgage of any Florida property. Next, the court will appoint physicians and social workers to make assessments. After the appropriate paper work is filed with the Court an incapacity hearing will take place (it is here that the court will determine if Maurice is incapacitated). Once the Court makes a finding of incapacity a guardian can be appointed. Guardianship proceedings require legal representation, are often quite lengthy and can be costly. After we guided Tom and his family through the Guardianship procedures, we met again to discuss the sale of the condo. Reflecting back on all the difficulties he had been through, Tom asked if there was anything that could have been done to avoid what he had just gone through. Simply, the answer is yes. Creating a Cross Border Trust SM and transferring the title into it would have allowed Tom to completely avoid probate and the long guardianship proceedings. Transferring property into a Cross Border Trust SM, avoids probate upon death as the Cross Border Trust SM does not die, as well, it avoids issues regarding incapacity and guardianship determinations. Rather than going through a guardianship proceeding, The Cross Border Trust SM enables the successor trustee(s) to step in to manage assets without Court intervention. Other benefits in the Cross Border Trust SM include the possible reduction and/or differing of U.S. estate taxes upon death. Additionally, this type of trust will preserve foreign credits in Canada under the Canada/Us Tax Treaty regarding capital gains tax. What does this mean? It means avoiding double capital gains tax (you will pay in the U.S. and get a credit in Canada EX: The IRS rate is 15% and the Quebec rate is 24%, you will be charged 24 % less 15% on your Quebec taxes). The Cross Border Trust SM can also protect the children as beneficiaries against their creditors and/or a beneficiary’s divorcing spouse realizing rights to the property in the Cross Border Trust SM. Fortunately the story does have a happy ending of sorts. With our firm representing Tom, the sale of the condo ran smoothly. We then created a Cross Border Trust SM for his Miami Beach property, protecting his wife and children from going through any of the complicated legal issues such as probate and incapacity.