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What happens when the owner of the property is deceased?

There may be some similarities in different states, but the documentation required in a closing involving an estate is determined by state law and you should discuss these situations with an attorney licensed to practice in your state.  The title company insuring the transaction will also have specific requirements regarding how to handle a particular estate issue and those requirements may vary between different title underwriters located in the same state.  The analysis of different situations in this blog is based on Tennessee law.

Definitions of Estate Terms.

These are some terms you may hear when dealing with a closing involving an estate. 

  • Testate: having died with a will.
  • Intestate: having died without a will.
  • Holographic Will: a handwritten will.
  • Nuncupative Will: an oral will
  • Probate: the process of proving a will in court.
  • Executor (Executrix): the personal representative of a testate estate, named in the will and appointed by the court.
  • Administrator (Administratrix): the personal representative of an intestate estate, appointed by the court.
  • Muniment of Title Probate: probate with no administration for the purpose of establishing title to real or personal property.
  • Insolvent Estate: an estate where there is not enough personal property or assets to pay all valid claims against the estate.

The Seller signs a contract to sell real estate and dies before closing.

In this situation, it is likely that an estate will need to be opened in probate court.  After a personal representative is appointed, that person would be able to convey the property to the buyer.  This is different from a typical closing involving an estate because the seller actually signed the contract before she died.  Since she signed the contract, her estate is bound by the terms she agreed to in the contract and the personal representative of her estate is authorized to sign on behalf of the estate.  The typical estate requirements that we will discuss below do not apply.

A husband and wife own property, the husband dies and the wife wants to sell the property.

In order to sell the property, the widow will likely only need to provide a copy of the husband’s death certificate.  If both of them were not on title to the property or if she did not have a survivorship interest, she will need to provide more, as discussed below.  But if they were both on title to the property and had a survivorship interest (which can be determined by reviewing the deed to the husband and wife in accordance with the laws of the state where the property is located), she will only need to prove that he is deceased.

Sam owns a three bedroom house and dies intestate.  He is unmarried and has 2 adult children, who want to sell the house as soon as possible.

Sam’s children would not be able to sell the house within 60 days from the date of his death in Tennessee under any circumstances.  There is a Tennessee statute that gives priority to a deed from the decedent that is recorded within 60 days after death.  If an estate is being administered, creditors of the estate have 4 months to file claims against the estate, so the children would not be able to close until the 4 month claims period has run and the title company has verified that no claims have been filed.  However, in some situations, they may be able to close before the 4 month claims period if there is proof that the sale is an arm’s length transaction for market value, but the net proceeds would likely need to be held in escrow until the 4 month claims period has run.  If Sam was age 55 or older at the time of his death, the 2 children will need to obtain a TennCare Release before they would be able to close.  If Sam’s estate is not being administered, his 2 children may be able to close after 6 months from the date of his death as long as they have a TennCare Release.

Sally owns a condo downtown and dies testate.  She is unmarried and does not have any children.  Her will names her brother, Bob, as Executor and leaves her condo to her church.

Bob has admitted the will to probate and wants to list the property for sale.  He has told you that since he is the Executor that he has the right to sell the property.  If the will contains language that the real property is to be administered as part of the estate subject to the control of the Executor, Bob would be able to sell the property as the Executor of Sally’s Estate.  Also, if Sally’s estate is insolvent, Bob may sell the property to satisfy creditors of the estate.  This will likely require a court order declaring that the estate is insolvent.  If the will does not contain that specific language and the estate is not insolvent, a representative from the church would need to sign in order to convey the property.  However, before that transaction can close, there would need to be a TennCare Release (if Sally is age 55 or older) and the 4 month claims period has run, or it has been 1 year from the date of Sally’s death, whichever is earlier.

Steve owned a 20 acre farm that was only in his name and died intestate 15 years ago.  He had a wife, Sara, and 3 adult children.

Sara wants to sell the 20 acre farm and said that since she is Steve’s widow that she should be able to do that since she hasn’t spoken to her children in 5 years.  Under Tennessee laws of Intestate Succession, the wife and all 3 children would inherit the property and would all need to sign in order to convey the property to a buyer.  A TennCare Release would likely not be necessary since Steve died 15 years ago.  Affidavits of Heirship would probably be required from someone who had enough knowledge of the family to identify Steve’s spouse at the time of his death and all of the children he had during his lifetime.  Once all of those heirs are identified, they would all be able to sell the property.  Not being able to locate any of the children is not sufficient, as their interest must be conveyed in order for the buyer to have clear title to the property.

Consult a local attorney or title company.

These are just a few examples of situations you may encounter and some things that can be done to help close these transactions with as little delay as possible.  Since laws vary greatly from state to state and title underwriters may have different requirements based on their interpretation of state law, you should talk to a local attorney or title company about the specifics of your transaction and always inform your title company if one or more of the property owners is deceased, so they can research and find out what they will need in that particular situation.

What is a 1031 Exchange?

A 1031 Exchange originates from Section 1031 of the Internal Revenue Code and allows an investor to sell one property and reinvest the proceeds from that sale in a new property, deferring the capital gains taxes on that sale.  IRC Section 1031(a)(1) states: “No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment, if such real property is exchanged solely for real property of like-kind which is to be held either for productive use in a trade or business or for investment.”

Rules for a 1031 Exchange.

  1. Like-Kind Property.  In order to qualify for a 1031 Exchange, the property being sold and the property being purchased must be “like-kind.”  This is a very broad term that means that the original and replacement properties must be of the same nature or character.  For example, you cannot exchange an airplane for an office building.  However with real estate, you can exchange almost any type of real estate for almost any other type of real estate:  you could exchange an apartment building for a strip mall, you could exchange a single family rental property for warehouse property.  Foreign property cannot be part of a successful 1031 Exchange…both the original property and the replacement property must be within the US.
  2. Investment or Business Property Only.  A 1031 Exchange only applies to property held for investment or business purposes.  You cannot exchange an apartment building for your next primary residence and cannot exchange your current primary residence for a new primary residence.  A primary residence is not property that is held for investment or business purposes.
  3. Greater or Equal Value.  In order to completely defer paying taxes when you sell your property, the net market value and equity of the replacement property must be the same as, or greater than the property you sold.  If it isn’t, you will not be able to defer all of the tax.  For example, if the property you are selling is worth $1,500,000 and has a mortgage of $500,000, the new property would need to be worth at least $1,500,000 and would need to have a mortgage of at least $500,000.  You can exchange one property for multiple properties, so all of the replacement properties together could have a value of $1,500,000 and mortgages of $500,000.
  4. Cannot receive the Sale Proceeds.  In order to not pay any taxes on the gain from the sale, the proceeds must go to a Qualified Intermediary and the taxpayer cannot receive any of those proceeds.  Of course, it is acceptable to do a partial 1031 Exchange, where tax on some of the gain is deferred but you pay capital gains tax on the remainder.  For example: If you sell property worth $1,000,000 and complete an exchange for replacement property worth $800,000, you would pay the normal capital gains tax on $200,000.
  5. Same Taxpayer.  The taxpayer who owns the old “relinquished” property must be the same as the taxpayer who is purchasing the replacement property.  For example:  If John Smith, LLC owns the relinquished property, John Smith, LLC would also need to purchase the replacement property.  John Smith as an individual would not be able to take title to the replacement property and complete a successful 1031 Exchange.
  6. 45 Day Identification Period.  The taxpayer has 45 calendar days from the closing of the relinquished property to identify potential replacement properties.
  7. 180 Day Purchase Period.  The taxpayer has 180 days from the closing of the relinquished property to close on the replacement property or properties and complete the exchange.

What does tax deferred mean?

When you complete a successful 1031 Exchange, you are deferring the capital gains tax that would be due upon the sale of the relinquished property.  That does not mean the sale is tax free, but you are postponing the tax until you sell the replacement property.  You can defer taxes for as long as you still own the replacement property and can even do another 1031 Exchange when you sell the replacement property and exchange for a new replacement property, further delaying the tax.  If you do not sell the replacement property or if you do another exchange in the future, you could actually defer the tax until you die and the property is left to  your heirs or devisees. 

What is a Qualified Intermediary?

A Qualified Intermediary (QI) facilitates a 1031 Exchange by receiving the proceeds from the sale of the relinquished property and sending those funds to the purchase of the replacement property.  Your title company will need to work with the QI in completing documents and coordinating the transfer of the proceeds.  Anyone who is related to the taxpayer or who has had a financial relationship with the taxpayer within the two years prior to the closing of the exchange cannot serve as the QI unless the services were related to an exchange of property under section 1031.  The QI should be bonded and insured and have relevant experience such as tax, law or finance. 

What are the first steps?

You should talk to an accountant while you are considering a 1031 Exchange and make sure it is the best thing for your situation.  Once you and your accountant have determined that you should do a 1031 Exchange, you should contact a reputable QI.  If you are having trouble locating a QI, your title company may be able to provide you with some referrals as most of the major title underwriters have an affiliation with a QI.

Wire Fraud

How Home buyers can protect themselves from wire fraud

Unfortunately, there are increasing instances involving scammers tricking home buyers into wiring down payment funds to a fraudulent account.  The scammers are taking advantage of the chaotic nature of buying a home, selling another home, packing and moving, and relying on people acting quickly without verifying information.  They also know that a home purchase involves large sums of money and are spending vast amounts of time trying to make the scams look legitimate because of the amount of money they can make from their scam.  This post will explore how that scam normally works and ways that home buyers can prevent it from happening to them.

Hacking Email Accounts

Scammers will typically hack into email accounts of real estate attorneys, title companies or real estate agents and, without their knowledge, monitor their accounts by installing malware.  Once the scammers see that a closing date is approaching, they will use the compromised email account to send a legitimate looking email to the buyer.  The email will look like it is coming from the real estate attorney, title company or realtor and will have instructions about sending a wire transfer for the funds the buyer will need at closing.  Since the scammer has been monitoring the email accounts, the amount they are requesting is often the exact amount the buyer needs to bring to closing, but the wiring instructions are to an account belonging to the scammer and not to the title company to which the funds should actually be transferred.  The scammer’s bank account is typically an overseas account, out of the reach of U.S. law enforcement.  The email will usually also contain a phone number for the buyer to verify the instructions, however, that phone number will go directly to the scammer.  Sometimes, the scammer may also try to call the buyer to reassure them that the wire transfer request is legitimate.

What are the signs of a potential scam?

If you notice differences in the language used in the email requesting money and any previous emails, that is usually a good sign that you should pay close attention before acting on the email.  Since a lot of the scammers are not located in the U.S., the language used in their email may be a little different from the language used by the actual title company or real estate agent in prior emails.  If the email demands that the funds are sent immediately, especially if it is before the closing date, pay close attention and make it a point to verify any wiring instructions with a trusted source before sending any funds.  A title company or real estate agent should not threaten you if you do not send the wire, so if the email appears to be threatening, please pause and verify before responding.

How can I verify the correct wiring instructions?

The best way to verify wiring instructions is by calling someone involved in the transaction that you know and trust.  DO NOT CALL ANY PHONE NUMBERS LISTED IN THE EMAIL REQUESTING FUNDS UNLESS YOU HAVE VERIFIED THE PHONE NUMBER ELSEWHERE.  If you have already been talking to someone at the title company and feel comfortable with that person, especially if you recognize their voice, call that person directly to make sure you have the correct wiring instructions.  If you have had no contact with your title company, talk to your real estate agent and get the title company phone number from the agent (instead of relying on the emailed phone number).  Today, many title companies will not email the entire account number and will require you to call in order to get the full account number.  Sending funds by wire transfer is the best way to provide down payment funds for the purchase of a house, and in many situations is the only way to provide those funds, but please make sure you always verify the correct account number by talking to someone you know and trust.  If you have any questions about whether the account number is legitimate, let someone at your bank know before sending the funds AND let the title company know.  You could always stop by the title company office to physically pick up a copy of their wiring instructions.

What can I do if I have already sent funds to a fraudulent account?

If you have already sent the funds to an overseas fraudulent account, Immediately take the following actions:

  • Report the fraud to your bank and request a Fraud Wire Recall.
  • Report the fraud to the FBI’s Internet Crime Complaint Center at IC3.gov.
  • Contact regional FBI and local policy.
  • Report the scam to the FTC.
  • Inform your escrow officer or settlement agent.

The FBI may be able to recover the funds if the fraud is reported fast enough, but if not, the money may be in the scammer’s overseas bank account and beyond the reach of U.S. law enforcement.

Have you or a client had any personal experiences with wire fraud? If so, please share your experience so we can give everyone real life examples so we can prevent this from happening as much as we can.

What should a buyer expect at closing?

closing photo

You have spent countless hours looking for the perfect house…getting pre-qualified from your lender so you know how much house you can afford, searching many websites for houses, meeting with your real estate agent to see houses in person, providing everything except a blood sample to your lender (even though you have a great credit), and making an offer on a house only to find out that there are 10 other offers on the same house.  With all of that time invested, you finally found your dream house and agreed on a price with the seller, so now it is time to close on the house.  But wait, what does that mean?  What should you expect at closing?

In this post, I will talk about what a buyer can expect at a real estate closing and what they typically need to bring to the closing.

Closing day

Today, you are going to sign a mountain of paper.  You have already seen some of the documents from the lender as you have gone through the loan process, but a lot of them you will be seeing for the first time.  You should plan to spend at least an hour at the closing agent’s office, but it may take a little more or a little less time than that.  Be sure to stretch your hands before you go into the closing…they will have quite a work out.

You may be wondering why you need to go in and sign in person at all. After all, we’re getting used to handling most everything online. Electronic signing is now allowed by the federal government and someday it may become the norm. But for now, physical signatures are still preferred to ensure that everyone has been able to read and verify the documents.

Who is going to be there?

In some states, the buyer and seller sit down at the same closing table. In other states, you’ll never see the seller, as you each have a separate title company. The closing agent is usually either an escrow officer or an attorney. The important thing is that the closing agent is a neutral third-party who has the knowledge and training to get everything completed according to the contract and the lender’s closing instructions. In addition to the closing agent, you may also have your real estate agent and loan officer present.  In a few states, an attorney must be present at closing.

What should you bring?

In addition to patience, you absolutely must have the following:

Photo ID: The closing agent has to verify that you are who you say you are. A driver’s license or current passport will do.  Sometimes, a lender will require a second ID, but that will depend on the lender’s closing instructions.

Closing funds: This is to cover any down payment and closing costs you owe.  You’ll know exactly how much you need once the lender approves the final figures. Do not bring a personal check or cash for the closing funds.  The closing agent will tell you whether you need to send a wire transfer or get a cashiers check.  Most title companies must have the funds in a wire if the amount you need to bring is over a certain amount.  If you wire the funds please verify the wiring instructions over the phone with someone at the title company, as fraudulent wiring instructions sent by email are unfortunately very common scams.  I will talk in more detail about these scams in a later post, but for now, just be sure you talk to someone from the title company on the phone about the correct account number for sending the wire.

What will you be asked?

If you haven’t already established this, you’ll need to tell the closing agent how you wish to take title to the home. You will likely decide between these common selections (although there may be differences in different states, so be sure to talk to your title company about ways to take title in your particular state):

Sole owner: An unmarried person buying a house alone has the easiest choice. Title is taken as a sole owner in that individual’s name.

Joint tenancy or Tenants-in-common with right of survivorship: When two or more people who are not married to each other buy a house together, things get more complicated. They can choose to take title with the right of survivorship, meaning that if one of them dies, full ownership goes to the survivor.  They could also choose to take title without survivorship…for that option, see Tenants-in-common below.

Tenants by the entirety: When two people who are married to each other buy a house together, they typically take title as Tenants by the entirety, which automatically has a right of survivorship.  However, they can choose to take title without survivorship, but must let the closing agent know that that is their wish.

Tenants-in-common: When two or more individuals buy a home together as tenants-in-common, they are partners who may own equal or unequal shares and who can sell their shares of ownership independently.  There is no right of survivorship in a tenancy in common.

***Before you attend the closing, decide how you wish to take title to the property and talk to your real estate attorney about it for an explanation of the law in your state.  Different states may have similarities regarding how you can take title to property, but there are some differences about which you will need to talk to a local attorney. 

How many papers will you sign?

More than you could ever have imagined.  I have been told by military buyers that when they joined the military, they didn’t sign nearly as many documents as they did at a closing. The number of documents will vary based on where you live and the specifics of your loan, but I have found that the average loan package is about 100 pages.   Of course, you don’t necessarily need to sign every single page, some may require initials and others may not require a signature or initial.  Here are some documents you’ll likely encounter:

Promissory Note: The Note contains the terms of your loan with the lender and provides a means for the lender to transfer or collect on the debt.  It should state the amount of the loan, the initial interest rate, the terms of any interest rate changes (there should not be interest rate changes if the loan is for a fixed rate), and the time and place that you must repay the loan.  It is common for the lender to sell the loan, and if they do, they will physically give the note to the purchaser of the loan.  The purchaser of the loan will then be entitled to collect on the loan under the terms you had agreed upon with the original lender.

Mortgage or Deed of Trust:  Some states are considered “Mortgage States” while others are considered “Deed of Trust States”.  Both the mortgage and deed of trust are instruments where you pledge the real estate as collateral for the loan.  The primary difference between a mortgage and a deed of trust is whether or not a lender must file a lawsuit in order to foreclose on the property.  With a mortgage, a lawsuit would be necessary, while with a deed of trust, the Trustee has the power of sale and can conduct a foreclosure sale without filing a lawsuit under the terms in the deed of trust and according to the laws of that state.  Once you sign the mortgage or deed of trust, that document is recorded in the public record as a lien against the property.  When you pay off the loan, the lender would release the lien on the property, meaning that you would then own the property free and clear…provided there were no other liens against the property.

Monthly payment letter: This document gives a breakdown of your monthly payment, showing the amount going toward principal and interest, taxes, insurance, mortgage insurance and any other figures the lender has included in the monthly payment.

Closing Disclosure:  The closing disclosure is also referred to as the CD.  This provides detail of your loan terms and the closing costs for your transaction.  It was designed to help you better understand the fees associated with the closing.  By law, you are entitled to get this form three days before closing and it should be in the same format as the Loan Estimate you received after applying for the loan.  You should have already had time to look this over before closing, but your closing agent should go over the numbers with you in detail.

Loan Application: It may seem silly that you have to sign a loan application at closing because you probably already completed an application when you actually applied for the loan.  However, the lender will have a new application for you to sign at closing with the information that you gave in your original application and information that was found on your credit report.  If your financial situation has changes since you applied for the loan (for example: if you lost your job, changed jobs, or incurred more debt) you must inform the lender before signing.

There are many other disclosures and agreements that will be included in your loan package.  Those include, but are not limited to: a compliance agreement, where you agree to cooperate with the lender in fixing any mistakes in the documents; IRS forms 4506 and W-9, which allow the lender to obtain copies of your tax returns and report the mortgage interest; a servicing disclosure to inform you whether your lender is going to use a servicer to collect payments or if the lender intends to sell the loan; an initial escrow agreement, which shows details of the first year of payments into the escrow account and disbursements out of the account for taxes and insurance; the lender may also have name affidavits showing different variations of your name as shown on the credit report and an affidavit that you intend to occupy the property as your primary residence.

When do I own the house?

You’ve signed all of the papers and paid the funds you needed for closing, but when is it all finally over and you get to take possession of the property?  The answer to that question may depend on local laws and customs and the language in the contract.  Typically, the transaction is complete when both the buyer and seller have signed, the disbursing title company has received all of the funds and the warranty deed has been delivered.  There is some debate about what constitutes delivery of the warranty deed, but when there is a separate title company for the buyer and a separate title company for the seller, my opinion is that it is delivered when the seller’s title company (as an agent for the seller) delivers the deed to the buyer’s title company (as an agent for the buyer).  However, I suggest that you ask your agent and title company about the language in the contract and about the local customs regarding possession of the property.