Sad Stories Make Good Lessons

Sad stories make good lessons. Don’t text and drive. Don’t share your passwords. And don’t spit in the wind. To those I’ll add this one: don’t buy real estate without title insurance.

A story in today’s paper tells the sad story: man buys beachfront condo at foreclosure sale; condo has two mortgages, not one; foreclosure was for second mortgage; buyer now has to pay first mortgage.

Here’s the lesson: get a title insurance commitment before you buy real estate. No matter who you buy it from: a neighbor, a friend, a family member, a Zillow ad, a real estate listing, or even on the courthouse steps in a foreclosure.

Here’s the reason: buying real estate is not like buying a car. Every car has a title certificate showing who owns it. But real estate is different: there is no title certificate for real estate. Instead, we have title insurance companies who research the chain of title to determine who owns it. Every single parcel of real estate in Florida is handled this way.

When the title company searches to determine who owns the real estate, they also search for mortgages. So, if there are two mortgages instead of just one, the title insurance company tells you that. But they don’t tell you that in a phone call or by email or text.

Title insurance companies give you what is a called a title insurance commitment. It reports the results of their title search by telling you who owns the real estate now and what mortgages and liens and things are against it. They cost anywhere from $50 to $2,000 depending on the real estate involved. The title commitment also tells you what they require to be done before they will insure the title.

That’s right. They will actually insure the title to the property. So if they missed something in their search, then their insurance should protect you from that error by paying you damages. For that, they charge a premium that is paid once at the closing, not annually, based on the purchase price. The seller usually pays that premium, but who pays it is actually negotiable.

Of course, if someone buys real estate at a foreclosure sale, the seller is not going to provide title insurance so you would have to get it yourself.

And you must have the title insurance commitment before you actually buy the property. If you get it afterwards, it’s too late to do anything about mortgages and other adverse things that appear on it. As the buyer in today’s sad story learned, the hard way.

How Many Kinds of Deeds Are There in Florida?

When you buy real estate in Florida and when you sell real estate in Florida, it’s important to think about the kind of deed to convey real property.  There are many kinds of deeds in Florida. Here are a few of them:

If you are the buyer, you want the seller to sign a statutory warranty deed because it means the seller gives various warranties to you, such as a warranty of title. If the title fails, then you could sue the seller for breach of warranty. This is the type of deed that is usually prepared by lawyers and title insurance agents for closings in Florida. It is the type of deed specified in the form contracts issued by the Florida Association of Realtors and The Florida Bar. But, there is no law that says it must be used.

If you are the seller, you want to sign a fee simple deed because it contains no warranties but it still purports to convey fee simple title. If the contract or buyer require a warranty deed instead of a fee simple deed, then the seller can try to negotiate to sign a special warranty deed which gives the warranties only for the period of time that the seller owned the property.

If you are a trustee, personal representative or guardian, then you want to sign a special type of deed for that capacity, which is similar to a fee simple deed and gives no warranties because it would obligate the trust, estate or guardianship beyond the term of your office.

If you are not sure whether you really own the property, then you want to sign a quit claim deed. Nonlawyers sometimes mistakenly call this a quick claim deed but the correct name is quit claim deed. Doing this means you quit claim your interest to the grantee, meaning that you only convey to the grantee whatever interest you have in the property, and if you have no interest in the property then you are conveying nothing.

Of course, it’s very important to have your own attorney review any deed before you sign it. And it’s imperative that a title search and title insurance be obtained from a licensed title insurance company before you sign a deed, too.

Joint Property and Probate in Florida

Florida recognizes three types of joint property: tenancy in common, joint with full rights of survivorship, and tenancy by the entirety. Only the last two avoid probate. Here’s the background.

When two people own property as tenants in common, each owns an undivided interest in the whole.  If one dies, then probate is required to deal with title to the property of the one who died.

When two people own property as joint tenants with full rights of survivorship, then each still owns an undivided interest in the whole, but when one dies his or her title automatically passes by operation of law to the surviving owner without probate. (There is controversy in Florida now whether creditors of the decedent can reach the joint property even though it does not pass through probate.)

When two people own property as tenants by the entirety, you know they are married because that form of ownership is reserved for married couples. The concept dates back to jolly old England hundreds of years ago when the property owned by husband and wife as tenants by the entirety was considered a “moiety” of title which could only be broken by voluntary act of both spouses. Thus, creditors of just one spouse could not reach tenancy by the entirety property. That rule still applies in Florida, which makes tenancy by the entirety a popular way for married couples here to hold title. In fact, Florida recognizes tenancy by the entirety in both real property like houses and in personal property like bank accounts and investments. And, of course, it avoids probate at each because tenancy by the entirety property passes automatically by operation of law to the surviving spouse.

Let’s apply the above concepts to a typical factual situation. A husband and wife in Florida own investment real estate as tenants by the entirety. One dies, and the property automatically becomes solely owned by the surviving spouse without probate.  Should he or she then add the children to the deed as joint owners with full rights of survivorship in order to avoid probate at her death?

Let’s suppose she did and then suppose that one of the children later has a nasty divorce proceeding and another child later has problems with credit card debt.  Can the children’s spouse and creditors reach the children’s interest in the joint property?  Yes, they can. This is a huge risk for anyone who adds someone else as a joint owner to their property for the purpose of avoiding probate.  While it might avoid probate at their death, it places the property at risk of being reached by the new joint owners’ present and future spouses and creditors.

Conclusion: It is simple to put property into joint names in Florida, but the effect is not so simple. Probate might be avoided, but at the risk of loss of the property before then to creditors of the new joint owners. There are other ways to deal with this problem. Ask your Florida lawyer.

Which State’s Laws Apply When Someone Dies Owning Real Property in More Than One State?

Many Florida residents own real property in other states. So, a frequent question is: which state law applies when a decedent owns assets in more than one state?

The answer depends on two things:

1.  Domicile of Decedent. The first question is where was the decedent’s domicile at date of death? Domicile generally means the place where someone intends to permanently reside. It is complicated because domicile is not always the same as residence. There are many factors involved in determining domicile: sleeping place, working place, driver license, voter ID, auto registration, mailing address, tax return address, phone, number of days at each place, etc. For some people, all of these are the same place. But for other people, their driver license is from Florida but they have a second home in another state.

2. Type of Asset. Generally, Florida law applies to land, buildings and other real property located in Florida no matter where the decedent was domiciled at death. Similarly, if a Florida resident owned real property in another state, then the law of that state would apply to that real property. But, for all bank accounts, stocks, bonds, mutual funds, and other personal property, the law of Florida generally applies as to Florida residents.

This means that if a Florida resident dies, then his or her will should be filed first in Florida as the domicile state, and the probate proceeding here is called the domiciliary probate proceeding. Then an exemplified copy of the will and court documents are sent to the other state where real property is located and an ancillary probate proceeding is filed there.

Does the Buyer of Florida Real Estate Need a Lawyer?

Whether you are buying a home, vacant land or an office building, the real estate buyer needs a lawyer.  Why?  Because the buyer’s goal is to get what is paid for.  But real estate is complicated and there are many pitfalls.  There is usually no one else to watch out for the buyer’s interest if the buyer does not hire a lawyer.  The brokers are paid by the seller, and the title insurance agency handles the closing paperwork without representing either side.  The lawyer’s job is to help the buyer prepare and negotiate a purchase contract, help the buyer through the buyer’s due diligence inspection period, and then review deed, title insurance commitment and other closing documents on behalf of the buyer.  The real estate buyer’s lawyer can do the following:

1. Due Diligence Period. The lawyer can assist in preparing and negotiating a contract for purchase of the real property that includes a due diligence inspection period with broad wording to allow the buyer to check for obvious (patent) and non-obvious (latent) defects.  These might be in the building, land, air or water.  They could be environmental, structural, mechanical, electrical, or otherwise. The buyer might remember the Latin saying, Caveat Emptor, which means “Let the buyer beware.”  This meant that the seller was not obligated to tell the buyer about defects known by the seller.  While this ancient rule of law has changed with regard to residential real estate, it still applies in Florida to commercial real estate, so it is even more important for commercial real property buyers to do their due diligence inspections.  However, it is still important for residential buyers to inspect because sellers are not obligated to tell about defects they are not aware of so the buyer might discover something unknown to the seller.  In addition, if the residential seller fails to disclose a known defect and is liable to the buyer for not doing so, the seller might not have enough money left to pay the buyer damages for the nondisclosure. If the buyer does not discover the defect until after the closing, then it is too late to back out of the transaction without expensive litigation.

2.  Clear Contract.  The lawyer can assist in drafting a clear contract that gives the buyer what the buyer expects to buy in the transaction.  Sometimes this is done with a standard form such as the FAR/Bar form issued by the Florida Bar and Florida Association of Realtors or the FAR forms issued by the Florida Association of Realtors. The lawyer often prepares addenda to these standard forms to clarify aspects of the transaction.  Sometimes, however, the lawyer prepares a form specifically for the particular transaction rather than using a standard form that has many provisions that are not applicable to the particular case.  Unlike real estate brokers, lawyers are trained in the art and use of words and the drafting and interpretation of contracts.

3. Deadline Follow-up. All contracts for the purchase of real property should include deadlines for such matters as inspections, financing, title insurance, surveys, closing, etc.  To avoid breaching the contract, it is important to comply with these deadlines.  The lawyer can assist the buyer in scheduling contract deadlines.

4. Review Closing Documents and Include Protections. Legal documents can be written to include representations and warranties that are binding upon sellers after the closing in a way that may obligate them to pay damages to the buyer even years after the closing, but sellers try to avoid this wording so that any discovered defects are buyer’s sole problems, if the buyer does not have an attorney the buyer may not have the benefit of including this wording in the contract, deed and other documents.  Since the seller’s only goals are to get paid (and stay paid) and avoid litigation (see companion article on this website), it is important to include seller’s representations and warranties in contracts and deeds. Lawyers know which warranties and representations are standard and which are not, which can be negotiated in and which are more difficult to include.

5. Cost-Benefit of Legal Advice. The benefits of having a lawyer come at a cost: legal fees. Buyers who do not have lawyers do not pay legal fees; at least, not unless or until a breach or defect is discovered. Legal fees in litigation are expensive because it is fueled by opposing parties with opposing claims and positions.  Legal fees paid to a buyer’s lawyer to advise the buyer before signing a contract to purchase and before closing on the contract are much less than legal fees in litigation. There is no crystal ball to determine in advance whether a particular deal will result in litigation so it is best to hire a lawyer to assist in assessing and minimizing the risks of the purchase transaction to the extent possible.

Therefore, the buyer of Florida real estate, whether it is residential or commercial, should always engage a Florida lawyer to assist in the transaction. Otherwise, there is really no one legally on the buyer’s side.

Does the Seller of Florida Real Estate Need a Lawyer?

Whether you are selling a home or an office building, the real estate seller needs a lawyer.  Why?  Because the seller has two goals: get paid and avoid litigation. The lawyer’s job is to help the seller get paid by preparing and negotiating a sales contract, helping the seller through the buyer’s due diligence inspection period, and then either preparing closing documents and handling the closing or reviewing closing documents and providing advice or attending the closing.  The real estate seller’s lawyer can do the following:

1. Clear Contract. Litigation is less likely with a clear contract, so the lawyer can assist in preparing and negotiating a clear contract for sale of the real property.  Sometimes this is done with a standard form, such as the FAR/Bar form issued by the Florida Bar and Florida Association of Realtors or the FAR forms issued by the Florida Association of Realtors. The lawyer often prepares addenda to these standard forms to clarify aspects of the transaction.  Sometimes, however, the lawyer prepares a form specifically for the particular transaction rather than using a standard form that has many provisions that are not applicable to the particular case or that are more favorable to the buyer.  Unlike others parts of the real estate sales team, lawyers are trained in the art and use of words and the drafting and interpretation of contracts.

2. Deadline Follow-up. All contracts for the sale of real property should include deadlines for such matters as inspections, financing, title insurance, surveys, closing, etc.  To avoid litigation, it is important to comply with these deadlines.  The lawyer can assist the seller in scheduling contract deadlines in order to achieve the goals of getting paid and avoiding litigation.

3. Limit Liability in Contract, Deed and Closing Documents. Legal documents often contain representations and warranties that are binding upon sellers after the closing in a way that may obligate the seller to pay damages to the buyer even years after the closing.  Since the seller’s only goals are to get paid (and stay paid) and avoid litigation, it is often important to limit the seller’s representations and warranties in contracts. Lawyers know which warranties and representations are standard and which are not, which can be negotiated out and which must stay.

4. Cashier’s Check or Wire Transfer at Closing. The seller must accept only a cashier’s check or a wire transfer of net proceeds at the closing. If the seller accepts a title agency’s escrow check, then the seller accepts the risk if the check fails.  While most title agencies are reputable, there is no way to tell whether its escrow check will be honored by your bank.  If it is not, the seller loses and the buyer gets to keep the deed. (There is a Florida case directly on point that so holds.) So, it is essential that the seller only accept a cashier’s check or wire transfer at closing.

Therefore, the seller of Florida real estate, whether it is residential, industrial, or commercial, should always engage a Florida lawyer to assist in the transaction.

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