Death and Taxes Blog

Reverse mortgages have become more popular in recent years. The concept, in a nutshell, is this:

-you (62 years old or older) borrow against the equity in your home
-instead of paying down the mortgage over time, your mortgage grows. But it doesn't have to be paid back until the house is sold or until you die

I've encountered this situation in the probate context a few times recently: mom dies, reverse mortgage is now due, and guess what? The house can't be sold because of the bad real estate market.

The bigger problem, of course, is one of estate liquidity. When a person dies, there are bills that have to be paid. Some of those bills are small, and some of them can be avoided. But certain bills can't be avoided, and are going to cause a real headache for your survivors if you've left them with no liquid assets. There are lots of older people, even those who aren't particularly sophisticated, who take action to prevent their heirs from being stuck with hard-to-pay bills. That's why there's funeral insurance. But you also have to think about the extent to which your assets are in illiquid forms like real estate.

Almost three years ago -- soon after I started writing this blog -- I posted about how real estate sales statistics tend to shed more heat than light. Here's that post.

This still happens in a down market, like the one we have now. Each Sunday, in a feature called Price Pulse, The Chicago Tribune real estate section runs the numbers for a different area of Chicago. This week the focus was West Cook County and DuPage County, using figures from August - October 2007 (and the same period in 2006). The "results" are shown in a half-page color map.

My biggest complaint about Price Pulse is that its focus is on increase/decrease in value, and not on the effect of a good or bad market on the number of houses sold. While Price Pulse includes total units sold, the emphasis is on whether there was an increase or decrease. That's not particularly helpful, especially in municipalities where few houses are sold. (For instance, in Wayne, Illinois, the median price of houses sold went from $720,000 in Aug. - Oct. 2006 to $466,00 in Aug. - Oct. 2007. Given that only 5 houses were sold in the '06 period, and only 2 were sold in the '07 period, are these figures at all meaningful?)

Here's a quicker way to quantify what's going on in an area's real estate market, one that takes into account median price and number of houses sold. Basically, it just involves multiplying these numbers together, as you would for a company that sells widgets or spark plugs. You can then quantify the drop in "gross sales." For instance,...

I live in Oak Park. From Aug. - Oct. 2006, 348 homes were sold in Oak Park, with a median price of $310,000. From Aug. - Oct. 2007, the median price actually increased -- to $310,750 -- but the number of homes sold dropped to 272. Is it at all accurate to think that the Oak Park real estate market went up, based on the small increase in median price? I don't think so. Rather, I'd show the Oak Park market by doing the following calculations:

Aug. - Oct. 2006: 348 x 310,000 = $107.88 million in gross sales

Aug. - Oct. 2007: 272 x 310,750 = $84.524 million in gross sales

That's a decrease of about 22%, which is a number that makes sense to me. Overall, the "big" municipalities (which I define as municipalities with sales of 100 or more units in Aug. - Oct. 2006 and in Aug. - Oct. 2007) in West Cook and DuPage saw a decrease in gross sales of 23.50%. Berwyn had the highest decrease (57.84%).

A few months ago, I recorded a deed by which my clients transferred their residence into their living trusts.  My clients were then contacted by a company that said my clients should purchase a certified copy of the deed for their property -- from the company, natch -- for a fee of $150.  I told my clients not to bother. 

This month's IICLE Flash Points newsletter on Real Estate Law (written by Steven B. Bashaw) says that my clients' experience was not an isolated incident:

[T]he Recorder of Deeds of Cook County, Eugene Moore, is alerting lawyers to scams that may impact their real estate clients. The first scam involves letters sent to unwary senior citizens suggesting that something may be wrong with the title to their home and they had better investigate. The method suggested to do this is to order a “certified” copy of the deed to their property at a cost of $150.00. Of course, the same document can be viewed on-line without cost (www.ccrd.info) and a hard copy obtained for less than $1.00.

For the past two years I have rented office space in Oak Park (at 1101 Lake Street).  However, my lease ends on July 31, which means that a move is in order.  After looking at a lot of other office space, and doing a lot of thinking about my needs and the needs of my clients, I've decided not to go with a formal office arrangement.  The reasons are fairly simple:

1. I don't have a lot of client visits.  I neither have nor seek walk-in traffic, and I interact with my clients a lot via e-mail and telephone.  It seems a little silly to maintain a permanent office when I probably have one client meeting per week.

2. I have always made "house calls," and I think that's one of the things clients -- especially elderly clients, and clients with small children -- like about me.  I'll continue to do that.

3. The rents for the office space I looked at were almost double what I am currently paying in rent.  I'm not willing to eat that increase myself, and I'm reluctant to pass it on to my clients by raising my rates.

4. I was able to work out a virtual office arrangement with a company called HQ.  This allows me to schedule client meetings at what will be my main office (One Westbrook Corporate Center, Suite 300, Westchester, Illinois 60154).  I can also schedule meetings at other Chicago-area HQ offices (and there are a lot of them).

My biggest concern in getting rid of my office is that it creates an unprofessional look for my practice.  I don't want to be perceived as "the lawyer who works out of the back of a van," or some such thing.  On the other hand, I'm not interested in spending "money for nothing" just so I can create a certain image for myself -- I'm more concerned about doing good legal work.

Real estate writer Bob Bruss heads into JG Banks territory with this article, which discusses making a profit on probate properties.  I like the discussion of the risks of buying these properties, but have two criticisms:

1. Mr. Bruss states that "[f]inding probate properties isn't easy," but then goes on to detail some fairly easy steps you can take to locate these types of properties:

... [C]lip the daily newspaper obituary notices, look for published legal notices to creditors and notices of petition to administer estates, check probate court public files to determine if the deceased left real estate to be probated, and check with estate executors and administrators to learn if real estate will be sold.

2. Mr. Bruss says that investors should try to buy directly from executors and administrators, stating that "[b]ecause most executors and administrators are 'amateurs,' they usually want a quick, easy sale and are not motivated to get top dollar."  As I said before in this post about JG Banks probate seminars, "executors and administrators owe certain fiduciary duties to the beneficiaries of an estate, and... selling estate property at a discount would seem to me (absent other compelling facts) to be a violation of these duties."  I suppose you can just say "seller beware," but do you really want to profit by trying to convince executors and administrators to violate their fiduciary duties?  There have to be easier ways to make a buck.

Two things:

1. Last week The Chicago Tribune ran a story about an Oak Park couple that recently discovered an interesting fact about their home: James Dewar, the inventor of the Twinkie, once lived there.  (The article is here, although registration is required.) 

2. I recently learned that Chicago Cubs Hall of Famer Joe Tinker (of "Tinkers to Evers to Chance" fame) once lived one block west of me in Oak Park.  (Mr. Tinker's house at 832 Gunderson was built for him in 1907, and just appeared on a neighborhood housewalk sponsored by The Historical Society of Oak Park and River Forest.) 

This got me thinking some more about whether having a house with a famous former occupant could help you in the real estate market.  (I pondered this question with respect to gangster's homes last year.) 

I have to think that the internet can be a huge help in marketing these properties.  After all, a person interested enough in gangsters to buy Sam Giancana's house may not necessarily reside in the Chicago area.  Instead of marketing only to Chicagoland residents, a savvy realtor engaged to sell the Tinker house might try to stir up interest among baseball fans generally or among Cubs fans (or fans of baseball history) in particular.  This tactic probably won't work in all cases --  I don't know whether there would be anyone willing to pay a premium for The House That Twinkie Built -- but this kind of niche marketing may be worth exploring in some cases.  After all, the goal in selling a house is to sell to the person who values it the most, and it only takes one huge Twinkie fan (no pun intended) to create a windfall for the seller.

A few years ago the Illinois Real Estate Lawyers Association (IRELA) drafted a form contract called the Multi-Board Residential Real Estate Contract 3.0 -- the form is available as a pdf document here. 

Contract 3.0 was very good, and pretty widely accepted in the Chicago area -- it was approved by the Chicago Association of Realtors as well as attorney and realtor groups in DuPage, Lake, Kane, and McHenry counties (among others).

IRELA has now prepared a new version of the Contract (4.0), which is available to its members on IRELA's website -- hopefully a version of Contract 4.0 will become available to the general public in the near future. 

The website also includes commentaries related to Contract 4.0 -- because IRELA's site is so horrible to navigate, I've linked to these commentaries (all of which are pdf documents) below:

Comparison of Contract 4.0 to Contract 3.0 by Joseph R. Fortunato, Jr. (link)

Contract 4.0 Key Revisions And/Or Additions At a Glance chart by Ralph Schumann (link)

Amendment, Notice and Response Forms 4.0 (link)

Inability to Satisfy Contingency And/Or Mutual Cancellation Agreement 4.0 (link)

Yesterday's Wall Street Journal had an informative article about websites that are starting to challenge the supremacy of Realtor.com in the real estate listings game.  Here's a partial list of other sites you may want to visit if you are thinking of buying a home:

Craigslist Chicago (real estate for sale is here)

Oodle Chicago (real estate is here)

Propsmart

Trulia (which doesn't currently have any Illinois presence)

ForSaleByOwner.com

Google [Added 4/9/06: thanks to Anthony Cerminaro for his link in the comment below]

At its heart, an agreement for the purchase and sale of real estate is just a contract.  As such, the agreement needs to conform to the requirements of a valid contract under state law.  A key aspect of a valid contract is the "meeting of the minds" -- the parties need to agree on the actual terms of the contract.  This is the law -- it's also common sense.

Let me present a (slightly altered) timeline for a transaction on which I'm currently working:

November 4: Buyers offer to purchase real estate for $210,000, with a $5,000 inspection credit (in other words, $205,000 net offer)

November 5: Sellers make a verbal counter-offer of $215,000 with $5,000 inspection credit ($210,000 net offer)

November 6: Buyers present a signed contract to Sellers offering $215,000 with $6,000 inspection credit ($209,000 net offer)

November 7: Sellers cross out the purchase price and inspection credit amount on the Buyers' contract, write in $216,000 with $5,000 inspection credit, and sign the contract ($211,000 net offer)

We now have a contract signed by both parties, but the contract isn't valid.  The Sellers have agreed to a $216,000 purchase price with a $5,000 inspection credit, but the Buyers haven't.  We're pretty close to an agreement ($209,000 net offer vs. $211,000 net offer), but we aren't there yet.

A separate issue arises when the parties have entered into a valid contract, one that includes an attorney review provision.  (This provision, which is very typical in residential real estate contracts, allows each party's attorney to propose modifications to the contract.)  Let's suppose that the buyer's attorney sends a letter to the seller's attorney, asking that certain provisions in the contract be modified.  The question then becomes whether or not this modification request constitutes a rejection of the original contract and a counter-offer.  As Helen W. Gunnarrson explains in this very insightful article from the Illinois Bar Journal, practitioners differ in their take on the effect of an attorney modification letter.  Some attorneys do indeed view the modification request as a rejection of the original contract and a counter-offer, while others simply think of the modification request as a proposal of some kind.

The recent Second District decision in Bauer v. Giannis has opened some eyes among Illinois real estate attorneys.  The facts are as follows (this synopsis comes from Steven B. Bashaw's "Real Estate Law Flash Points" for November 2005, available online here -- the Bauer case is point #4):

In executing the Residential Real Property Disclosure Act Report at the time of the contract with Bauer, the sellers misrepresented that they were not aware of flooding or recurring leakage problems and concealed the fact that the property had flooded the year before and sustained $425,000 damage due to flooding. The home was on the market at the time of the flooding, and taken off for repairs by a civil engineer, including constructing a berm and a comprehensive grading plant. When a contract was prepared between the parties, and after a number of inspections (at least six) by the Bauers (during which time the Bauers testified Giannis never advised them about the flooding or repairs, but Giannis testified otherwise), an "As Is" Rider was added to the contract by their attorneys.

The Court found that, because the sellers did not make the appropriate disclosure on the Residential Real Property Disclosure Act Report, the "As Is" rider was not a defense against a fraud action by the buyers. 

The moral of the story for sellers?  Disclose disclose disclose.

"Mortgage fraud" is an overly-broad term for fraud involving a mortgage.  I say "overly broad" because mortgage fraud isn't limited to one type of scam; rather (and unfortunately), crooks seem to come up with new types of mortgage fraud on an almost daily basis.  It's also important to realize that mortgage fraud can be perpetrated by many different parties, including (but probably not limited to) home buyers, home sellers, lenders, real estate attorneys, closing agents, realtors, appraisers, and mortgage brokers.

Let me give a couple of examples of mortgage fraud:

1. In order to get a loan, a home buyer makes false statements on his loan application ("my annual income is $100,000," when it's actually $50,000) or when signing the closing documents.  One popular false statement is for the home buyer to claim that he or she will occupy the property when in fact he or she is an investor, and plans to rent out the property.  (Interest rates for investment property are higher than they are for owner occupied property, so the home buyer is lying in order to get a better interest rate.)  Note that, in the never-ending quest for a commission, the home buyer's mortgage broker may be encouraging or assisting the home buyer in making false statements to the end lender.

2. Another mortgage fraud scam is known as "flipping," and works something like this: A person (let's call him Sam) buys a distressed property for $60,000.  Sam does a very minimal amount of work to the property and, two months later, lists it for sale at $90,000.  A friendly (and crooked) appraiser appraises the property at $90,000, and a buyer makes a bid (after having secured an $80,000 mortgage).  Once the deal is done, the buyer -- and his or her lender -- discover that the property isn't actually worth $90,000.  The buyer and his or her lender are then stuck -- the buyer can't sell the property without losing money (neither can the lender), and the buyer may also not be able to afford his or her mortgage payments.

Cases of mortgage fraud seem to be on the rise in this strong real estate market, and threaten the strength of this real estate market (and, potentially, the economy as a whole).  To get a better feel for mortgage fraud, you may want to check out The Mortgage Fraud Blog.

This article has a good summary of the ongoing war between regular real estate brokers and so-called discount brokers, and how it has resulted in new legislation in Missouri. 

Discount brokers offer specific services -- like listing a property in the Multiple Listing Service -- in return for a smaller fee or commission than a regular real estate broker would charge.  The Missouri legislation (which passed their House and Senate unanimously, and has been signed by the Governor) requires brokers to be involved in handling and negotiating offers and counteroffers for their clients.  What does all this mean to home buyers and home sellers?  Follow the money and the influence:

-Regular real estate brokers are under a lot of pressure from discount brokers.

-The legislation was sponsored by a real estate agent.

-The Missouri Realtors Association spent $50,000 for a lobbyist to get the Governor to sign the legislation.  The lobbyist has close ties to the Governor's father.

-The Justice Department and the FTC both believe that the legislation (a) will reduce competition among brokers, "causing some home sellers to pay thousands of dollars more in commissions," and (b) "does not address any demonstrated consumer harm."

I think there could be an analogous situation to my estate planning practice here.  A discount broker might be the equivalent of an estate planning attorney who charges a small fixed fee to review estate planning documents drafted by the client using Will and Trust software.  Would I ever offer such a service?  No -- I think the risk (potential malpractice because I didn't catch a mistake in a document I didn't draft) far exceeds the reward.  But do I oppose the right of all Illinois attorneys to offer such a service?  Of course not.  Even though I think my rates are reasonable, I know that not everyone agrees and that not everyone can afford (or even wants) my services.  Shouldn't consumers who want less be able to pay less?

This question was recently asked in Robert J. Bruss' "Realty Q&A" column (the complete column is here):

DEAR BOB: My husband died almost 10 years ago and his name is the only one on the title to our home. His will said I inherited all his assets; we had no children. Now I want to sell my home, but the title insurance company says it can't insure title for my buyer until my husband's estate goes through probate court. A lawyer said this will take at least six months. Is there any way I can sell my home sooner? -- Claudia T.

Mr. Bruss' response is the same as mine would be -- a probate is needed.  However, I think it's important to understand why this is the case.  When a buyer goes to purchase real estate, or a title insurance company seeks to protect a buyer in the purchase of real estate, the buyer and title insurer will look at the real estate's "chain of title."  For instance, the buyer and title insurer might find something like the following for 123 Smith Street, Chicago, Illinois:

6/1/1990: Warranty deed from George Curious to Maisy M. Ouse

9/5/1995: Warranty deed from Maisy M. Ouse to Dora Explora

10/7/2000: Warranty deed from Dora Explora to Thomas Engine

If the buyer is purchasing from Mr. Engine, then there's no question about the chain of title being correct.  But what if a woman purporting to be Mr. Engine's widow seeks to sell 123 Smith Street?  In that case, the chain of title is unclear, and the buyer and title insurer need to ask themselves whether the widow can "fill in the gap" and show proof of why she is now the owner of the property.  The probate process provides this proof -- when the probate estate is opened, a formal document known as a "letter of office" will be issued by the court clerk, and the executor appointed by the court can then take steps to sell the property.  In this case, the letter of office acts as the next link in the chain, connecting Thomas Engine to the person buying 123 Smith Street from Mr. Engine's estate.

Two further points:

1. Claudia T. says that an attorney estimated the timeframe for a probate at six months.  In Illinois, this wouldn't be the case, at least not in a situation where the decedent died almost 10 years prior to the probate.  The six month timeframe in Illinois is necessary to handle any claims against the decedent's estate, but under Illinois law, all claims against an estate are barred unless asserted within two years of the decedent's death.  This is the rule even if no probate estate was opened for the decedent immediately after his or her death.  So, if (a) a probate court in Illinois found the Will of Claudia T.'s husband to be valid and (b) Claudia T. is named as the sole beneficiary under that Will, then the executor of her husband's estate should be able to sell the property and distribute the proceeds of sale to Claudia T. immediately.

2. Having a complete chain of title is necessary even in the case of joint tenants.  Let's take the above example but change it slightly, so that the 10/7/2000 transaction involved a Warranty deed from Dora Explora to Thomas and Ernestine Engine as joint tenants.  What happens if Mr. Engine then dies?  Mrs. Engine becomes the sole owner of the property, but if she wishes to sell the property, the buyer and title insurer will ask for Mr. Engine's signature on the deed as well (which Mrs. Engine obviously can't provide).  However, Mrs. Engine can establish the necessary linkage by recording a "Deceased Joint Tenant Affidavit" with the county recorder's office -- this is a sworn statement by Mrs. Engine (with Mr. Engine's death certificate attached) stating that Mr. Engine predeceased her, and that she is now the sole owner of the property.

When real estate that's being sold is subject to a mortgage, the lender must be contacted prior to the closing, and a "payoff letter" must be obtained.  This letter tells the party in charge of the closing (in Illinois, this is usually the title company) the exact balance on the sellers' mortgage as of the day of closing, as well as information about how to send the final payment to the lender. 

The attorney for the seller usually obtains a payoff letter for his or her clients as part of the title commitment/title insurance process.  This can be a fairly simple process, except for the fact that each lender must be contacted separately, and has different requirements for obtaining a payoff letter.  Some of these requirements are due to privacy concerns, while others simply appear to be based on the lender's preferences.

This page is meant to be a resource for attorneys and other individuals needing to order a payoff letter.  My goal is to list pertinent information for most major lenders here, including contact information and requirements for obtaining a payoff letter, in order to streamline the process of obtaining these letters.  To that end, I ask that readers e-mail me if they come across this information for a lender not yet listed below -- I'll then update this page with such information.

Lender: Bank One/Chase
Phone: (800) 836-5656
Information Needed for Payoff Letter: loan number, seller's zip code

Lender: Citimortgage
Phone: (800) 283-7918
Information Needed for Payoff Letter: seller’s social security number (last four digits), loan number

Lender: GMAC Mortgage Corp.
Phone: (800) 766-4622
Information Needed for Payoff Letter: seller’s social security number (last four digits) and name, loan number

Lender: Washington Mutual
Phone: (866) 926-8937
Information Needed for Payoff Letter: seller’s social security number (last four digits), loan number

Q: Do I need to attend my real estate closing?

A: That depends on whether you are buying or selling the real estate.

If you are a seller, you don't need to attend if (1) you execute a power of attorney for property, and (2) your agent under that power is present at the closing and signs all of the sale documents (deed, bill of sale, etc.) on your behalf.  It's fairly common for married couples to use a power of attorney for this purpose, with one spouse attending the closing and signing documents for both spouses, and the other spouse dealing with the movers or watching the kids.  In addition, it's somewhat common for sellers (whether married or single) to avoid the closing altogether, by appointing their attorney as their agent. 

While powers of attorney work fine, I usually like to have sellers who don't plan to attend the closing sign all of the sale documents in advance.  That way, the sellers will be able to avoid having to record their power of attorney with the county recorder's office (saving a recording fee of perhaps $50).  The power of attorney will still be necessary to sign ancillary documents at closing (such as the settlement statement), but shouldn't need to be recorded.

If you are a buyer, you will need to check with your lender, to see if you can (1) have the loan documents signed by an agent under a power of attorney or (2) sign the loan documents prior to closing.  If your lender says no to both of these requests, you'll have to attend the closing (or find another lender).

Dear Lender or Mortgage Broker,

I look forward to working with you to assist our mutual clients, Mr. and Mrs. Smith, with their home purchase.  Please let me know if you need my help at any time during the process.  At the risk of being too forward, I know that I certainly will need your aid with respect to the following:

1. As you know, Mr. and Mrs. Smith have a mortgage contingency in their contract.  If they don't have a mortgage commitment by the date shown in the contract, they can declare the home purchase null and void.  Of course, nobody wants that result.  I know that you are working hard to obtain a loan for Mr. and Mrs. Smith by the mortgage contingency date, and I don't want to get in your way.  However, I do ask that you (a) let me know as soon as possible if you need me to obtain any documents or information for you (such as a title commitment) and (b) let me know prior to the mortgage contingency date if the commitment won't be ready by that date, so I can ask the sellers for an extension.

2. In order to close on their home purchase, Mr. and Mrs. Smith need to know a "bottom-line" figure.  This figure is the amount of money (in the form of a cashier's check) that Mr. and Mrs. Smith will need to bring to closing in order to complete the deal.  Lots of homebuyers wake up in a cold sweat, worrying about whether they will have enough money for their closing.  I hope we can allay our clients' fears by getting them a "bottom-line" figure well in advance, so that they can get their financial ducks in a row and obtain their cashier's check a day or so (rather than an hour or so) before closing.  I would appreciate your help on this point.  I am happy to prepare a closing statement, taking into account purchase price, credits from the seller, loan fees, and other closing costs to come up with a "bottom-line" figure, but I can't do this alone.  Since you are the only one who knows the fees for Mr. and Mrs. Smith's loan, I will need a copy of these fees -- at your earliest convenience -- to do my job.

3. I will attend the closing for the home purchase, and part of my job will be to explain the loan documents (note, mortgage, etc.) to Mr. and Mrs. Smith.  As you know, lots of time can be wasted at closings, waiting for (a) loan documents that haven't arrived, (b) loan proceeds (via a lender's check or wire) that haven't arrived, or (c) final consent from the lender or mortgage broker to distribute the loan proceeds.   All this does is create bad publicity for your company in the minds of the buyers, sellers, realtors and attorneys in attendance, which obviously isn't good for your business.  Therefore, I think it's very important that you (or someone from your office) take responsibility for making sure the closing goes smoothly.  The best way to do this would be for you to actually attend the closing.

If you have questions about this letter, or need my assistance in any way, please let me know.

Sincerely,

Joel A. Schoenmeyer
Attorney at Law