Buying Residential Real Estate: The Inspection Process

In my last few posts, I guided you through the contract phase of buying residential real estate. Now I’d like to talk in more detail about the inspection process. This step occurs after you have negotiated terms with the seller. Most contracts provide a designated period for you to hire a licensed professional to examine the property you want to purchase.

Just because a home might seem perfect on the outside doesn’t mean it’s actually flawless. Major concerns could be hidden in the smallest places or even invisible to the naked eye. You might not notice cracks in the foundation or signs of a mold problem, or not recognize that the roof, furnace or appliances may be beyond their useful life and ready to fail, or not know if there are serious problems with the electrical wiring. You need to choose the right inspector who can discover potential problems before you close the deal.

The inspector you hire will evaluate the home to identify any code violations, hidden damage, required repairs and/or maintenance items. If you fail to take advantage of this inspection right, you could be waiving your right to reject the deal or to require that the Seller make repairs prior to the Closing.

The Value of a Professional

An experienced, licensed inspector’s evaluation and identification of potential or actual health and/or safety issues affecting the condition of the property, can provide you with ammunition to negotiate repairs and/or repair credits. These credits can offset the expenses you will otherwise incur after the Closing to fix or eliminate the problems identified by the inspector.

You can either compel the Seller to make the repairs before the closing documents are signed. Or, you can compel the Seller to provide you with credits at Closing equal to 10% of the estimated cost of the repairs/replacement costs.  You should always discuss these decisions with your attorney so you can weigh all your options.

Without your inspector’s expertise, you could be stuck making expensive repairs years after your purchase when they might have been resolved during the Negotiation Stage at no cost to you.

Since it is so essential to pick a knowledgeable inspector, let me stress that it’s not in your best interest to fall back on a family member or a friend for the job. Even if you feel someone in your inner circle can investigate the property as well as a professional and at a more modest cost, you could be setting yourself up for disaster. If the inspection proves to be faulty, you have no meaningful legal recourse.

Therefore, I recommend you search for an independent professional, licensed inspector to inspect your prospective home during the Inspection Contingency Period. When you hire someone who is not personally tied to you in any way, you’re much more likely to get an impartial and professionally organized report of every potential issue in the home.

Avoid Limitations of Liability

While I strongly advise using a professional inspector to protect your interests against expensive hidden defects in the house, you must also protect yourself against the inspector. The inspector you hire will most likely present you with a Service Agreement. This agreement may contain fine print seeking to excuse the inspector from any responsibility for making mistakes in performing the inspection. This exoneration is most often found in a certain clause in your contract called “Limitations of Liability.”

Signing an agreement with the Limitations of Liability clause means that if the inspector doesn’t inform you about a certain issue and you discover at a later date that the problem is financially devastating, you cannot sue the inspector. The most you will be able to recover is a reimbursement of the inspector’s original inspection fee, which is typically $250-$400 and probably won’t cover a fraction of your expense in fixing the overlooked issue.

So if an inspector hands you a contract with a Limitation of Liability provision, cross it off. Or keep looking for an inspector who doesn’t insist on this exoneration provision.

Coming Soon

Concluding my series on buying residential real estate, in my next post I’ll explain the attorney approval process. This is the final stage of the Negotiation Stage and is a critical part in ensuring you obtain the fairest deal possible.

Buying Residential Real Estate: Real Estate Tax Proration

 

Another important consideration is the real estate tax proration. This proration is necessary because real estate taxes are billed by the county in arrears, meaning if you own a home, the tax bill you receive is for the real estate taxes for the prior year. Therefore, when you buy a home, you will receive a real estate tax bill after Closing for the year before the Closing, when the property was owned by the Seller.

These pre-Closing taxes should be paid by the Seller, but at the time of the Closing, the tax bills will not be available. This is why we use the tax proration and calculate a real estate tax credit that the seller will give you at the Closing. You can think of it as getting the tax money in advance so that when it’s time to pay the taxes, you have enough to cover the bill.

The challenge of negotiating this proration is, however, that nobody knows for certain what the future taxes will be for your new home. There’s always the chance that taxes shoot up. This is why it’s customary to have a cushion. It is designed to provide for more than just the same tax dollar amount from the prior year so as to compensate for any increase.

Traditionally speaking, the cushion is a figure that’s between five and twenty percent. As a buyer, you would want that cushion to be as large as you can possibly get from the seller. This may translate into a request for a one hundred and twenty percent proration. An extra twenty percent gives you some wiggle room in case the tax bill rises significantly from the previous year.

Furthermore, if the Real Estate Proration creates a Closing credit that proves to be more than the future real estate tax bill, you do not have to refund any monies to the Seller.  This is because the real estate tax proration agreed to by the seller and purchaser is final and neither party has any right to seek any repayment after the Closing. But be aware that this finality also means if you do not negotiate a large enough “tax credit cushion,” you will not have the right to make the Seller pay you after the Closing if the future tax bill increases by more than your cushion. This is yet another incentive to secure as much of a cushion as you can for the tax proration during the negotiation process.

Coming Soon

Next time, I will discuss the Property Inspection Phase and I will provide you with essential advice on how to get this real estate properly examined so you can protect yourself from liability after you purchase your home.

Buying Residential Real Estate: The Negotiation Process – Part 1

In this post, I take a closer look at what you as a Buyer can expect when you start to negotiate the Real Estate Contract terms with the Seller’s side.

The Mortgage Contingency Provision

When buying a new piece of real estate, it’s easy to get caught up in the excitement of such a purchase and overlook certain factors that may not seem as important at the time. Unfortunately, I’ve seen this happen again and again with different clients. The result is that the sales contract neglects to fairly represent you as the buyer in key areas.

To avoid that scenario, you need to be aware of a variety of aspects in your contract before signing on the dotted line. One critical area centers on the mortgage contingency provision. In basic terms, this section of the contract should be consistent with the current interest rates for mortgages and permit at least forty-five days to get a home loan.  Some contracts are overly optimistic and only allow for a thirty-day window to obtain the mortgage. That can be a problem.

Although the seller obviously wants to wrap up the deal as soon as possible, thirty days is not always enough time to satisfy all of the requirements that the mortgage broker will need to secure an approval of your loan application by the bank. So make sure you specify forty-five days to attain a loan in the contract. If you are able to get one sooner, that’s fantastic. But the forty-five day time span is a much more realistic expectation.

Similarly, when filling in the blanks for the proposed interest rate or loan charges, choose conservative figures. For example, if interest rates for 30 year fixed mortgage loans are at 4.0 percent, insert “4.0 percent” rather than “market rate” or “4.5 percent.” In this way you preserve your right to reject a 4.5 percent loan (or higher) and to truthfully declare the mortgage contingency to be “unsatisfied.” Otherwise, the seller will compel you to close the sale because you received a loan approval at a rate that is within the “acceptable” terms specified in your contract (even though the rate is actually unacceptable to you as a borrower).

Coming Soon

Next time, I will discuss the Real Estate Tax Proration Phase – the challenge of predicting the future.

Buying Residential Real Estate: An Overview

Buying a new home can be an exciting experience. But it can also be very stressful because it is a “life event” (like getting married or having a baby) and it is  more complicated than it appears, and, when so much money is at stake, there isn’t a lot of room for error. So, you really need to have a clear idea of the steps involved in order to avoid any critical errors.

At the outset, however, it is comforting to know that based on statistics, almost every residential sale closes once the buyer’s mortgage loan is approved. And, equally comforting is the fact that almost every closing that occurs, is finalized despite the occurrence of a least one or more last-minute crisis. Indeed, like birthing a baby, the outcome is wonderful despite all the noise and discomfort that is predictably part of the process.

In general, the home buying process has three different stages:

·        The Negotiation Stage;

·        The Mortgage Loan Approval Stage; and

·        The Deal Closing Stage.

This particular post  will concentrate on the negotiating phase, which has three fundamental parts:

1. Negotiating contract terms;
2. Performing the inspection; and 
3. Attorney approval.

Negotiating Contract Terms

The Negotiating Stage begins once you find a house that you want to purchase. Usually, your realtor will play a key role in negotiating the contract terms with the seller’s agent. As an attorney, I don’t participate in this phase for the most part. However, I’ve found that it doesn’t hurt to consult a lawyer during this phase, especially if you have questions that your real estate agent hasn’t addressed.

But in the majority of cases, you and your realtor will work together to develop the terms and conditions that are realistic for the purchase of the home. A form contract then needs to be filled out. This can be done either by you or your real estate broker.

The contract identifies the home’s agreed upon price and all of the personal property that is included with the purchase. From light fixtures to appliances to lawnmowers, for example, every item must be specified in the contract. The contract also has other specific terms, such as real estate tax pro-rations, title exceptions and other legal issues that will be initially completed by you and your real estate broker but will alter be approved by your attorney as part of the Attorney Approval Phase.

Performing the Inspection

After you and the seller have agreed on the terms for the sale, it’s time to move to the next phase: “Property Inspection.” In most circumstances, you’re given a designated period of time to have a licensed, third party inspector examine the home in detail and to decide if you are willing to accept it. This time period is outlined in the contract that you and the seller previously signed. The procedure for accepting, rejecting or conditionally approving the home is also detailed in the contract.

Attorney Approval

Now that you’ve completed a contract and hired an inspector to look closely at the home you plan to purchase, it’s time for the attorneys to analyze the agreement between both parties. My role as your attorney is to make sure the contract represents your interests fairly and doesn’t expose you to any liability when you take possession of the home.

During the attorney modification stage, it is important to keep in mind that the lawyers from each side of the transaction often go back and forth to make any necessary changes to the contract. With the exception of the sale price, there are many areas of the contract that can be altered between the two attorneys.

When both attorneys reach an agreement, they then sign a letter outlining any additional terms or revisions. This letter agreement does not need to be signed by the buyer or the seller. But it is officially included in the real estate contract as an addendum. Therefore, the changes made by the attorneys are considered to be part of the contract for the purchase of the home.

Coming Soon

In this overview blog, I’ve provided you with the basics of the Negotiation Stage of a residential real estate transaction.  Next time, I will expand on this foundation and take you through the negotiation process in greater depth so that you better understand the procedure.

How To Choose an Attorney

In my prior posts, I have stressed the importance of mindfully creating a sound infrastructure for your business, to ensure that it is protected from predictable disasters. I discussed using Non-Disclosure Agreements, employee restrictive covenants, key man insurance, Shareholder agreements and Cost of Collection vendor provisions.

 

While it is essential that you thoroughly understand each functioning part of the infrastructure of your business, you will not be the person who actually creates all of the legal documents necessary to bring the infrastructure to life. That is the role of the attorney for your business, commonly referred to as Corporate Counsel.

 

But choosing a Corporate Counsel must be done with great care and caution. This attorney will be your first and last line of defense. He/she must be capable of effectively protecting your business and vigilantly keeping it out of harm’s way. In short, your Corporate Counsel must be a wise legal confidant and business strategist who understands your business and whose judgment is sound and keen.

 

So, in this post, I will discuss how to wisely choose an attorney to serve as the Corporate Counsel for your business.

 

The Qualifications

 

While every attorney has his/her own background, education and experience, I believe that those attorneys who are in the top ten percent (10%), all share three essential qualifications:

 

1)            Competence:  The attorney must have a thorough understanding of the important aspects of your unique business and must possess a complete command of those areas of the law that directly relate to your business. Nothing short of this high level of competence is acceptable, since it is this fundamental legal expertise that will serve as the basis for all strategic pre-emptive plans and tactical decisions.

2)            Honesty:  While seemingly obvious, this qualification is essential. Your attorney’s integrity must be non-negotiable and you must be able to trust both his advice and loyalty without hesitation.

3)            Care:  The attorney who acts as your Corporate Counsel must be committed to you and your business. He/she must truly care about vigilantly protecting your interests.

 

Now, most people blur these three credentials by choosing an attorney based on their “gut” feeling. For example, they might select their golfing buddy, who just happens to practice law, since there’s already a relationship between them. Or, a likable neighbor may seem like the perfect attorney to bring on board.

I’ve found some people assume if they have an attorney who has a couple of the above three qualifications, that this is sufficient.

 

But it’s not. I regularly explain to people that two out of three is a wicked marriage. If you hire an attorney who cares and is good at what she does, but isn’t honest, you’re in trouble. Similarly, if you hire an attorney who feels a responsibility to you and values honesty, but has no idea what he’s doing, your business is going to suffer. And the attorney who is competent and honest but is indifferent to the safety of your business will provide you with a false sense of security.

 

You need an attorney who embodies all three of the qualities I’ve described. Anything short of this complete list could spell disaster for the castle you’ve worked so hard to build.

Worker Classification: Part Two

In my last post, I explained the critical importance of properly classifying your workers as either employees or independent contractors. Indeed, I warned you that if you do not classify your workers in accordance with state and federal guidelines, your staff incorrectly, your business could be subject to hefty penalties and retroactive interest.
Since it is so important to understand how the State of Illinois and the federal government evaluate the status of a worker, I’d like to discuss this subject in greater detail. That way, you’ll become more familiar with the evaluation factors, so you can better protect your business.

Illinois’ Factors

As I’ve previously mentioned, the Illinois courts rely on a ten factor “right to control” test. This tool enables the state to conclude whether or not your workers are employees or independent contractors. The difference between the two types of workers matters from a governmental perspective for purposes of employment benefits and taxation.
These ten factors cover a wide range of circumstances. Most importantly, Illinois wants to know how closely you manage your worker. For instance, does this individual receive training, materials and direction from you? If so, it is likely that the state will conclude that you “control” the worker and therefore, this worker is properly classified as a “controlled” employee rather than an “uncontrolled” independent contractor.

Other aspects include:

·        Worker engagement – Illinois will look at whether or not the worker performs duties for other employers. If he is exclusively employed by your business and is not available for hire, then the state will see him as an employee.

·        Worker skill – The state evaluates the amount of skill needed to do the work in a particular company. In general, if more expertise is necessary, the state tends to classify the worker as an independent contractor.

·        Employment length – The period of time a worker has offered you services can make all the difference to the Illinois courts. If this individual has worked in your company for a short time, she’ll usually be viewed as an independent contractor. Conversely, a worker who has a longer history with your business will probably be recognized as an employee.

·        Payment method - If you pay your workers on a project-by-project basis, chances are that the state will see these individuals as independent contractors. On the other hand, salaried or hourly workers are more likely to be categorized as employees by Illinois.

·        Integral or ancillary – An integral worker is considered part of the company’s regular business. The fact that he performs a key function in the business, it’s probable the courts will look at him as an employee. At the other end of the spectrum is the ancillary worker, who is an occasional contributor to the company and not involved in its operations on a consistent basis. The ancillary worker will likely be viewed as an independent contractor.

In general, the underlying theme to remember is how much control the business exerts over its staff members.

Similar to the state’s court system, the Illinois Unemployment Insurance Act examines the amount of power you have over your workers in order to determine the correct categorization. But instead of ten factors, there are only three. Furthermore, all three of these circumstances must be met for a worker to be recognized as an independent contractor. Otherwise, the worker is deemed to be an employee.

Below are the factors this statute systematically applies:

·        The business does not control the worker’s performance.

·        The service cannot take place during the normal course of business or at the physical location of the company.

·        The worker has to offer an occupation or profession that’s separate from your business.

Again, control is the key. This means that the less supervision you have over a worker, the better the argument for classifying this individual as an independent contractor.

The Internal Revenue Service’s Factors

Like the state of Illinois, the Internal Revenue Service (IRS) also evaluates employment status based on the right to control. Therefore, if you direct, train and integrate workers’ services into your business operation, for example, it’s reasonable to expect the IRS to define your staff as employees rather than independent contractors. This means that you’ll be required to pay certain taxes and possible penalties, if you have misclassified your workers.

While the amount of regulation over your workers is a critical element of the federal government’s final judgment, other components are also involved to generate this decision. In total, the IRS relies on twenty different factors. These essential circumstances include:

·        Reports – If a business requires written or oral reports as part of the job, then the IRS could assume the worker is an employee. This consistent expectation suggests the worker is regularly supervised, which supports the government’s theory of permanent employment.

·        Payment of expenses – If a company covers workers’ travel or business expenses, the government may conclude they are employees. That’s because the payment is interpreted as control over the workers.

·        Realization of profit or loss – If workers can experience a profit or loss as a result of providing services to a business, they will be probably be viewed as independent contractors.

·        Working for numerous companies – If a worker provides products or services to several unrelated businesses, it’s likely the IRS will see him as an independent contractor.

·        Right to discharge – If a business has the right to discharge its workers, then the IRS might regard these individuals as employees. An independent contractor is protected from being fired unless he does not live up to contract specifications.

·        Right to terminate – If a worker can terminate her employment without any liability, then the federal government will generally look at this individual as an employee.

Need More Help?

Worker classification encompasses many detailed factors. So it’s understandable to feel overwhelmed by the numerous elements. But as a small business owner, you need to be aware that if you group your workers incorrectly, you could face harsh tax consequences.

However, my team and I at DregerLaw are well-versed in all of the factors the state and federal governments use to determine worker status. Let us make sure you’ve designated your staff correctly.