Sellers: Don't give away your right to collect earnest money
Benny Kass
Inman News®
DEAR BENNY: Some states such as California have a 3 percent limit to deposit recovery; buyers have the right, if they legally back out of a contract, to secure a full return of up to a 3 percent deposit. Any deposit over 3 percent is not refundable. In California, I have never seen a deposit over 3 percent. --Joe
DEAR JOE: I am not a California attorney, but I did a Web search on the issue of the earnest money deposit when you sign a contract to purchase a house or a condo. I am not sure you are correct. While you are right that most deposits in California do not exceed 3 percent of the purchase price, it's not based on any legal requirement.
Apparently, sellers sign a provision that they will be limited to 3 percent of the purchase price in the event the buyer defaults. Accordingly, the earnest money deposit rarely exceeds that amount.
If I am a seller, I want more than 3 percent should my buyer default. If there is a default, I have to start all over again marketing the house, and in the meantime I have to continue to carry my property -- i.e., upkeep, real estate taxes, mortgage and insurance.
In my practice, when I am representing sellers, I try to get a deposit of no less than 5 percent. I want the buyer to recognize that should he decide not to buy -- i.e., get buyer's remorse -- he stands to lose a lot of money. Of course, if he can't meet certain contingencies, such as an acceptable appraisal or obtaining financing, he gets the deposit back.
And obviously if I am representing buyers, I want the deposit to be as little as possible. Ten dollars is adequate consideration.
DEAR BENNY: In your May 30 column response regarding stepped-down basis of inherited property and/or gifting of same, there are two errors in your answer.
1. With respect to the alternate valuation date allowed for an estate, the available election is available only when the estate has an estate tax liability, and only to the extent of that liability. If there is no estate tax, then no alternate valuation is allowed. Your answer implies otherwise. The date is the date of death.
2. When property is received by gift, the basis to the donee is the basis of the donor, or the fair market value of the property on the date of gift, whichever is lower. Your answer does not mention the fair market value on the date of gift.
I submit this information only for purposes of clarity, certainly not to criticize. --Jim
DEAR JIM: Many thanks for the clarification. This highlights perhaps the main message readers should get from my column: Discuss your legal issues with your attorney and discuss your financial issues and concerns with your financial expert or CPA.
DEAR BENNY: The changes with FHA over the last year have not only made it difficult for condo owners to sell or refinance, but it has also put a potential financial strain on the community as well. If the community meets the new FHA qualifications, the board is faced with the decision of spending the $1,000 to $2,000 to get it approved. Those funds may be difficult to come by in today's economy.
The reason I'm writing you is that I felt you may have oversimplified the amendment process and gave readers the impression that it should be quick and easy to get the rental limitation in place so that the community could work towards FHA approval.
As an owner of a community association management company that works with communities in Virginia, I can personally attest that getting the required 66.67 percent affirmative vote to amend the declaration is anything but easy, especially when you are dealing with an emotional issue like limiting an owner's right to rent his unit. I am personally in favor of rental limits; however, clear and equitable processes must be developed and implemented to manage the rental limitation. It is not an easy task to develop processes that most can agree on.
Even if you are able to educate the community on the importance of limiting rentals, and that ultimately the ability to easily sell your unit should outweigh your ability to rent it, there is the much bigger issue at play: apathy among unit owners. Many communities struggle to just get a quorum to hold an official owners meeting, and actually getting enough votes to approve an amendment can be an impossible task. We've had communities try for more than two years, expending significant money and energy attempting to pass an amendment just to fall short due to a lack of response.
I think education on the process and the understanding of how important it is for the unit owners to be involved is the key to reversing this trend. Thank you for your time and I hope you continue writing articles to educate your readers and encourage participation in their community associations. --John
DEAR JOHN: Many thanks for your very helpful comments. If my earlier column gave the impression that it was easy to amend community association documents, then I apologize.
From my personal experience representing a large number of community associations in the Washington, D.C., metropolitan area, I am well aware of how difficult it is to get the legal documents amended especially with a topic as controversial as restricting (or at least capping) the number of rental units in the complex.
Case law throughout this country makes it clear that if your legal documents do not impose any cap or other restriction on the number of investor-owners in the association, the board merely by rule cannot make the change. In fact, some court cases have said that to make such a rent restriction valid and enforceable, the declaration of condo (and not the bylaws) must be amended.
And as we all know, to amend association legal documents requires a supermajority vote of all of the members, either 66.67 percent or a 75 percent vote.
Here are some tips when seeking to amend your association documents:
1. Make sure you carefully read the appropriate sections in the bylaws. Not only do you have to make sure you have the correct percentage interest, but you also have to comply with the notice of meeting requirements.
2. If you are attempting to put curbs on renting, whether it be an outright ban or a cap on how many units can be rented at one time, in order to convince those owners who currently rent out their units (or who plan to in the near future) to support the vote, you might want to grandfather all owners. In other words, all current owners have the right to rent, and there is no ceiling for them. However, when they sell their unit, their purchaser will be subject to the new requirements.
3. The legal definition of "adjourn" is to "break off a meeting with the intent of resuming it later." If you hold a meeting to vote on a proposed amendment, and have a quorum but not enough votes to enact the amendment, do not close the meeting. Adjourn it for 30 days. During that time, the board -- and those who support the proposal -- should mount a vigorous campaign to get more supporters on line. Of course, the opponents will that same opportunity.
But isn't that the essence of democracy?
DEAR BENNY: How can we remove the bankruptcy from our files? It's been 10 years and it's still out there. --Mitch
DEAR MITCH: I am not a bankruptcy attorney so I did a Web search for "removing bankruptcy from credit report." There's a lot of information out there, but make sure that your source is a credit reporting agency and not someone posting a blog online.
According to one website, Chapter 13 bankruptcy is deleted seven years from the filing date, while Chapter 7 is deleted 10 years from the filing date.
Presumably you had an attorney when you first filed. He/she should have given you basic information, including answers to your current questions.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.
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