Haunted Real Estate

Given the fact that today is Halloween, I thought we would touch on the subject of haunted houses. Selling a house that is haunted in some states can raise a disclosure issue. Buyers of homes who were not informed of the haunted reputation of the purchased home have been known to go to court to try and reverse the sale, and in some states have succeeded. It all depends on a state's disclosure laws relating to the sale of 'stigmatized properties.'

Below are links to various blogs and web pages that I've come across on the subject of haunted real estate:

Hollow Hill: Buying or Selling a Haunted House

Selling a Haunted House: A Satiric Real Estate Deal Based on the Famous Stambovsky Vs. Ackley Case

Field Guide to Dealing with Stigmatized Properties

The Haunted Real Estate Blog

Haunted Real Estate: A Primer for Real Estate Agents

GhostsandStories.com: Haunted Real Estate

HauntSpot.com: Haunted Real Estate

FannieMae Reinstating Homebuyer Education and Counseling Requirement

Effective January 1, 2009, first-time homebuyers obtaining a MyCommunityMortgage loan or a loan that relies upon nontraditional credit to qualify must receive homeownership counseling and education.

All required borrower counseling will be provided according to the National Industry Standards for Homeownership Education and Counseling, or according to standards of comparable quality that are established by other organizations. The purpose of such counseling is to provide the first-time homebuyer in particular with reliable information and the resources necessary to make an informed decision that will hopefully lead to sustainable home ownership. The stated concern is that too many homebuyers arrive at the settlement table without a full understanding ofthe terms and conditions of their loan or the overall responsibilities of home ownership.

Click here to access the press release issued by Fannie Mae.

Ohio’s Revised Foreclosure Law

Ohio’s Foreclosure Law was recently revised in Ohio Substitute House Bill 138 (effective September 11, 2008) to help shorten the timeline of foreclosures, help reduce the backlog of foreclosure cases on court dockets, and help resolve inconsistencies that exist among counties in Ohio regarding handling foreclosures.

Among the significant changes in the law are the following:

1. Mediation. Under the new law, a court, at any stage of the litigation may require both the mortgagor and the mortgagee to participate in mediation. While there are no guarantees, mediation is bound to help shorten the process in some cases, as well as reduce the costs involved.

2. Improvements in the Information Process.

A. Preliminary Title Report. Under the new law, to proceed with a foreclosure action, it will be first necessary for the plaintiff to file a standardized “preliminary judicial report” which, in effect, is a guarantee of title issued by a title insurance agent, and which must be filed within 14 days after the complaint is filed. For commercial property (and residential property consisting of more than four single family units), either a preliminary judicial report or a title commitment can be filed to satisfy this commitment.

B. Advertisement of Sale. The new law requires that any notice and advertisement for the sale of land situated in a municipal corporation contain the street number of any buildings on the land, as well as the website address of the officer (e.g. County Sheriff) in charge of the sale. The advertisement of the sale must be published for at least three weeks prior to the sale (vs. 30 days prior to the sale under the prior law).

C. Legal Description/Open House. The officer holding the sale must provide a legal description upon request, and may allow an open house to be held at a vacant property so that persons wishing to view the property prior to the sale can do so.

D. Purchaser Information. Under the new law, a successful bidder must now deliver to the officer in charge of the sale the bidder’s name, address, phone number, the identity of a specific individual who can be contacted with respect to the sale, and a statement indicating whether or not the purchaser will personally occupy the property.

3. Due Date for Payment to Complete the Sale. The purchase price balance must be paid by the successful bidder within thirty (30) days after confirmation of the sale, or the purchaser will be held in contempt of court. There is no exception for lien-holder/purchasers.

4. Due Date for Delivery of Deed. The attorney filing the Writ of Execution must, within seven days after the filing of the Order of Confirmation of Sale, deliver the deed to the officer who sold the real property. The officer must then record the deed. This procedure was designed to prevent “flipping” of property.

5. Confirmation of Sale Requirement. The new law requires the court to enter the order confirming the sale within thirty (30) days after the sale.

Most commentators believe that the new revisions to Ohio’s Foreclosure Law will add expedience and fairness to the process. Because of the added nuances to new and existing procedures, legal counsel is always advised, no matter what side of the foreclosure process you may find yourself on.

To review Ohio Substituite House Bill 138 in its entirety, click: http://www.legislature.state.oh.us/bills.cfm?ID=127_HB_138

Ohio House Introduces HB 626 to Help Residential Tenants Facing “Foreclosure Eviction”

As you may recall from our post last week entitled “Don’t forget the “ND” and the “A” in SNDA’s”, Ohio law generally provides that unless the parties have signed a “Non-Disclosure Agreement”, a foreclosure (resulting from a Landlord defaulting on a mortgage filed before the lease) extinguishes that lease, even if there is time left in the lease term, and the tenant did not default.

As the law in Ohio stands now, tenants don’t even have to be notified of, or joined in the foreclosure action. For residential tenants, this literally means being “thrown out on the sidewalk”, with little warning.

H.B. 626 was introduced by the Ohio House of Representatives on October 7, 2008 to help soften the blow of these unfortunate, and lately, frequent occurrences.

First, the House Bill proposes to amend Ohio Revised Code Sec. 2329.26 such that a judgment creditor would need to serve a minimum thirty (30) day notice of the sale of the property, on any tenant residing in residential property that was not made a party to the creditor’s action. Proof of service of the thirty (30) day notice would need to be shown to the Court at least 7 days before the scheduled sale or the sale would not go through.

Second, House Bill 626 would enact new Ohio Revised Code Sec. 5321.20 which, as a general rule, would effectively convert any existing rental agreement to a Month to Month tenancy, after a foreclosure sale (terminable by either party upon thirty (30) days notice) instead of extinguishing the lease on the day of the sale. An exception to this new general rule (if enacted) applies if the lease is entered into after a foreclosure action is filed, and no notice of the foreclosure is given to the Tenant. In that situation, the new owner after the sale must offer the tenant the same lease deal entered into after the foreclosure was filed.

It seems that the net effect of this House Bill is first, “notice of the humane kind”. A residential tenant would get thirty (30) days notice of the sale, and a minimum thirty (30) days afterwards (if the new owner exercises its thirty (30) day right to terminate the lease on the date of sale) to find alternate housing. Second, the House Bill would thwart those trying to take advantage of the less fortunate by getting rent money from a clueless tenant during the foreclosure action, and then getting rid of the tenant after the sale.

Hopefully, House Bill 626 will go quickly through the legislative process to prevent faithful tenants who pay their rent, from ending up on the sidewalk, with little or no warning, just because they made an unfortunate choice of Landlord.

Home Builders Get Inventive to Assist Buyers in Their Home Purchase

A growing trend among home builders has been to work with potential buyers to help them raise their credit scores so they can qualify for a mortgage or a better interest rate. This help has been in the form of enrolling potential buyers in programs for credit report errors, managing debt or other credit enhancement assistance.

Some home builders are working with companies that provide certified credit counseling to help people clean up their credit or providing free credit-improvement programs in-house. Since rebuilding bad credit takes more time than just correcting errors in a credit report, the programs can take anywhere from a few weeks to several months.

This approach is no quick fix to the current slowdown in the new home sale market. However, builders hope the process will build loyalty to their company and lead to a deal down the road. Home builders taking this approach include Hovnanain Enterprises, Inc., M/I Homes Inc. and D.R. Horton Inc.

While no one expects the use of these credit enhancement programs to generate a signficant volume in home sales, in today's market, every single sale counts.

New Features On Our Blog

In an effort to provide useful content for readers of our blog, we have added a few new sections.

These sections are on the right hand side, and contain headlines for news articles on various real estate related topics. Click on the headline and the link takes you to the full article. The three news sections are Commercial Property News for the Midwest, headlines from the Wall Street Journal's Real Estate Development page, and news headlines related to mortgage loans.

Seller As Mortgage Lender

In today's tough real estate market one of the biggest obstacles to selling your home or commercial building is the buyer's ability to obtain mortgage financing. It is much harder to qualify for a mortgage than it was 1 or 2 years ago. Some sellers may want to consider financing all or part of the purchase price as a way to close the sale.

In a business setting, I've come across more situations in which seller financing plays a significant role. Financing for commercial properties, like jumbo mortgages, are the most difficult to get. While some traditional bank financing is still possible, it generally will not cover the full purchase price. Every commercial transaction I've handled this year, whether real estate is a part of the deal or not, has included seller financing as part of the purchase price payment.

These same financing difficulties are also affecting the home buying market. In Sunday's Wall Street Journal, writer Amy Hoak discussed the trend of home sellers stepping in and financing deals on their own. For those readers with a print or online subscription the the Wall Street Journal, I recommend reading Ms. Hoak's article.

Being able to finance the sale of your home can give a seller an edge. If a seller can eliminate the hurdle of qualifying for a bank loan, then the pool of interested buyers doubles. A seller can benefit from receiving steady income stream from the mortgage and deferring capital gains.

On the downside, if the buyer defaults, the seller has to go through the foreclosure process to reclaim the home. Also, seller financing works best for someone who has the home paid off and does not need all of the purchase price up front to pay on the next home.

Sellers interested in pursuing this avenue should consult legal counsel to prepare appropriate documentation to address the key deal terms such as how much of a down payment should be provided and the terms for payment, late fees, events of default, required insurance, etc.

Sellers may also want to consider the use of a loan servicer to handle the recordkeeping and collection of mortgage payments. Loan servicers and peer-to-peer lenders mentioned in Ms. Hoak's article are sellerloans.com and virginmoneyus.com.

Don’t Forget the “ND” and the “A” in “SNDA’s”


If you are a landlord, tenant, or lender, and have no clue as to what the title of this Blog article is referring to, please read on. The bottom line is that if “the form does not fit, you must alter it”. If you are a lender, the “A” - (Attornment) will be necessary to prevent a tenant from walking away from its lease without liability, in the event its landlord is foreclosed upon. Without the “ND” - (Non-Disturbance), a tenant can be permanently evicted from its leased premises after a foreclosure of its landlord’s property, regardless of how much time is left in the lease term. The “ND”, the “A”, and at times, the entire “SNDA”(Subordination, Non-Disturbance and Attornment Agreement) are often overlooked because they are not understood, frequently resulting in disastrous and unintended consequences.

Before one can understand the crucial nature of SNDA’s or its various “sub-agreements”, it helps to get a sense of what all the letters stand for, what they mean, and the law in Ohio that makes them necessary.

There are two basic principles of Ohio real estate law that dictate the need for SNDA’s. The first is Ohio’s Recording Acts (See Ohio Revised Code Section 5301.23 and Section 5301.25). The general purpose of recording acts is to protect people who have acted in good faith, paid value for property, and want to assure themselves that they have all the rights to their property, as against the rest of the world. Ohio has what is called a “Race-Notice Recording Act” (for deeds and other instruments, except mortgages-O.R.C. Sec. 5301.25) providing that unless one party has actual notice, the person that “wins the race”, and records their interest in a property has priority over the person that records later. As between mortgages, Ohio has adopted a “Race” Recording Act (O.R.C. Sec. 5301.23), with the date and time of recording being the sole test for priority. For an example on how the law works, if a bank lends money to a landlord and takes back a mortgage, and records that mortgage, the bank has staked its first priority position. If the landlord later leases the property to a tenant, and the lease, or a memorandum of lease is subsequently recorded, the tenants’ rights are second in position. In the Olympics, second place is a coveted silver medal. In real estate, however, especially in Ohio, second place can be catastrophic for a tenant due to the “second basic principle of Ohio real estate law discussed below.

The second basic principle of Ohio real estate law dictating the need for SNDA’s is that as a general rule, a lease is extinguished upon foreclosure of the property leased. Ohio and a minority of other states declare a lease terminated, upon foreclosure of the property being leased, whether or not the tenant was joined in the foreclosure action. (See New York Life Ins. Co. v. Simplex Products Corp., 21 N.E. 2d 585 [1939- Ohio]; Hembree v. Mid-America Federal Savings & Loan, 580 N.E. 2d 1103 [Ohio App.-2nd Dist., 1989]). If the tenant does not vacate the premises after the foreclosure, the new owner can file for eviction and prevail, regardless of how much time the tenant had left on its lease. (Note: as a result of some contrary lower court authority, mortgagees seeking assurance that “junior” leases to a property will terminate, often will join the tenants as additional parties defendant in their foreclosure action. See Ohio Real property Law and Practice Sec 20.23 [Matthew Bender & Company- 2007]).

As a result of the above-described real estate law, the SNDA was “invented” as a vehicle to prevent unintended or distressing consequences from otherwise occurring. Actually, the SNDA is three agreements in one. The “S”, the Subordination Agreement allows a lender-mortgagee of the property whose lien is second (or junior) to become superior to the lien of the lease. Most lenders like to be in “first place”, and insist, as a condition to their loans, that any superior leases in place be “subordinated” to their mortgage. That is why most leases will have a clause requiring the tenant to subordinate their lease to mortgages which the landlord may apply for during the lease term.

One crucial, fatal error for tenants is to forget to insist upon the “ND” part of the SNDA. The Non-Disturbance Agreement is an agreement, or part of an agreement that permits the lease to stay in force as long as the tenant is not in default. It is a contractual agreement between the lender and the tenant, necessary because the lease itself would otherwise be extinguished after a foreclosure. The following language, or variation thereof, should always be in a lease to qualify the right of subordination and protect the tenant: “provided that Landlord shall procure from any mortgagees or other parties requesting subordination, as a condition to such subordination, an agreement in form reasonably acceptable to Tenant providing in substance that so long as Tenant shall faithfully discharge the obligations on its part to be kept and performed under the terms of this Lease, Tenant's tenancy and rights under this Lease will not be disturbed by any mortgagee or as a result of any default under any such Mortgage (“Non-Disturbance Agreement”), and that this Lease shall remain in full force and effect even though default in or foreclosure of the Mortgage may occur”.

With the above language, or variation thereof, the lender or new buyer after a foreclosure of the landlord’s property would be legally obligated to recognize the tenant and its lease. One extremely important, and often overlooked requirement for a tenant signing a lease is a Non-Disturbance Agreement with regard to existing mortgages in place, recorded before the recording of the lease. In these situations, the existing mortgage starts out in “first place”, and consequently, a Non-Disturbance Agreement is just as, if not more important for the tenant. The following language can help protect the tenant from losing its lease as a result of a mortgage filed prior to the start of its lease, that is later foreclosed upon: “Notwithstanding anything contained herein to the contrary, Tenant shall have the right to terminate this Lease, upon written notice to Landlord, in the event Tenant and any current mortgagee or assignee shall not have entered into a Non-Disturbance Agreement in form and substance reasonably satisfactory to Tenant within (60) days after the Commencement Date of the Lease.

In addition to unhappy tenants coming to us for advice “after the fact”, we have heard from unhappy lenders when the “A” is ignored, with unintended consequences to the lender. Suppose we have a situation where a landlord’s property is foreclosed upon, and the tenant wants to get out of its lease obligations. If the lease was subordinated to the mortgage, the lender’s rights have priority over the tenant’s rights. The tenant’s obligations, however, are another story. Since the lease becomes extinguished upon foreclosure, there is no resulting agreement obligating the tenant to pay rent and stay in place. This is where the “A” comes into play. The Attornment agreement (or provision) creates a contractual obligation between the tenant and a third-party lender, in which case the tenant agrees to recognize the mortgagee as its new landlord, after a foreclosure sale.

Landlords are cautioned in regard to SNDA’s as well as tenants and lenders. We have seen many elaborate subordination and SNDA clauses in leases, some purporting to be “self-effectuating”. While there is some lower court authority to the contrary, the danger of fancy, elaborate subordination clauses within the lease is that they may be ruled extinguished, along with the lease they are contained in. It is much more cost effective to put the SNDA is a separate document, signed by landlord, tenant and lender, than being faced with the prospect of litigating the matter to be a “test case” for the Supreme Court of Ohio.

Even if “all the letters are in the agreement”, legal counsel is advised to review the same. While containing similar provisions from time to time, SNDA’s are no more “standard” than any other legal document with rights and obligations of more than one party to the documents. The SNDA should track the existing lease rights and obligations and not add to or subtract from same. At the very least, tenants, make sure the SNDA has a “ND” and insist on a “ND” prior to signing a lease, if there is a mortgage already in place on the landlord’s property. Landlords, don’t believe there are no issues to be concerned about, if your SNDA’s are not separate documents, approved by your lender. And lenders, don’t forget the “A”, or you may find yourself taking over a former income producing property, with no more rent income in the future.

Acquistion & Development Loans -- Gone Up In Smoke

Last week I asked everyone whether they knew of any lending institution making A&D loans these days. After that posting I received a number of emails and phone calls on the issue. The results are not encouraging. Most area lenders have virtually ceased to lend money for acquisition and development. No one knows when it will change. The concern understandably centers upon the developer/builders' ability to then sell the homes they are building or to lease the office space in a new building.

In addition, Bank regulators are scouring through the lender's records looking for reasons to write down assets, making 'caution' the operative word in a lender's vocabulary today.

For those few (and I mean few) lenders still lending to developers, the rules have changed. Demand for these loans far exceeds the supply of available funds, allowing the lender to be quite choosy. The pricing has gone up considerably as lenders want a higher return for taking the risk. Also, the capitalization requirements and financial covenants expected of a potential borrower have become much more stringent in the past 60 days; i.e., lenders will reject an applicant that is too leveraged and not sufficiently capitalized.

Of the handful of borrowers that succeed in obtaining loans, it often is because that borrower had sufficient collateral and cash flow to qualify for a more traditional secured loan. For developers that are land rich, cash poor and highly leveraged, they are out of luck.

What the Fed's Interest Rate Cut Means for Consumers

Yesterday the Federal Reserve enacted an emergency interest rate cut of 50 basis points. This is only the second time this year that a rate cut has been enacted outside the Federal Reserve's regularly scheduled meeting process. While interest rate cuts have sometimes been followed by reductions in the interest rate of mortgages, that is not always the case these days.

Below are links to some articles that discuss what the interest rate cut means:





The “Housing Glass” is Half Full - Buy Before It Fills Up

Now that the ink is drying on the “bailout bill,” how long will it take the housing market to recover; and to what extent? Fortunately, we know that based on the historic, cyclical nature of the housing market, there will be a recovery. “Historically, housing has led the nation out of economic doldrums”, said Lawrence Yun, National Association of Realtors (NAR) Chief Economist (quoted in a recent “E-article” by Walt Molony, at the National Association of Realtors’ website). “The faster (a free flow of credit) happens, the sooner we’ll see a broad stabilization in home prices that in turn will help the economy recover”, Yun said.

While we know a recovery is coming, unfortunately, we do not know when, or to what extent. Based on various reports released last week, it sure seems like rates and prices are at, or nearly at the “bottom of the glass”, signaling opportunists to “buy low” and start the recovery.

Here is what we do know.

(1) Mortgage rates went up nine basis points (9/100 of one percent) in a politically volatile week. According to BankRate.Com, the average benchmark rate for a 30 year home loan was up to 6.41 %, up from 6.32 % a week ago. 6.41 % is about where rates were last year at this time. Two weeks ago, mortgage rates were under 6%. Most housing experts seem to agree that despite some small up and down fluctuations; credit score requirements, debt-equity ratios, fees and rates are expected to rise.

(2) According to a new study by Foresight Analytics of Oakland, California (cited in a September 22nd article by Stan Bullard in Crain’s Cleveland Business) delinquency rates for single family construction and development loans for the Cleveland-Elyria-Mentor and Portage and Summit Metropolitan Statistical areas, have dipped slightly in the second quarter from the first quarter of this year, in comparison to rising rates in other parts of the country. The study cited by Mr. Bullard indicated that loan delinquencies by builders and developers in the Cleveland MSA edged down to 16% in the second quarter of 2008, from 16.2% at the end of the first quarter. In the Portage and Summit MSA, the rate slipped to 13.3% (from 13.6%). While these rate drops are indeed modest, in comparison, the national rate of such delinquencies rose 2.7% from the first quarter to the second quarter of 2008. This leveling off, in Northeast Ohio hopefully means that builders can soon afford to get back into the market and build more homes. In the meantime, however, our “buyers market” is expected to continue, at least until the glut of existing homes (old and new) continues to exist.

(3) Two national indexes show home sales and prices declining in the last month. According to the National Association of Realtors recent study (as reported by Walt Molony), existing home sales declined nationally by 2.2% from July to August,2008, and median home prices are down 9.5% in August, 2008 from a year ago. Regionally, existing home sales in the Midwest, however, rose .9% in August. Furthermore, the median price in the Midwest from a year ago was down only 5.6% or almost half of the national average. A Standard and Poor’s/Case-Shiller Home Price Index (cited in an October 1, 2008 Wall Street Journal Article by Kelly Evans), paints a somewhat gloomier picture with its Twenty (20) City Index. This Index showed a 16% decrease in prices from August 2007- August 2008. The “S&P/Case-Shiller Index” is heavily weighted by the number of sunbelt cities having a large proportion of foreclosures in sub-prime loans. Home prices in Las Vegas, Miami, Los Angeles, San Diego and San Francisco were down between 25 and 30% from one year ago.

When you add up what we do know (low mortgage rates, low prices of existing homes, and the number of new homes to be constructed expected to rise), the seemingly easy answer to the housing story, is if you can afford it, buy now- and buy low.

For more information on real estate trends in Northeast Ohio, check out Crain’s Cleveland Business at www.crainscleveland.com. For more information on national real estate trends, consult the National Association of Realtors at www.realtor.org/press_room/news_releases/2008.

Acquisition and Development Loans - Where Have They Gone?

One effect of the mortgage and credit crisis we are facing today is the impact it has had on developers. First, the difficulty in selling newly-built homes in a down market, battling falling prices and stricter mortgage lending requirements. Second, the banks have stopped making A&D loans (acquisition and development), bring some developers to a virtual standstill. Many of these developers have an excellent track record, but that doesn't seem to matter right now.

My question to readers is, do any of you know of lenders that are willing to make an A&D loan in northeastern Ohio today? I'd love to hear from you. Responses wil be posted.

BureauVeritas Webinar Schedule

BureauVeritas, a provider of health, safety and environmental services, has posted its webinar schedule for the remainder of 2008. Their seminars and webinars are useful for those who need CM points, or hours for CIH, CSP, CHMM, PE or AIA.

Click here to access the BureauVeritas webinar page on the Internet.

Board of Revision “Address Snafu” Delays, But Won’t Deprive the Board from Increasing Taxpayer's Real Estate Taxes

In Nickerbocker Properties Inc. XLII v. Delaware Cty. Bd. of Revision, 119 Ohio. St. 3d. 233, 2008-Ohio-3192, the Supreme Court of Ohio overruled the Board of Tax Appeals (appeals court for tax matters) ruling that had claimed such Board of Tax Appeals had no jurisdiction to vacate a Board of Revision (the first step in challenging real estate valuation) Order that increased the value of a taxpayer’s property.

In Nickerbocker, the taxpayer never received a notice of a hearing because the proper address was not put on the complaint. The taxpayer argued that the Board of Revision should have dismissed the complaint totally, because of the faulty address, and left the value of the property the way it was before the Board of Revision increased it. The taxpayer further argued that the Board of Tax Appeals had no jurisdiction (a form of authority) in the matter.

The Supreme Court of Ohio disagreed with the jurisdiction argument, ruling that once the taxpayer appealed to the Board of Tax Appeals, the Board of Tax Appeals had jurisdiction. The Supreme Court of Ohio held, however, that the use of the wrong address resulted in a failure to afford the taxpayer due process, as the hearing was held without the taxpayer, who was absent due to the faulty notice. Accordingly, the Ohio Supreme Court concluded that the Board of Revision had no authority to have ordered the increase in value.

To make a long story short, the taxpayer wins the battle but loses the war, in this case. While the Supreme Court of Ohio ruled that the Board of Tax Appeals had jurisdiction (to tell the Board of Revision its increase in value without a proper hearing was invalid), the Board of Tax Appeals was also ordered to “remand” (give back) the case to the Board of Revision to prepare a new, correct notice and conduct a new hearing. While this seems like good news, it will just prolong the inevitable since the property’s increase in valuation was due to a recent, “arms length” sale, between unrelated parties, which the Ohio Supreme Court has ruled is not only the best, but the only real evidence needed by a Board of Education to prove an increase in valuation.