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David K. Fowler is Board Certified in Real Estate Law. He concentrates his practice in the areas of transactional real estate representing buyers, sellers and developers; condominium and community association law representing condominium, timeshare and homeowner associations; title insurance claims and underwriting; and construction contracts. David also assists lenders with commercial and residential loan transactions, forbearance, loan restructuring and workouts.

David also writes for and serves as editor of the firm's real estate blog, The Legal Scoop on Southwest Florida Real Estate and newsletter, The Lender's Perspective. He is AV rated by Martindale Hubbell. David has also been recognized by Best Lawyers in America® for his work in real estate law (2013-2016).

contract flickr MarkMoz12Lawsuits regarding nondisclosure of a home’s problems are becoming more prevalent. Historically, the rule of “caveat emptor” or “buyer beware” was the prevailing standard in residential transactions. However, the law has evolved and Florida now requires sellers of residential property to make certain disclosures to buyers about the property’s condition and history. An increasing number of sellers and sometimes their real estate agents are finding themselves on the hook for nondisclosure. Therefore, it is important for both home sellers and real estate agents to be familiar with the disclosures required.

Florida law provides that, with some exceptions, a home seller must disclose any facts or conditions about the property that have a substantial impact on its value or desirability, and that are not easily observable to a buyer. This has been the standard since the Florida Supreme Court decided the case of Johnson v. Davis, 480 So.2d 625 in 1985.

Although not required by Florida law, it is well advised that property disclosures be made in writing together with proof of delivery to the buyer. Although some required disclosures are included in the prevailing residential real estate contract forms, disclosures relating to the specific property are normally made by separate disclosure form. Types of issues or property conditions required to be disclosed include:

  • whether improvements have been made without building permits;
  • whether the property contains any environmental hazards such as asbestos, lead, mold, Chinese drywall;
  • whether any infestations or damage have occurred from wood-destroying organisms such as termites and carpenter ants;
  • whether there are any problems with essential components of the home, such as the roof, plumbing, electrical wiring, major appliances, HVAC;
  • whether any actual or potential claims, complaints or court proceedings affect the property;
  • whether the property is subject to the rules of a condominium or condominium association; and,
  • whether any disputes have arisen regarding the property’s boundaries.

The good news for sellers in Florida, home sellers are not responsible for defects they “should have known” about. Rather, Florida sellers are required to disclose only those property defects of which they have actual knowledge. This standard was determined in the case of Jensen v. Bailey, 76 So.3d 980 (Fla. 2nd DCA 2011). In this case, the Court recognized that sellers should not be expected to guarantee to buyers that their properties are free of all defects. Instead, to make a claim against a seller, the buyer must be able to demonstrate that:

  • the seller knew about the property defect;
  • the defect has a substantial impact on the value of the property;
  • the buyer did not know about the defect at the time of purchase;
  • the defect was not readily observable or easy for the buyer to detect; and,
  • the seller did not disclose the defect to the buyer.

It is important to note that selling a home in “As-Is” condition, does not relieve a seller from the disclosure duties under Florida law. The “As Is” condition means only that the buyer agrees to take the property in its existing condition without the seller having to make any repairs.

Bottom line: Sellers are well advised to carefully review their property disclosures to any prospective purchaser. A little extra caution at this stage of any potential transaction can limit a seller’s liability exposure and help avoid a lawsuit post closing.

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Good Intentions

In passing the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress created the Consumer Financial Protection Bureau (CFPB). The purpose of the CFPB was to safeguard consumers against fraud and other predatory practices by financial institutions.

The CFPB recently issued a final rule which will require residential mortgage lenders to begin using new mortgage forms designed to make it easier for borrowers to review important information such as interest rate, monthly payments and costs to close the loan. So far, so good.

Unintended Consequences

Some of the new mortgage rules the CFPB has issued this year will influence qualification requirements and the types of mortgages that borrowers may get. Although the new rules may not affect many people seeking to buy a home or refinance their home loans since lenders have already tightened their lending standards following the financial crisis, analysts say certain groups of borrowers will be adversely affected.

New lending rules would bar people from obtaining a mortgage or refinancing if it puts their household borrowing over 43 percent of their income. Borrowers seeking larger mortgages, self-employed borrowers, first-time homebuyers, especially those who have college loans, and seniors, many with substantial savings, but lower incomes, may all need to jump through additional hoops to get a home loan. Those who lost jobs during the recession or who otherwise have had career disruptions in the past five years may find it difficult to get a real estate loan due to CFPB regulations regarding verification of job history and employment standing. Small business owners and independent contractors whose incomes are volatile, and recently divorced or widowed people could all have a tough time getting mortgages or refinancings. In sum, it has been estimated that anywhere from 10% to 50% of potential borrowers who qualify for real estate loans will be adversely affected under the new regulations.

The rules are aimed at protecting consumers from hurting themselves, but will likely reduce loan availability, loan choices and increase borrowing costs. Additional regulatory compliance costs are likely to put smaller community banks with fewer resources at risk of closing down or offering fewer services to their clients. Is it a good idea to reduce choices and increase regulatory compliance costs in the name of protecting some borrowers from hurting themselves while adversely affecting other borrowers and favoring the “too big to fail” financial institutions? Is a new federal bureaucracy the best way to protect consumers from “predatory lenders” or an example of the “nanny state?” As noted above, lenders have already tightened their lending standards since the financial crisis.

Will the good intentions outweigh the unintended consequences?  Time will tell.

Most real estate savvy folks are familiar with the phrase “caveat emptor” or “buyer beware,” as applied to real estate transactions. Buyers are routinely advised to scrutinize their purchases through property inspections, review of zoning, permitting and code compliance of the property in addition to obtaining title insurance. However, when leasing property, tenants typically focus on the terms of the lease agreement often without adequate consideration of risks associated with the landlord’s title to the property. This risk has increased in the past several years given the increased frequency of title transfers of distressed properties through foreclosures, deeds in lieu of foreclosure and other types of distressed property workouts. Tenants are well advised to protect their interests in the event the landlord is not holding clear title to the property. This is particularly important for longer term leases, leases where the tenant is investing in substantial tenant improvements to the property and leases with the option to purchase the property.

What Happens to My Lease in the Event of Mortgage Foreclosure?

Tenants often presume that: (i) the landlord is the lawful owner of the property, (ii) the landlord’s agent executing a lease agreement has lawful authority to do so, (iii) there are no covenants or restrictions affecting their intended use of the property, and/or (iv) there is good legal access to the property. Also, tenants often do not consider what may happen to their lease in the event of foreclosure of a mortgage the landlord may have on the property. Failure to confirm and address such issues may result in significant losses that are not recoverable due to the invalidity of the lease or the condition of the landlord’s title. In the worst case scenario where a tenant is forced to move as a result of legal issues associated with the lease, here are some potential consequences:

  • the tenant may lose the value of leasehold improvements made to the leased property;
  • the tenant may lose the value of any design and permitting expenses related to the existing location;
  • the tenant may incur significant relocation expenses;
  • the tenant may lose locational goodwill which can be of crucial importance to a tenant’s business; and
  • the tenant may lose the value of favorable lease terms if current market rates have increased.

Bottom line:  Perform Due Diligence

A title search of the leasehold property and subsequent leasehold title insurance provides knowledge of matters affecting the title that are pertinent to the leasehold investment and insures against a wide range of damages that could be suffered due to invalidity of the lease and/or due to the condition of the landlord’s title to the underlying property. Let the tenant beware!

Scam xSmall.jpgBy now most everyone knows that a short sale occurs where the proceeds from the sale of a property are less than the debt owed on the property. Short sales have seen rapid growth recently as both investors and lenders turn to them as a way to maximize returns over foreclosure sales. As short sales have increased, so have short sale scams. Therefore, prudent homeowners, prospective buyers and real estate agents should be vigilant to avoid short sale scams.

Some examples of short sale fraud schemes include:

  • Flopping. When a property is flipped illegally, it is sold for an inflated value in order to obtain a mortgage in excess of the property’s real value. When the seller, who is often in on the scheme, is paid at closing, the difference between the actual selling price and the loan amount is split between the fraudsters. When a property is flopped, it is usually owned by an underwater borrower who has asked the lender to approve a short-sale at a price less than what is owed. In this scenario, the fraudster, which may be the owner, real estate agent, or both, supply one or more opinions of valuation that show the property to be worth significantly less than its actual fair market valuation. When the lender agrees to take the lower price, the fraudster purchases the property in his name or that of a straw buyer, thereafter flips the property to an arm-length purchaser at a higher price than the one negotiated with the lender, and pockets the difference. Like flipping, flopping is the intentional misrepresentation of a property’s true market value. However, whereas flipping usually takes place when housing prices are rising, flopping occurs when values are depressed.

Continue Reading Flip, Flop – Beware Short Sale Scams

construction money.jpgFlorida’s Construction Lien Law is intended to provide a balance of protections for owners, contractors, subcontractors and material suppliers. Commercial landlords and lenders should be aware of recent changes to the Construction Lien Law which, in certain circumstances, have tipped the scale against their interests.

One of the most common problems faced by a commercial landlord is when a tenant’s contractor (or a subcontractor, supplier or laborer) records a construction lien against the landlord’s interest in the property. Such lien encumbers or “clouds” the landlord’s title to the property and can prevent the sale or refinancing of the property. It can also create a default under the landlord’s mortgage.

Continue Reading Recent Changes to Florida's Construction Lien Law: Commercial Landlords and Lenders Beware