So what is appropriate when a tenant leaves? Can the landlord use the security deposit to repaint the apartment? The answer is usually found in the lease. If there is no lease, common law applies. In either event, the rule is typically that tenants are only responsible for damage beyond the scope of ordinary wear and tear. Painting between tenants is not typically something that a tenant would have to compensate for, as this is an ordinary landlord expense. In addition, filling small nail holes, and “deep cleaning” the apartment for the next tenant are not unusual expenses and the landlord must pay for these from operating funds. But if the tenant does excess damage, then the tenant is responsible. For example, if the tenant breaks a vanity mirror, or makes a gaping hole in a wall, these would be tenant obligations to repair. Also removal of personal property and garbage left behind would be the tenant’s obligation also.

A good idea to avoid disputes is for the landlord and tenant to walk the apartment after the tenant moves out. Do this the day of the move out, and both parties should bring a checkbook. If the landlord sees excess damage, a reasonable repair cost should be assigned, and if the parties agree, both should sign a statement indicating the amount which is arrived at for final resolution. Be reasonable, and don’t try to hold tenants accountable for ordinary maintenance. Moreover, tenants must realize they cannot impose on landlords the obligation to remove garbage and other abandoned property. These things might seem minor to a tenant, but a landlord must pay someone to do that which the tenant was otherwise obligated to do. If there is no superintendent for the building, a landlord would easily have to pay $100 or more just to have someone show up to remove debris.

A buried and leaking underground oil tank is one such surprise that brings a hefty cleanup bill along with it. Homeowners are responsible for leaking oil tanks on their property, and cleanup costs generally start at $20,000 and can grow much larger if there is an active groundwater contamination. Moreover, these costs are typically not covered by most homeowner’s insurance policies, which have “pollution exclusions” that carve out liability for these cleanups. So before buying, be sure to search for evidence of an underground oil tank before you sign on the dotted line.

Here are some suggestions:

Step 1: Ask The Seller. Start by asking your seller if they ever replaced the oil tank on the premises. Even if the current fuel source is natural gas, or there is an above-ground tank in the basement, this question sometimes yields answers like “yes, we have an oil tank for pool heater,” and never replaced it when we switched to gas. Sellers may not realize that their under-ground tank may be an issue, and often will simply tell you what they know which will help in the investigation. If the seller discloses an abandoned tank, ask for documentation to confirm that it was properly abandoned in compliance with local codes.

Step 2: Ask Your Inspector. Hiring a qualified home inspector or engineer is an important part of the buying process. Discuss with the professional what, if anything, they will do to search for buried oil tanks on the premises. The inspector may offer, at an added cost, a magnetic scan or ground scanning radar to locate a buried tank. The extra cost may be well worth the piece of mind.

Step 3: Look For Outdoor Clues. Buried oil tanks often have with them bald patches of grass where the spilled oil from fill-ups have contaminated the soil and prevented grass from growing. If there is no snow on the ground to cover these patches, walk the property, particularly the area near the house and indoor furnace, to look for evidence of dead patches of grass. This can be a sign that a buried oil tank resides below. In some areas, the oil fill pipe is at curbside, even if this is a long distance from the underground tank. Walk the curb line of your property to search for the presence of oil fill pipes.

Step 4: Look For Indoor Clues. Find the furnace servicing the home and look to see if there are any lines exiting the basement wall, or coming out of the basement floor.

Step 5: Call The Oil Company Servicing The Property. If there is an above-ground oil tank servicing the heating system, call the oil company that the selling homeowner uses and ask them to check their records for the installation of the tank. Even if the seller did not do the new tank installation, the oil company records may shed some light on who did, and whether there was a proper abandonment of the old, buried underground tank.

What is your credit score? A short sale will drop your credit score at least 100 points or more, making the possibility of getting a loan right after unlikely. While credit repair is possible, it takes time, so be sure to learn your credit score before deciding to do a short sale. If you have a good one, consider other alternatives and try to preserve it. Many short sellers have had late mortgage payments in the past year, which makes it likely your credit score is already damaged. If that’s the case, then the additional impact of a short sale might not be that significant.

Do you have a financial hardship? Generally a bank will only consider a short sale if there is a financial hardship. It’s not necessary to be in arrears on the mortgage, but it is required that the borrower show financial hardship. Loss of job, depleted savings, and not being able to afford monthly living expenses and the mortgage are good examples.

How under water are you? This is an important question to ask. Consult a short sale attorney (like this one) to calculate exactly what a sale is likely to yield, and what other expenses need to be paid. Some homeowners could “get out from under” by putting cash into the deal, rather than short selling, which may be a better option if you’re trying to protect a good credit score.

Do you have a lot of other debt? Remember a short sale will only deal with the underwater home, not other debt. So if the goal is a fresh start, and the remaining debt even after the short sale is insurmountable, then maybe bankruptcy is a better option. Consult with an attorney on this alternative.

Here is how it works. In New York City, there is a tax when a mortgage is recorded against real estate. For example, if a purchaser borrows $1,000,000 from a bank, at closing, that purchaser will have to pay 1.925% of the face value of the mortgage to record it. And the bank, of course, requires that it be recorded. So in addition to all the other closing costs, the borrower will have to pay $19,250 for the privilege of recording his mortgage with the county clerk.

But a provision in the law permits the bank holding a mortgage on a property being sold to “assign” its rights in the mortgage to a successor bank. Not to be confused with assumption of a note, which it’s not, an assignment (technically known as a purchase CEMA) simply changes the name of the secured party – the bank – an permits the new bank to step into the mortgage without the new borrower having to pay a new recording tax. In addition, the seller on the property benefits from a continuing lien deduction which reduces his NYS transfer taxes on the sale. For a $1,000,000 mortgage properly assigned, the seller would save $4,000!

Of course, this only works if several factors are in place, but the potential savings make it worth the time to check. The seller must have a mortgage, the buyer must be financing, and both the seller’s bank and the buyer’s bank must consent to the assignment. There are fees in connection with the process, but if the mortgage is large enough, the savings vastly outweigh the expenses. On the example above, the total savings are $23,250 on a million dollar loan, and with fees typically around $1,500 to $2,000 in total, there is a lot to be saved by going through this exercise. The key is to start early in the process, and use an attorney that knows how to structure it. Waiting until the week before the closing won’t work, as the assignment paperwork takes several weeks to create and must be ordered well in advance so as not to delay the closing.

An even crueler joke occurs when a buyer thinks they are exempt from the mansion tax but has unwittingly veered off into mansion tax land due to some interesting twists in the tax law. Real estate transactions are subject to audit for payment of this tax, so be careful. Here are two situations to look out for.

Buyer paid transfer taxes: It’s quite common for purchasers to agree to pay transfer taxes on sponsor deals, whether new construction or conversion. As market forces changed, this practice did too, with sponsors agreeing to waive this tradition when the market softened and buyers gained more control in negotiations. Sometimes, however, instead of agreeing to pay the transfer tax themselves, sponsors give a closing cost credit equal to the amount of the transfer tax to be paid by the purchaser, giving the same economic effect to the transaction. But be careful. If a contract is written at $985,000, for example, and the buyer agrees to pay the sponsor’s transfer tax at closing, this deal will also trigger a mansion tax payment. This is because the tax code requires the additional tax (as the mansion tax is technically known in the code) to be paid on the total consideration given, which not includes the purchase price but also any other consideration given in connection with the purchase including the payment of the seller’s transfer taxes. In this case, even if the sponsor agreed to a credit to cover the transfer taxes, the payment of the taxes would bump up the total consideration of the deal to over $1,000,000 (to be exact, $985,000 + $3,940 NYS transfer tax + $14,036.25 NYC transfer tax, or $1,003,976.25). So in this case the buyer would be required to pay an additional tax of $10,040 because the total consideration is $1,000,000 or more! And recently, the tax department has begun to consider other buyer paid costs like seller attorney fees as additional consideration. Be sure to check carefully when deals are approaching $1,000,000 to ensure that they are not going to inadvertently subject the buyer to the mansion tax.

Mixed-Use buildings: : If a building has 3 or fewer units of residential component, then it is subject to the mansion tax if the total purchase price is $1,000,000 or more. This is the case even if the building is largely commercial. Here is how to determine the tax. First allocate the portion of the building that is residential. This can be done using square footage, or floor ratios. For example, if a 4 unit building has 1 residential, and 3 commercial, then the residential allocation would be 25%. Suppose the purchase price is $2,000,000. The mansion tax would then be $500,000, or 25% of the total price. The rule applies on any transaction of $1,000,000 or more that has any residential component. Be careful here, this is a widely unknown rule.

First, let’s review the basic rules on home mortgage interest deduction. Taxpayers who itemize deductions on Schedule A can include interest paid on mortgages with certain limits. Only interest paid on a loan secured by a principal residence, and a second home, is deductible. Additionally, taxpayers can only deduct interest on loans for which they are legally liable. So contributing to the payments on a loan for someone else will not qualify.

Assuming these criteria are met, the amount of interest a taxpayer can claim is limited. Taxpayers cannot deduct the interest on more than $1,000,000 of debt for their first and second residence together. Married couples filing jointly are limited to $1,000,000 for the couple, and if they file separately the limit is reduced to $500,000 each. In addition, a taxpayer can also deduct the interest on the first $100,000 of home equity loan debt. So an unmarried taxpayer with a mortgage and home equity line of credit could deduct the interest on $1,100,000 in total.

But what if an unmarried couple jointly owns a home together that has more than $1.1 million of qualifying mortgage debt? Can each taxpayer deduct the full extent of their individual limit? Prior consensus had always been yes. But recently, the IRS ruled that the limit should be applied applied by residence, not by taxpayer. Thus, one or two homes which are the principal and second homes cannot provide more than a total of $1.1 million interest credit no matter how many taxpayers own the homes. Once the $1.1 million of interest deduction is used from the first and second home, no further interest deduction can be claimed.

An example will help. Suppose Bob and Sue own two homes jointly and are not married. The principal residence has a first mortgage debt of $1,500,000, and the second home has a first mortgage debt of $1,000,000. There is no home equity loan in place on either. According to this ruling, Bob and Sue cannot together claim interest on more than $1,000,000 of total mortgage debt, despite the fact that they file separately and are not married, because the mortgage debt is related to the same first and second homes. If instead, Bob owned property one with debt of $1,500,000, and Sue owned property two with debit of $1,000,000, then each taxpayer could claim the full $1,000,000 limit providing they were otherwise eligible.

Tax planning can help in this situation. Non-married couples who own a first and second home should consider structuring transactions to have one home owned entirely by the first taxpayer and a second home owned entirely by the second if this is possible. Under that scenario each taxpayer should be able to deduct the full extent of the interest on $1,000,000, rather than splitting it as they would when owning both homes jointly. Non-married co-ownership is common in our market and likely on the increase, so be careful to consult tax advisers before purchasing to ensure that the structure permits maximum deduction.

But times have changed. Now, in a complete turnaround the banks are not only processing short sales more quickly, and timely responding to requests for approval, but are actually offering relocation allowances to homeowners to assist them in their move out of the home. Some programs give homeowners up to $30,000, but these are typically in the foreclosure clogged states like Florida. And the allowances are still subject to bank approval, so not every sale will grant the allowance.

Still, the trend marks a good sign for underwater homeowners facing the prospect of foreclosure or bankruptcy. Years into the crisis and the lending banks are finally realizing that short selling is the lesser of several bad options. The bank never takes title to the property, its quicker than a foreclosure or a bankruptcy, and short-selling homeowners are much more likely to maintain the property during the marketing period. Moreover, with tightened underwriting standards on new loans, economists like short-selling because the home is “transferred” into the name of a credit-worthy owner who is ready to make timely payments, maintain the property, and contribute to condo or home owner association dues.

Thinking of short-selling? Be sure to get a team of experts in place. An experience lawyer who has a good track record of success, like the writer here, is imperative to getting your short sale approved. And selecting a broker who knows how to market a short-sale is equally important, as the dynamics are different in a short-sale and must be considered in the marketing plan.

But those days are over. Today, the pendulum has swung, and the market norm for transactions of less than $2 million is that a qualified buyer will ask for – and get – a financing contingency in the contract of sale. So what exactly, does that contingency mean?

I explain this concept to my clients this way: contracts are about allocating risk between the parties. For example, what happens if the apartment is destroyed by fire prior to the closing? What if there is an active leak that occurs before we close? These are risks that a properly drafted contract address. And the risk of financing is no different. In the absence of a contingency, that risk remains entirely with the buyer. But in a standard financing contingency, most of that risk moves to the seller. So if the buyer applies to a bank, provides accurate information promptly, and the bank rejects the buyer within a certain period, the buyer can elect to terminate the deal and get her 10% downpayment returned. But if the buyer loses their job the day before closing, and as a result the bank cannot verify employment and will not fund the loan, the typical language in a financing contingency would allocate that risk to the buyer. And most sellers would agree that such a risk is properly for the buyer.

So where exactly is the line drawn, and when does the risk shift from seller to buyer? Here’s how it works. The contract creates a loan contingency period, typically 30 to 45 days, during which the buyer must apply for a loan and cooperate with the bank to provide requested documents. At the end of this period, a window opens for a period of a few days in which the buyer can elect to terminate the deal if (1) they have not received a loan commitment letter from the bank, or (2) they have received a denial on their application. For the purposes of the contract, a loan commitment letter is a legally binding obligation by the bank to make the loan conditioned on any factor other than appraisal.

And that’s where it starts to get tricky. An example will help. Suppose the bank issues a loan commitment letter conditioned on a number of typical factors (e.g. verification of employment within 24 hours of funding the loan for example). But the letter is also conditioned on the buyer selling his existing apartment prior to closing on the new loan. That might not be something the buyer was planning on doing, but if the bank will not withdraw this condition, the buyer is stuck with a loan commitment letter than has shifted the risk of financing to him, but with a condition that might not permit them to actually close on the new loan due to the difficulty in complying with that condition. Not a good place to be for the buyer, and not a risk they likely were ready to take on.

But appraisals are different. If the loan commitment is issued conditioned on appraisal, it’s not a loan commitment letter as that term is defined in the contract. So until the bank clears that condition, the buyer is in the same position as they would be if no letter had been issued, or if they had a rejection. Even if the appraisal comes in just a few thousand short of the purchase price, most contracts would permit the buyer in that situation to terminate the deal and obtain a return of their 10% contract downpayment.

Time Limits: The Internal Revenue Code (IRC) requires that the exchanging taxpayer (the investor) identify like-kind replacement properties within 45 days of the sale of the relinquished property. The identification must be in writing, signed by the taxpayer, and sent to the qualified intermediary (QI) holding the exchange proceeds. The properties must be unambiguously identified. For example “a multi-family house to rent to tenants” would not be specific enough to meet the requirements.

The Identification Rules: The IRC provides three different rules for determining how many properties can be identified to the QI. Take time to identify, as the rules only permit a successful exchange when the replacement property or properties ultimately acquired are on the identified list signed within the first 45 day period. Investors can select only one rule from the following:

• The Three Property Rule: This is the simplest, and most commonly used. This limits the total number of like-kind replacement properties to 3, without regard to valuation. If the investor plans to diversify into multiple properties, however, this option is not the best. But a one for one exchange is easily facilitated by the investor selecting 3 appropriate properties, and ultimately closing on one of them in the allowable period.
• 200% of Fair Market Value Rule: This permits an unlimited number of properties to be identified as like-kind, provided the total market value of all those identified does not exceed 200% of the net sales value of the relinquished property. For example, suppose an investor sells an apartment complex for $5,000,000. Using this rule, the exchanging investor can identify an unlimited number of like-kind properties provided that their aggregate value does not exceed $10,000,000.
• The 95% Acquisition Rule: This rule provides no limit on the number of identified properties, nor the value of the identified property, provided that the investor actually acquires identified property from the list totaling 95% of the aggregate value of all property on the list. So, for example, an investor selling one apartment building for $5,000,000 could identify 20 properties valued at $50,000,000, provided that he actually acquired properties on that list that total at least 95% of the total value of all properties on the list ($47,500,000 in value). This rule should only be used where the investor plans to step up significantly with multiple properties, and when the other two rules above are inadequate. Remember, failing to actually acquire property having aggregate value of 95% of the total value on the list will cause the entire transaction to be disallowed.

• Have you refinanced? If you have not called every client you have ever worked with and asked them if they have refinanced recently, then you’re missing a great opportunity. Very few homeowners who have not refinanced in the last 180 days would not benefit from doing so again now, even with the added closing costs of doing it again, given the historic and unprecedented interest rates we are seeing. This “gentle reminder” is also a way to introduce your client to a preferred financing expert to ensure that your client is in capable hands during the refinance. It’s also a nice excuse to make a call to your prior clients and catch up.
• iHow are things going? A buyer I represented 3 years ago called me recently and asked me to help him again now that he was selling. There was a deal on the table and he wanted to forward his broker my contact information. “Of course,” I responded, happy to help, but was curious about why he was using a different broker than the one who had assisted him in the purchase 3 years ago, and who had originally referred him to me. So I asked. “Oh, I liked her very much,” he responded, “but I hadn’t heard from her in a while and wasn’t sure if she was still in the business, so I asked a friend at work who they used and got a referral.” Sometimes, we just need to keep reminding clients that we’re still in the business and still there to help them.
• Control the referral. Last year I represented a seller who decided to rent, rather than buy, for a year or so. The broker who had represented them successfully on the sale – and who they liked very much – didn’t do rentals and instead referred the seller to a colleague to handle the rental. The referring broker moved on to another deal, and simply didn’t stay involved in rental part. Now, aAfter a year of renting, the buyer is back in the market, looking for a new apartment and calling me for counsel. But this time they are using that “rental broker” for the purchase. Be careful about handing your valued clients over to another agent, and if you must because they need an expertise that is not yours, be sure to stay involved, insisting to go along on rental showings even if you’re not taking a commission. This is “your client” and you need to stake your claim.
• Attend the closing. When you’re not there, clients always ask me, “where is the broker?” I know, it’s not really necessary, and someone can pick up your check, but for clients this is a huge day, and the culmination of a sometimes long and exhausting transaction. Clients are let down when the broker doesn’t show. And it’s an easy way to show up and bring a nice gift for the client and wish them well on their next chapter. Hopefully, they’ll do it all again in a couple years and call you when they do!
• Understand your business. I know closing costs aren’t the sexiest part of real estate, but buyers need to know and sellers always ask. So learn them, and learn them cold. It will set you apart from the pack and make you a valuable part of the transaction from the outset. Here’s a guide I’ve written that can help you figure them out.