DEAR BENNY: I own a house worth approximately $400,000. The current mortgage is $25,000. A company in Florida took over the mortgage about six months ago. The mortgage company handles the tax and insurance payments through an escrow account. Given the current schedule of payments, the account will have a positive balance all next year. The mortgage company now wants to double the escrow payments.
What, short of paying off the mortgage, are my options? Can the mortgage company legally demand such payments? I have owned a number of homes, vacation homes and rental homes over the years and never experienced anything this outrageous. –John
DEAR JOHN: Lenders throughout this country usually demand that their borrowers pay money monthly into escrow so that the lender will pay the annual (or semi-annual) real estate tax and the home insurance. Most lenders are conscientious about making timely payments out of the escrow funds. But over the years, many of my clients have encountered such problems as nonpayment or late payment.
I have never liked the concept of escrow for taxes and insurance. As far as I am concerned, it is basically a means of giving the lender some extra dollars.
Many years ago, when Congress learned of the many abuses involved with real estate, it enacted the Real Estate Settlement Procedures Act — commonly known as RESPA.
One aspect of RESPA deals with these escrow accounts. Under the law, unless local law requires otherwise, a lender has the right to require a borrower to deposit into an escrow account for property taxes and insurance a sum not to exceed the amount of these actual charges, plus one-sixth of the estimated total amount of these taxes or insurance premiums.
In other words, the lender cannot require more than approximately two months of escrow payments.
Do your calculations. If the required escrow exceeds the limits described above, contact the lender to complain. If that does not work, you should file a formal complaint with your state’s attorney general or banking commission. You should also file a complaint with the Federal Trade Commission, the Department of Housing and Urban Development (HUD), and if the financial institution is a national bank, with the Office of the Comptroller of the Currency.
DEAR BENNY: My six-unit condominium (with three owners renting their units) is attempting to change our bylaws to prevent any other owners from renting. It has something to do with FHA not approving loans for condo buildings with more than 50 percent rental units. This gives these owners (one of whom plans to sell) a virtual monopoly!
My question: Can bylaws be changed to affect owners who have purchased units under the current bylaws — ergo, we would never be able to rent our units?
I am 81 and would like to rent out my home if I should need to go to a nursing home or assisted living. With no income from my home, this would be impossible. Or, on my death, I wish my daughter to have the option of renting out the unit if she cannot move here. …CONTINUED
Do I understand correctly that the bylaws cannot be changed to affect current owners of the units? –Lois
DEAR LOIS: Unfortunately, bylaws can be changed. You are correct that the legal documents in a condominium (declaration and bylaws) are carved in stone. This means that the board of directors (or a small minority of owners) cannot suddenly decide to change them.
It takes a supermajority of all owners (usually based on their percentage ownership interest) to amend the legal documents. You (or your attorney) should read your bylaws carefully. Near the end of that document, you will find a section entitled "Amendments." (Sometimes the rules for amending documents will be found only in the declaration).
The law is very clear. A condominium unit owner is legally bound by the existing documents when he or she first bought into the complex, and as those documents are legally amended from time to time.
You are correct that FHA (as well as VA, Fannie Mae and Freddie Mac) have lender requirements that no more than 50 percent of the owners can be investors (the percentage varies slightly between these various secondary mortgage organizations).
However, your three investor-owners on their own will not be able to amend your bylaws. You should talk to the other two owners who live in your complex and try to convince them not to vote for the amendment.
And if the investor-owners pursue the amendment anyway, have a lawyer review the process to determine if it was done legally.
DEAR BENNY: I entered into a contract to buy a house built in 1908 that was refurbished by a local company that had partnered with a city redevelopment group to restore an old neighborhood. Shortly before closing, a title search showed that the house was still owned by the estate of the family who purchased the house back in 1908. We cannot buy the home.
After paying for an inspection fee and an appraisal to get the loan, I am now out of pocket and feel the developer should reimburse me. Had they researched the title they would have found what I did and not done the renovation and put the house on the market.
I have asked for reimbursement of the money I paid out, but am getting the runaround. Is this a reasonable request? –Brit …CONTINUED
DEAR BRIT: It is more than reasonable. Have you discussed this with a lawyer? Is there any way that the purchase can be salvaged? Perhaps the estate will be happy to sell the house to you — although the estate should get the sales proceeds and not the developer.
Assuming that you have a valid contract, you have the right to sue the "seller" for breach of that contract. Depending on the laws in your state, you may be entitled not only to be reimbursed for your out-of-pocket expenses, but for the loss of that house. For example, if you subsequently buy another house, which costs more than the other house — or if you have to pay a higher rate of interest for your new mortgage — these are damages that a court may give you in a lawsuit.
DEAR BENNY: I am very worried about my cousins. They completed a 1031 exchange four years ago. They exchanged a single-family property, which was rented from the day it was bought to the day they exchanged it. The exchange property is also a single-family property in a vacation community. They have been working on it on weekends, bringing family and friends to help. They rented it for a total of only three weeks during the last four years of ownership. Will the IRS accept the fact of this Starker-exchanged property still being improved and not fit to rent, or are they in trouble? –Elizabeth
DEAR ELIZABETH. In order to have a successful 1031 exchange (also known as a "like-kind" or "Starker exchange"), you have to exchange one investment property for another of like kind. The definition of "like kind" is very broad. You should use the proper terminology. The one you currently own is known as the "relinquished" property, and the one that you will obtain through the exchange process is known as the "replacement" property.
While both must be real estate, they don’t have to be exactly the same. For example, you can exchange a condominium unit for an office building, a single-family house for farm land, or even a shopping center for raw land. The rules are complex and legal and tax counsel should be consulted before you go down this path.
But, both properties must be held for investment. While there is no definitive rule on how long you have to hold the replacement property before you can move into it, most tax experts recommend a minimum of two years. According to these experts, the IRS considers such property "old and cold" and will not challenge by claiming that it was not really investment.
You do not actually have to rent out the property, but must make reasonable efforts to do so. The best proof would be to show that you listed the property with a real estate agent.
However, your relatives never rented it out. I seriously doubt that the Internal Revenue Service would accept the fact that it took so long to get the property ready for occupancy. I also suspect that, in reality, the property was used as a second home or vacation home on weekends.
Your relatives may have to pay the capital gains tax that they deferred when they did the exchange, plus penalties and interest. They should consult a tax attorney to see how they can mitigate their exposure.
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 firstname.lastname@example.org.
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