THE PERILS OF DIY REAL ESTATE TRANSACTIONS
Yes, it’s a family law blog but what makes this field so interesting is how many ways people can find to get themselves in trouble. Usually, folks know the risks they get into when they borrow out their 401(k) or trade their S&P balanced fund for bitcoin. Alas, even when they proceed innocently and seemingly in good faith, things can become crazy complicated because, after all, “Who needs a lawyer to buy a house, right?”
Once upon a time, which is to say before the mid-1980s, almost no mortals bought or sold houses without lawyers at the closing. They arrived at the closing having received the deed and mortgage documents several days in advance. They had read the documents and informed the title clerk (conveyancer) if anything seemed problematic.
In the late 1980s, there was a real estate boom remarkably similar to 2007 and 2020-22. Buyers and sellers were lined up like cordwood in the halls of real estate brokers waiting for their transaction to be summoned for closing. By this time the fax machine was ubiquitous and mortgage lenders decided they didn’t have time to deal with lawyers. They would simply fax the documents to the closing. People who once hired lawyers to make the biggest purchase of their lives said to themselves: “I’m not paying for the lawyer to sit in the hallway waiting for my settlement to be called.” The lawyers said: “I don’t want to have to review documents involving hundred of thousands of dollars of debt in 20 minutes after they come through the fax machine.” Moreover, if something was wrong, there was no one to call to correct the documents. So, lawyers got out of the residential real estate business. Clients assumed they were already working with licensed “brokers” so they thought the broker would protect them.
We recently were consulted by a client whose divorce we had handled. The client was in a new relationship and he wanted to purchase a home with his fiancé. They were not married. They would own 50/50 but one “partner” would put up down money (about 25%) while the other was going to pay the mortgage. They wanted an agreement to say that so we wrote such an agreement.
Today, real estate transactions are happening fast. We were still circulating documents for what amounted to a “partnership” when the closing came. Consistent with the trends of the day, no lawyers reviewed the real estate sales or deed/mortgage documents or attended the closing. What’s a bit shocking as we look at those documents today is that it doesn’t appear that the title insurer or the mortgagee (the lender) read the documents either. What makes this all the more concerning is that this home purchase was big; lots of 00000s on the purchase price and the mortgage debt.
The real estate transaction closed a couple months ago and our couple is happily ensconced in their new crib. We have been asking about the partnership agreement and became concerned when we saw that the mortgage as recorded said the property was acquired with “rights of survivorship.” That was not the deal we were asked to write as a deed granting a couple property with “rights of survivorship” (WROS) means that if one partner dies, the survivor takes all of the dead owner’s interest. In contrast, if the deed said they held as “tenants in common” or said nothing except the names of the parties taking title, that’s a tenancy in common. That means that if someone dies the dead person’s half interest goes not to his co-owner but to his heirs or as defined by a will. That’s a BIG difference, especially when the transaction involves BIG money.
Note also that as we reviewed the recorded mortgage, the partnership agreement we prepared had not yet been signed. In fact, it referred to the transaction “to be.” We saw that the transaction had already “been” as it was recorded in the courts. We recently looked at the recorded deed. It’s a tenants in common deed. 50/50. Meanwhile, the mortgage says the property is owned with “rights of survivorship.” So, we have two documents that are inconsistent on their face relating to the terms by which the parties own the property. If there is happy news in all of this, it is that the parties did sign our draft partnership agreement specifying the conditions and terms by which they would hold and manage the property. But they dated that document 10 weeks after they settled on the property.
Thus, we have a document saying the couple own the property by the terms of a signed agreement. They have a deed recorded many weeks earlier that suggests they may own it straight out 50/50 and a mortgage that says they own it such that if one party dies the survivor takes all. The agreement we prepared says our client puts up the down money to buy the house, but the other partner is the only person who will be obligated on the mortgage. The documents are executed in the wrong order. You want to have an agreement in place before you take title or pledge property under a note and mortgage.
Is there something nefarious here? Not really from what we can see. But if one of the partners dies in the next 30 years before the mortgage is paid, there could be a legal mess to untangle and the property may be unsalable until the courts untangle the mess.
The realtor who represented the couple as buyers has 75 hours of training in real estate. That’s less than 2 weeks. Perhaps, you shouldn’t need to be a lawyer to handle legal conveyances. Lenders and title insurance companies should be paying more attention. But again, when people get busy lots of things slip through cracks. This error was patent, but we are certain there are many legal deeds and mortgages out there where the legal description of the property is in error; not just omission of a word or line, but someone pasted a completely different property description on your deed in the haste to get things done. This is a silent nightmare that does not emerge until the buyer tries to sell.
There really isn’t a clear solution to this. The days when lawyers had a few days to review deeds and mortgages in residential transactions seem to be ancient history now. And lawyers can’t edit real estate documents “on the fly” unless someone at the lender and/or title agent’s office is willing to babysit that event. But it may make sense after your documents are recorded and you have moved into your beautiful new home to take the documents from your settlement to a lawyer and ask “Are these kosher?” This is much more readily done soon after the transaction than many years later when you are told that the property you are selling doesn’t belong to you the way you think it does.
