License Law . Chapter 1. 2. ?2011 Kaplan, Inc.. Purposes of Real Estate Law. New York Department of State (DOS)Division of Licensing ServicesShares duties with New York's State Board of Real EstateHas power to issue licenses and enforce the real estate license lawThrough fines, reprimands, and
1. Modern Real Estate Practice in New York for Salespersons, 11th Edition
2. License Law Chapter 1 2 ©2011 Kaplan, Inc.
3. Purposes of Real Estate Law New York Department of State (DOS)
Division of Licensing Services
Shares duties with New York’s State Board of Real Estate
Has power to issue licenses and enforce the real estate license law
Through fines, reprimands, and the denial, suspension, or revocation of licenses
Violation of license law is a misdemeanor
Punishable by up to a year in jail and a fine of up to $1,000
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4. Who Must Be Licensed? Broker
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5. Qualification for Licensure: Salesperson Be 18 or older
Never been convicted of a felony
Be either citizen/legal permanent resident
Successfully complete prelicensing course
75-hour course approved by the DOS
Coursework valid for eight years
Pass the state’s licensing examination
Have a sponsoring broker
Before obtaining the license
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6. Qualification for Licensure: Broker Be 20 or older
Never been convicted of a felony
Be either a citizen or a legal permanent resident of the United States
Two full years’ experience/three years’ equivalent experience
120 hours of study
Pass the state’s licensing examination
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7. License Examinations May take exam before or after prelicense coursework
Walk-in test centers
Online reservation test centers
Test results processes vary
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8. Licensing Procedure Real estate salesperson’s application
Only individuals licensed
Registration for corporations, partnerships, and other legal entities
Issuing the license
Principal broker displays broker license
Broker may display salesperson’s license separately
Pocket card with photo must be shown on demand
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9. Maintaining a License Change of business address, status, or name
All commissions through broker
Disclosure of interest
Offers to purchase
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10. Termination or Changes in Association Supervising broker must file termination of association notice online
Return license to licensee
Licensee moves to new sponsoring broker and establishes new record of association with DOS
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11. Termination or Changes in Association (cont.) Revocation or suspension of broker’s license
Automatically causes the licenses of those affiliated with the broker to be suspended, pending charge
Real estate salesperson who terminates association with a broker
Must turn over all listing information, as well as all customers and/or clients obtained during the association
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12. Renewal and Continuing Education Licenses must be renewed every two years
Licensee not renewing within two years after expiration must retake licensing examination
To renew license every 2 years
Must complete 22.5 hours of continuing education
Must include 3 hours on fair housing/discrimination
Minimum module length of 3 hours
Exemptions from continuing education
Only brokers licensed for 15 years continuously
Already exempt prior to July 1, 2008
Only if license does not lapse
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13. Brokerage Management in Accordance with License Laws Place of business
Business name and sign
Delivery of documents
Care and handling of funds
Obligations to other parties and other brokers
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14. Other Licenses or Registrations Involving Real Estate Apartment information vendor’s license
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15. Other Licenses or Registrations Involving Real Estate (cont.) Mortgage banking companies
Not thrift institutions
Make real estate loans
May later be sold to investors
Registered with State Banking Department
Bring borrowers and lenders together
License and continuing education required
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16. Uncapped Wells Disclosure Seller must disclose any uncapped natural gas wells on property
If existence known by seller
Before entering into contract for purchase and sale
Purpose is to protect buyers from significant cost
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17. Reciprocity versus Mutual Licensure Recognition Reciprocity
States may recognize each other’s license laws and requirements for licensure
No additional education or testing required
States not willing to enter into reciprocal agreements
Recognize prior education and experience
May require additional education
Probable requirement to take state law portion of exam
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18. Licensing Nonresidents Licensing nonresidents
Must comply with all requirements except maintaining office in New York
Law of nonresident’s home state must allow New York licensees to be issued a license without taking licensing examination
If not, applicant required to take examination
Irrevocable consent form
Must be filed by any nonresident requesting a license. This allows service of process in New York.
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19. Advertisements Must not be misleading, and no blind ads
Salesperson’s name may not be more prominent than broker’s or firm’s name
In print ads or on Web sites
Internet site must link to firm’s Web site and be supervised by broker
Ads stating vicinity location must include name of area in which property is included
Need owner consent to place For Sale sign
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20. Suspension and Revocation of Licenses Division of Licensing Services
May hear complaints and/or initiate investigations into any alleged violations
Of license law or its rules and regulations
Anyone found guilty of untrustworthiness or incompetence
May have license temporarily suspended or permanently cancelled
May be fined or reprimanded
20 ©2011 Kaplan, Inc.
21. Investigation and Hearing Department investigates, conducts hearing
Damages up to four times compensation
License suspended or revoked
Fine up to $1,000
DOS cannot imprison for violation
Violation is a misdemeanor
Possible prosecution by attorney general
Fine up to $1,000 and/or one year in jail
21 ©2011 Kaplan, Inc.
22. Unlicensed Real Estate Assistants May do paperwork and legwork
Must refrain from performing any real estate activities for which a license is required 22 ©2011 Kaplan, Inc.
23. The Law of Agency Chapter 2 23 ©2011 Kaplan, Inc.
24. Agency Legally defined relationship
Fiduciary relationship between principal and agent
Client is principal, given counsel and advice by agent
Interests of principal to be above all others, including those of agent
Customer is owed fair and honest dealing, but not a principal and not a fiduciary relationship
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25. What Is an Agent? Individual employed or authorized and consenting to transact business on behalf of another
In real estate relationship between broker’s firm and the following:
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26. Types of Agents Universal agent
Able to enter into any contract on behalf of principal
Requires prior written notarized power of attorney
Authority limited to specific assignment or one contract
May be created by power of attorney
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27. Types of Agents (cont.) Special agent
Represents principal in one transaction under detailed instructions
Cannot bind principal to a contract
Agency coupled with an interest
Agent has some interest in property being sold
Cannot be fired by principal
Relationship not severed at principal’s death
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28. Creation of Agency Express agency
Created orally or in writing
Agreement describes responsibilities of agent
Best to put agreements in writing
Created from words or conduct
Both principal and agent act as if an agency exists
Ostensible agency/can be misleading
28 ©2011 Kaplan, Inc.
29. Creation of Agency (cont.) Providing services accepted by principal can create an implied agency
Danger of creating undisclosed dual agency
Principal can establish agency relationship when agent claims relationship
An after-the-fact acceptance of relationship or agreement
Accept benefits of previously unauthorized acts
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30. Agency Disclosure Nondisclosure cause for disciplinary action
The licensee’s actions control the creation of agency relationship
Must disclose nature of licensee’s relationship at first substantive contact
When licensee first provides property information
When a party discusses interest or ability to conclude a transaction
Disclosure for residential property must be in writing
Agreement describes responsibilities of agent
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31. Compensation Gratuitous agency (no compensation)
Compensation source does not determine agency
Parties determine who pays compensation
Written agency agreements should state how agent to be compensated
Licensee may only receive compensation from one party
Unless all parties have full knowledge and agree 31 ©2011 Kaplan, Inc.
32. Brokerage Act of bringing parties together to conclude a real estate transaction
Principal employing a broker may be
Owner seeking to lease property
Person seeking property to rent
Broker is agent of principal
Principal generally pays broker commission for successful transaction 32 ©2011 Kaplan, Inc.
33. Brokerage (cont.) Broker normally authorized to use licensees employed by the broker
These licensees are subagents of the principal.
They are agents of the broker.
Cooperating agent or broker from another company may be
Subagent of the seller
Agent for listing broker (broker’s agent)
Agent for the buyer
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34. Brokerage (cont.) A salesperson or associate broker may only be compensated from broker
All salesperson’s activities performed as follows:
In name of supervising broker
The salesperson’s principal
Under direct control and supervision of employing broker
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35. Dual Agency and Self-dealing Dual agency
Representation of both parties within same transaction
Care must be taken to avoid unintended and illegal dual agency
Broker acting as seller’s agent when purchasing property for self
Agent attempts to acquire or dispose of own property for own account
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36. Duties of Agent to Principal Broker may reject agency contract
If accepts position as agent owes certain duties to principal
Must exercise care, skill, and integrity
Must provide principal with six basic fiduciary duties
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37. Fiduciary Responsibilities Care
Licensee considered an expert under the law
Confidential information must not be disclosed, even after closing
Place client’s interests above all others
Carry out lawful instruction for assignment
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38. Fiduciary Responsibilities (cont.) Accounting
Provide copies of documents
Account for funds
Deposit funds in special account
Include words “trust” or “escrow”
Agent required to pass on to principal facts and information that could affect decision
Includes material facts agent should have known
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39. Penalties for Breach of Fiduciary Duties Loss of commission
Loss of license or other disciplinary action
Adverse judgment in civil suit
Rescission of transaction by court order
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40. Scope of Authority Real estate agents normally special agents
Only have authority granted by broker agreements
Should be explicitly stated
Broker rarely may sign
Must be attorney-in-fact
Need not be an attorney-at-law
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41. Responsibilities to Third Parties Fair and honest dealing
Disclosure of material facts
All those that agent knows or should have known
That customer cannot discover easily
If affecting property desirability/value
If affecting buyer’s ability to complete transaction
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42. Opinion versus Fact Statement of opinion allowed
If offered as opinion, not intended to deceive
Legal exaggeration often used as sales tactic
Intentional misrepresentation of material fact with intent to harm
Violates obligation to deal honestly
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43. Disclosures Concerning the Property Environmental concerns
Disclosure of environmental health hazards may be required
Some court rulings that seller is responsible for revealing material hidden defects
Listing agreement may contain hold harmless clause to protect broker for representations made by seller
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44. Disclosures Concerning the Property (cont.) Disclosure Responsibility
Broker need not verify any seller representations unless broker uses them in marketing property
Seller must fill out 48-question disclosure form
Site of felony
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45. The Broker’s Compensation Amount specified in contract with principal
Normally percentage of sales price
Often preclusive agreement
“as, if, and when”
For broker to be entitled to commission
Have valid license during transaction/collection
Employed under agreement or be authorized
Was procuring cause
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46. The Broker’s Compensation (cont.) Broker may share only with licensees
Salesperson may only be paid by own broker
May receive payment from former broker only if earned when associated with former broker
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47. Antitrust Brokerage sets own fees and negotiates with clients
Different firms may not agree to standardize rates
Licensees may not discuss fees
Except when cooperating on multiple listing service (MLS) transaction
Firms may not agree to boycott 47 ©2011 Kaplan, Inc.
48. Antitrust Laws — History Sherman Act, 1890
Clayton Act, 1914
Federal Trade Commission (FTC) created in 1914
To enforce compliance
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49. Antitrust Definition Any business activity that would result in
a monopoly and/or
a restraint of trade, and
would be deemed a harmful act, or
would act as impediment to free enterprise and competition.
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50. Antitrust Violations Price-fixing
Market allocation agreements
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51. Penalties for Sherman/Clayton Violations Individuals
Fines up to $1 million and/or
Felony prison sentence up to 10 years
Department of Justice may impose other fines
FTC may enforce but has no penal sanctions
Fines up to $100 million
Department of Justice may impose other fines
51 ©2011 Kaplan, Inc.
52. Agency and Real Estate Brokerage Chapter 3 52 ©2011 Kaplan, Inc.
53. New York Agency Disclosure Requirements Licensees must give agency disclosure statement in all residential transactions
To prospective sellers, buyers, landlords, tenants
At first substantive contact
Different forms for seller/buyer and landlord/tenant
Disclosure describes roles of agents
Listing broker’s agents
Dual agents 53 ©2011 Kaplan, Inc.
54. New York Agency Disclosure Requirements (cont.) This law applies to residential transactions
Four or fewer units intended as dwelling
Buyer/seller asked to sign
Stating received and understands role of licensee in transaction
Purpose is to warn public to not share confidential information to the other party’s agent
If buyer or seller refuse to sign
Agent to make notarized written oath or affirmation that the disclosure was provided
54 ©2011 Kaplan, Inc.
55. New York Agency Disclosure Requirements (cont.) Broker to keep all documents three years
Including agency disclosures
Parties to sign second acknowledgment regarding role of agents
When entering into a purchase agreement
Unless both parties’ attorneys arrange/prepare contract
55 ©2011 Kaplan, Inc.
56. New York Agency Disclosure Requirements (cont.) Broker’s agent
Cooperating broker, agent of listing broker
Not strictly subagent of seller
But agent owes fiduciary duties to seller
Seller not liable for this type of agent’s acts (vicarious liability)
Unless specifically authorized
DOS additional requirement
In all transactions, not just residential
Broker to make clear for whom acting
Receive compensation from only one party unless with full knowledge and consent of all parties
56 ©2011 Kaplan, Inc.
57. Agency Alternatives Agency disclosure form is not a contract
Does not create agency relationship
Agency relationships usually in writing
Listing or buyer-broker agency agreements
Similar to employment contracts
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58. Agency Alternatives, MLS Common for broker collaboration with MLS
Participating brokers work together to achieve sale
Commission generally shared
May create subagency
Selling broker acts as subagent of seller, or
Selling broker acts as the broker’s agent
Unless posted, invitation to subagency
58 ©2011 Kaplan, Inc.
59. Subagency When broker accepts listing
Broker becomes seller’s agent
Broker’s salespersons are subagents of seller
They are agents of the broker
Outside broker who procures buyer may be
Subagent of seller
Note that seller may not want liability
Agent of buyer
Agent of listing broker
59 ©2011 Kaplan, Inc.
60. Brokerage Without Subagency Seller can direct the listing agent
To cooperate with other brokers
To split commission with procuring broker
Seller not liable for statements/actions of other broker
In New York City, selling agent is a buyer’s agent
If selling agent from different company
Letter ruling from attorney general’s office 60 ©2011 Kaplan, Inc.
61. Dual Agency When broker represents both parties
Both parties give up right to full disclosure and confidentiality
Within certain parameters
Legal form of agency relationship
Requires full disclosure by agent to all parties
Requires agent’s receipt of full consent from all interested parties
61 ©2011 Kaplan, Inc.
62. Informed Consent for Dual Agency Agent needs written document stating
Parties agree to dual agency
Parties’ pricing strategy to remain confidential
Information parties agree to will be protected
Agent may be paid fee by either or both parties
Potential for conflict of interest
If either party uncomfortable, do not proceed
Parties should obtain attorney’s advice
Signed by all interested parties
62 ©2011 Kaplan, Inc.
63. Undisclosed Dual Agency Often unintentional
In-house sales and dual agency
Whenever an agent of the brokerage sells firm’s listing
Steps to avoid liability should be taken
Sales by cooperating brokers
Cooperating broker must disclose if
Subagent of seller
Agent of buyer
Broker’s agent with neither buyer nor seller as client 63 ©2011 Kaplan, Inc.
64. Single Agency Broker only represents one party at a time
The broker’s principal or client
The other parties or agents
Treated as customers
Broker may terminate single agency
If buyer client interested in seller client’s listing
Confidential information learned prior must not be disclosed
64 ©2011 Kaplan, Inc.
65. Designated Agency DOS allows broker to designate one agent for each party
Listing agent represents seller as single agent
Selling agent represents buyer as single agent
Broker communicates with both principals
Brokerage firm continues to be dual agent
Informed consent required
For dual agency
For designated agency 65 ©2011 Kaplan, Inc.
66. Agency Forms Listing agreements
Between broker and seller
Buyer broker agency agreement
Between broker and buyer
In commercial transactions
Same requirements for disclosure, loyalty, and confidentiality 66 ©2011 Kaplan, Inc.
67. Listing Agreements Authorized relationships created through listing agreements
Illegal type of listing
Net listing subject to fraud
Seller receives a predetermined amount
Broker sells for any price, keeps excess
67 ©2011 Kaplan, Inc.
68. Other Listings Multiple listing not a type of listing
Brokers agree to distribute and share listings
In certain geographical area
Exclusive-right-to-sell or exclusive-agency
Includes agreement to share with member brokers
Brokers agree to share commission
Often broker members obligated to use MLS
Many brokers have own Web page
Many large Internet sites on the Internet 68 ©2011 Kaplan, Inc.
69. Termination of Listings Listings may be ended by the following:
Performance of the object (sale)
Expiration of time (no automatic extensions allowed)
Abandonment by broker
Revocation by owner
Cancellation by broker, or mutual assent
Bankruptcy, death, insanity of either party
Destruction of property
Change in property by outside forces (e.g., zoning)
69 ©2011 Kaplan, Inc.
70. Needed Information for Listings Needed information includes the following:
Name and address of owners
Description of property, size of lot, number of rooms, total square footage, age, construction
Date of occupancy
Zoning and neighborhood information
Personal property included
70 ©2011 Kaplan, Inc.
71. Seller Disclosure Required for one- to four-family dwellings
Includes 48 questions
Buyer who does not receive form gets $500 credit
Seller liable for undisclosed defects
Seller’s agent should provide form
Seller’s agent may not help to fill in form 71 ©2011 Kaplan, Inc.
72. Seller Requirements Functioning carbon monoxide detector and smoke alarm required
In each one- or two-family house, co-op, condo
Lead-based paint disclosure
Built prior to 1978
Seller and landlord must provide disclosure and booklet
Failure to comply, $11,000 fine
Must disclose any known hazard upon listing and again prior to closing 72 ©2011 Kaplan, Inc.
73. Uncapped Wells Disclosure Seller must disclose any uncapped natural gas wells on property
If existence known by seller
Prior to entering into contract for purchase and sale
Purpose to protect buyers from significant cost
73 ©2011 Kaplan, Inc.
74. Information from Seller Environmental hazards
Agent should ask seller for information
Rental income-producing property
Seller should provide agent with income statement
If written request, seller to furnish two past years’ heating and cooling bills
To prospective buyer of one- or two-family home 74 ©2011 Kaplan, Inc.
75. Other Government Requirements HUD: Flood Insurance
If HUD determines in flood-prone area
May be required to insure for certain mortgages
Ordinances that potentially restrict land use
Aquifers, wetlands, steep slopes
75 ©2011 Kaplan, Inc.
76. State Requirements — Exclusive Listings No longer excludes co-ops and condos
For listing agreement for one- to three-family dwelling
Attach statement to or print on reverse
Must be signed separately
States that with exclusive-right-to-sell
Broker paid even if seller or another broker finds buyer
States that with exclusive-agency
Broker paid if another broker finds buyer
Broker not paid if seller finds buyer 76 ©2011 Kaplan, Inc.
77. Listings with MLS Listing must allow seller to choose who submits offers to purchase
Per DOS, buyer’s broker has right to be present
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78. Buyer Agency No requirement buyer/seller have agent
Vicarious liability when retaining agent
Buyers (and sellers) both responsible for the acts of the agents they retain
78 ©2011 Kaplan, Inc.
79. Buyers as Customers Buyers (customers) using seller’s agent
Seller’s agent helps
Find suitable property
Provide information about property values
Prepare and present offer
Seller’s agent must avoid undisclosed dual agency 79 ©2011 Kaplan, Inc.
80. Buyer-Agency Agreements Also known as buyer listings
High degree of representation
Buyer retains broker as agent
Services expected should be spelled out
Similar to seller listing agreements
Anticipate potential conflicts/dual agency
80 ©2011 Kaplan, Inc.
81. Buyer Agency Agreements (cont.) Exclusive buyer-agency agreement
Exclusive right to represent
Buyer agent paid even if buyer finds property by self
Exclusive agency buyer-agency agreement
Buyer agent paid unless buyer finds property
Open buyer-agency agreement
May have similar agreements with many brokers
Buyer only pays broker who locates property 81 ©2011 Kaplan, Inc.
82. Buyers as Clients Compensation does not make a relationship
Buyer agent may be compensated by the following:
Buyer, as a fee
Hourly, percentage, or flat fee
Possibly buyer credited for amount seller willing to pay
Seller, through a commission split
Possibly credit buyer for amount seller willing to pay
Both parties, if disclosed and all parties agree
Requires written consent 82 ©2011 Kaplan, Inc.
83. Estates and Interests Chapter 4 83 ©2011 Kaplan, Inc.
84. Real Estate Transactions Rights of ownership
Bundle of legal rights
Control of property
Within the law
Use property in legal manner
Keep others from entering or occupying
Sell or transfer
84 ©2011 Kaplan, Inc.
85. Real Estate Transactions (cont.) Additional rights of ownership
Devise (leave by will)
Mortgage and/or encumber
Lease and/or license
Dedicate, give away, and/or abandon
Share, trade, and/or exchange the property
85 ©2011 Kaplan, Inc.
86. Land Surface of the earth to infinity
Including air and things attached by nature only
Such as trees and water
Surface of earth to center of earth
Including minerals and substances below surface
Fee is term to describe an estate in land
Estate is degree, quantity, and extent of interest person possesses in real and personal property
Parcel is tract of land with specific boundaries 86 ©2011 Kaplan, Inc.
87. Real Estate Earth’s surface downward to center of earth
Upward into space
Includes all things permanently attached by nature and by people
Includes land and
all permanent improvements
such as buildings, streets, utilities, sewers, and other man-made additions to property 87 ©2011 Kaplan, Inc.
88. Real Property Includes land
Includes real estate
Includes bundle of legal rights
Real property is defined as the earth’s surface extending downward to the center of the earth and upward into space, including all things permanently attached to it by nature and by people, as well as the interests, benefits, and rights included in ownership. 88 ©2011 Kaplan, Inc.
89. Sale and Lease of Rights Rights may be sold separately.
Rights in one parcel may be owned by many.
Subsurface rights may be sold or leased.
Such as oil and other mineral rights
Air rights may be sold or leased.
Courts permit reasonable interference for flights
Owner’s right to use and occupy land not to be interfered with
89 ©2011 Kaplan, Inc.
90. Other Rights Riparian rights
Owner’s rights in land bordering river or stream
In New York if property borders non-navigable stream
Owns to midpoint of stream
If property borders navigable stream
Own property to high-water mark
Riverbank belongs to state
Land borders large lakes, bays, and oceans
Unrestricted use of water, own land to high-water mark
Government owns land below this point
90 ©2011 Kaplan, Inc.
91. Riparian and Littoral Rights These rights may not be sold separately
They may not be kept when land is sold
Owner is entitled to accretion
Increases by water or wind depositing soil
Owner may lose land
Through gradual erosion
91 ©2011 Kaplan, Inc.
92. Personal Property (Chattel) Movable items not attached to real estate
Items severed from real estate
A growing tree is real estate
Severance occurs when tree is cut
Cooperative ownership is considered personal property
Ownership of stock in a corporation that owns real estate
92 ©2011 Kaplan, Inc.
93. Personal Property/Real Estate Personal property can be changed to real estate
Building materials are personal property
When structure built, becomes permanent improvement on land
Personal property unless permanently attached to land by foundation 93 ©2011 Kaplan, Inc.
94. Trees and Crops Two classes
If do not require yearly cultivation
Known as emblements 94 ©2011 Kaplan, Inc.
95. Fixtures Fixture is personal property converted to real estate
Attached to real estate with intention it be permanent part thereof
Trade fixture is personal property
Attached to real estate
Owned by tenant and used in a business
Legally removable by tenant
95 ©2011 Kaplan, Inc.
96. Legal Tests of a Fixture Adaptation of article to the real estate
Method of annexation of the item
Intention and relationship of the parties
Existence of an agreement
96 ©2011 Kaplan, Inc.
97. Uses of Real Estate 6 basic categories of real property
All property used for housing
Includes acreage, city lots, single- and multifamily
In urban, suburban, and rural areas
Includes offices, malls, theaters, hotels, parking facilities
97 ©2011 Kaplan, Inc.
98. Uses of Real Estate (cont.) Industrial
New York City may call it “manufacturing property”
Warehouses, factories, land in industrial districts, research facilities
Lawful combination of other categories zoning permits
Farms, timberland, pastureland, orchards
Religious institutions, schools, cemeteries, hospitals, government-held lands
98 ©2011 Kaplan, Inc.
99. Estate (Ownership) in Land Estate in land is amount and kind of interest (ownership) person has in real property
Exist indefinitely, for a lifetime, or forever
Four freehold estates recognized in New York
Qualified (determinable) fee
Fee on condition
99 ©2011 Kaplan, Inc.
100. Estate (Ownership) in Land (cont.) Leasehold estates
Estates for particular period
Estate for years
Gives tenant possession of property for fixed time
Commonly established with written lease
If for less than 1 year may be oral
Periodic estate, estate at will, estate at sufferance
Exist for indefinite length of time
100 ©2011 Kaplan, Inc.
101. Fee Simple Estate Fee, fee simple, or fee simple absolute
Most complete type of real estate ownership
Upon death of owner, estate passes to heirs
Under New York law
Grant (sale or gift) of real estate conveys fee simple ownership
Unless terms of grant clearly show intent to convey lesser estate 101 ©2011 Kaplan, Inc.
102. Other Fee Estates Qualified fee estate
Gift or sale requires real property be used for specific purpose
If use not for that specific purpose
Ownership automatically reverts to owner’s heirs
Fee on condition
If use not for specific purpose
Ownership does not automatically revert to owner’s heirs
Owner’s heirs have right to sue to recover property
102 ©2011 Kaplan, Inc.
103. Life Estate Limited to life of specific person
Owner cannot pass ownership to heirs
Ordinary life estate
Lasts as long as life tenant is alive
Life estate pur autre vie (for another life)
Lasts as long as a particular third party, named by original owner, is alive
This life estate can be passed to heirs but still ends upon death of named third party
103 ©2011 Kaplan, Inc.
104. Life Tenant’s Interest in Real Property Life tenant’s interest is true ownership
May not commit act of waste
Is entitled to all income and profits arising from property
A life interest
Can be sold, leased, mortgaged, or given away
Always terminates on the death of the person against whose life the estate is measured 104 ©2011 Kaplan, Inc.
105. Remainder and Reversion Original owner provides for future ownership of property
(Who owns a remainder interest) will receive the property after life tenant’s death
A reversionary interest
Reverts (returns) to original owner or heirs after life tenant’s death
Also applies to both qualified fee and fee on condition 105 ©2011 Kaplan, Inc.
106. Not Used in New York There are other real estate concepts
Used in other areas of the country, not used in New York:
Interest wife has in real estate of dead husband
Interest husband has in real estate of dead wife
Property acquired during marriage presumed to belong equally to husband and wife
Special rights in property used as family home
106 ©2011 Kaplan, Inc.
107. Forms of Ownership Determines who signs deed as seller
Buyer must decide what form to take title
Fee simple estate in land may be held as follows:
Title held by one owner
Title held by two or more persons
Title held by third person
For benefit of another
107 ©2011 Kaplan, Inc.
108. Forms of Ownership (cont.) Tenant is “owner” in forms of ownership
One person or entity
Ownership is severed from any co-ownership
Passes to owner’s heirs or as directed in will 108 ©2011 Kaplan, Inc.
109. Forms of Ownership (cont.) In concurrent or co-ownership
Title held by two or more persons
Forms recognized in New York:
Tenancy in common
Tenancy by the entirety 109 ©2011 Kaplan, Inc.
110. Tenancy in Common Tenant owns undivided interest
If no fractional interest stated,
each owns equal portion
On co-owner’s death,
interest passes to heir or devisee, and
tenancy in common continues
Each owner may without consent of co-owners do as follows:
Sell, convey, mortgage, or transfer that interest 110 ©2011 Kaplan, Inc.
111. Tenancy in Common in New York In New York, tenancy in common is automatic when the following exist:
Conveyance (sale or gift) is to unmarried persons
Unless stated differently in deed
Property is inherited by two or more persons
Unless stated differently in will
Unmarried persons must decide as follows:
If property to go to heirs, or to surviving partner
111 ©2011 Kaplan, Inc.
112. Joint Tenancy with Right of Survivorship Property owned by group of two or more
Death of one means one less in group
Remaining persons receive deceased’s share
Immaterial what will might say
Last survivor becomes sole owner
May dispose of property by will
In New York
Language in deed must specifically state title taken in that form
112 ©2011 Kaplan, Inc.
113. Creating Joint Tenancy Four unities required to create joint tenancy
All joint tenants acquire interest at same time
All joint tenants acquire interest in same deed
All joint tenants hold equal ownership interests
All joint tenants hold undivided interest in entire property
113 ©2011 Kaplan, Inc.
114. Terminating Joint Tenancies Joint tenant can convey own share to anyone
Consent of other joint tenants not needed
Person receiving share is tenant in common
Upon death, share goes to heirs
Remaining joint tenants still joint tenants
Upon death of joint tenant, share goes to remaining joint tenants
114 ©2011 Kaplan, Inc.
115. Termination by Partition Suit Termination of co-ownership by partition suit
Tenants in common or joint tenants may file
Court will order property divided, or sold
Proceeds divided among co-owners 115 ©2011 Kaplan, Inc.
116. Tenancy by the Entirety A special joint tenancy
Used in New York but not in all states
Is between husband and wife
Must be husband and wife when receiving property
Have rights of survivorship
There is no right to partition
In New York, conveyance automatic
Tenancy by entirety unless deed specifies otherwise
Divorce breaks this tenancy
Become tenants in common immediately
116 ©2011 Kaplan, Inc.
117. Establishment of Trusts Property owners may establish trusts
Prepare for own financial care or for others
Inter vivos or living trust
Established during owner’s lifetime
Established by will after owner’s death
117 ©2011 Kaplan, Inc.
118. Parties to a Trust Trustor
Creator of trust; conveys asset to trustee
Assumes certain duties
Care of asset, investment, pay expenses and fees
Income paid to or for benefit of beneficiaries
Benefit for lifetime, or until reach certain age
118 ©2011 Kaplan, Inc.
119. Ownership of Real Estate by Business Many people may hold interest in same parcel
Investors organize in different ways to finance
Real estate owned by organization or by investors
Sole proprietorship, business owned by one individual
Limited liability company (LLC)
119 ©2011 Kaplan, Inc.
120. Partnerships Two or more people in business as co-owners
Share in business profits and losses
All participate in operation and management
May be personally liable for losses and obligations 120 ©2011 Kaplan, Inc.
121. Partnerships (cont.) Limited partnership
Used to organize investors in real estate project
General partner or partners
Limited (or silent) partners
No participation in management activities
Liable only to extent of their investment
If general partner dies, partnership dissolved
Unless partnership agreement provides otherwise or allows substitution of another general partner
121 ©2011 Kaplan, Inc.
122. Corporations When formed, considered a C corporation
Death of shareholder, officer, director does not affect title to property owned by corporation
Artificial person or legal entity
Created under state laws where chartered
122 ©2011 Kaplan, Inc.
123. Corporations (cont.) Owns property in severalty
Due to existence in perpetuity
Never joint tenant with right of survivorship
Managed by board of directors
Elected by shareholders
Stock in corporation is personal property
Shareholders buy stock
Shareholder liability limited to investment
123 ©2011 Kaplan, Inc.
124. C Corporation No limitation on classes of stock issued
No limit on number of shareholders
Is taxed twice
Corporation taxed on profits
Individual shareholders taxed on the dividends distributed to them 124 ©2011 Kaplan, Inc.
125. S Corporation Simplified corporation
Make election within first 150 days of formation
Only domestic citizens, no foreigners as shareholders
Limited number of shareholders
125 ©2011 Kaplan, Inc.
126. S Corporation (cont.) Profits passed directly to shareholder
Only taxed once
Maximum 20 percent passive income
Must file for with IRS and state
“Election to create an S corporation”
Must be accepted by taxing authorities
Reports shareholder profit and loss using K-1
126 ©2011 Kaplan, Inc.
127. Limited Liability Company Hybrid entity
“Members” not “shareholders”
Members pay tax on earnings and profits
Freedom to manage company
Income tax advantages
127 ©2011 Kaplan, Inc.
128. Syndicates A joining together
Of two or more people or firms
To carry out one or more business projects
Co-ownership (joint tenancy, or in common)
Corporation 128 ©2011 Kaplan, Inc.
129. Joint Venture Not a legal entity
Special state laws
If expect benefit without active participation
A joining together
Of two or more people or firms
To carry out a single project
Not a permanent relationship
Lasts for a limited time 129 ©2011 Kaplan, Inc.
130. Cooperative (Co-op) Ownership Corporation holds title to land and building
Purchasers (shareholders) resemble tenants
Receive proprietary leases to apartment
Elected board of directors
Shareholders pay fees monthly
Maintenance, corporation’s property tax, mortgage on building, board’s assessments
130 ©2011 Kaplan, Inc.
131. Cooperative (Co-op) Ownership (cont.) Corporation financially vulnerable
Cooperative must pay expenses
Even if an individual tenant cannot pay
Generally co-ops created by converting rentals
Real estate license needed even though personal property
IRS allows co-op owners to treat apartments as real estate for tax purposes 131 ©2011 Kaplan, Inc.
132. IRS 80/20 Rule Repealed Co-ops taxed by IRS as not-for-profits
Under old law, maximum 20 percent annual operating budget from passive activity from following:
Rents on property owned by co-op
Interest payments on invested capital
The 80 percent is active income
Received as monthly maintenance from shareholders
132 ©2011 Kaplan, Inc.
133. Condominium Ownership May be commercial or residential
Owner holds fee simple
To unit and percentage of common elements
Receives individual tax bill
May mortgage property
Foreclosure does not affect other owners 133 ©2011 Kaplan, Inc.
134. Condominium Ownership (cont.) Administration in New York State
Generally association of owners or board of managers
Elected by owners
Manages itself or hires professional property manager
Owners pay monthly charges for maintenance expenses
134 ©2011 Kaplan, Inc.
135. Variations Town house ownership is hybrid form
Occupants own living unit and land beneath in fee simple
Includes roof and basement
Perhaps also own patio or yard
Homeowners’ association owns common elements
Town house owner becomes member
Cluster housing may use this form
Single houses on very small lots
135 ©2011 Kaplan, Inc.
136. Condop Hybrid real property ownership
Uses both condominium/cooperative forms
Land organized as condo
Allows two or more separate owners in the same parcel of land; eliminates IRS 80/20 concerns
Two or more condominium interests formed
Developer retains commercial space
Condo association on behalf of residential units
Each owner receives fee simple
For their ownership interest in the property
136 ©2011 Kaplan, Inc.
137. Condop (cont.) Builder/developer
Retention of commercial space
Sells off residential units
Co-op unit owners
Deductible mortgage expense 137 ©2011 Kaplan, Inc.
138. Other Ways Title Transferred Escheat
Person dies without a will (intestate)
If no relative qualifies as natural heir, real estate becomes property of the state of New York
Land acquired through long use without owner’s consent
Complex legal process
New law limitations 138 ©2011 Kaplan, Inc.
139. Liens and Easements Chapter 5 139 ©2011 Kaplan, Inc.
140. Encumbrances Liens
Financial claims against property
Provides security for debt
Voluntary or involuntary
General or specific
140 ©2011 Kaplan, Inc.
141. Voluntary or Involuntary Liens Voluntary liens
Created by owner’s action
Example is a mortgage loan
Created by law
Example is real estate tax lien 141 ©2011 Kaplan, Inc.
142. General Liens Affect all personal and real property
Estate and inheritance tax
Debts of deceased person
Corporation franchise tax
Federal and state income tax
142 ©2011 Kaplan, Inc.
143. Specific Liens Secured by specific parcel of real estate
Only affect that parcel
Specific liens included as follows:
Special assessment lien
Ad valorem tax lien
Municipal utility lien
Surety bail bond lien 143 ©2011 Kaplan, Inc.
144. Judgments Court order to pay a bill
Become liens against all property in county
When docketed (recorded) in county clerk’s office
May be filed in other counties in New York State
May be filed against personal property 144 ©2011 Kaplan, Inc.
145. Mechanics’ Liens Workers or suppliers may place against specific property
When not paid for labor or materials used in that property during the following:
Repairs 145 ©2011 Kaplan, Inc.
146. Effects of Liens on Title Liens and other encumbrances run with the land
Bind successive owners
Buyer could purchase an encumbered property
Would not be personally liable
Creditor could take court action to foreclose the lien
146 ©2011 Kaplan, Inc.
147. Priority of Liens Priority established by date, time recorded
Oldest recorded lien has priority, except:
Real estate taxes and special assessments (tax liens)
– Supersede all recorded liens
– Always first recorded claim against property 147 ©2011 Kaplan, Inc.
148. Subordination Agreements Voluntary written agreements between lienholders to change priority
Mortgage, judgment, and other liens prioritized
All leases within income-generating properties will contain a subordination clause
Places the interests of the leaseholder as secondary to that of past, present, or future financing on the property and/or
Any underlying ground lease by which the leaseholder leases land from the landowner 148 ©2011 Kaplan, Inc.
149. Liens Other Than Real Estate Taxes Mortgage lien
Lien on real estate given to a lender by a borrower
Security for the repayment of a loan
Becomes lien when mortgage funds are disbursed, document signed, and delivered to the mortgagee
The lender (mortgagee) records the mortgage in the county where the property located 149 ©2011 Kaplan, Inc.
150. Removal of Mortgage Lien When debt fully paid, lien removed
By filing a satisfaction of mortgage certificate
Signed by the lender
Lien can be removed by recording document called a “release of lien”
For this to occur, the party holding the lien (lienor) must execute the release document
In favor of the liened party (lienee) 150 ©2011 Kaplan, Inc.
151. Mechanics’ Liens If owner has not paid for work done, or
If general contractor has been paid but has not paid subcontractors or suppliers of materials
On a single dwelling
Claim must be placed within four months of completion of the work
On other types of transactions
Liens must be placed within eight months 151 ©2011 Kaplan, Inc.
152. Mechanics’ Liens (cont.) A mechanic’s lien expires in one year
But may be renewed
Court action is not required
Lien is simply filed in the public records 152 ©2011 Kaplan, Inc.
153. Liens for Commission In New York, broker’s lien may be filed as follows:
For commission, if
the property is not to be used for residential purposes,
the lease is for three years or longer, and
the broker worked under written commission agreement
Must be filed within eight months
Includes installments 153 ©2011 Kaplan, Inc.
154. Broker’s Affidavit of Entitlement Broker’s affidavit of entitlement to commission
For purchase or lease of any real property
Not become a lien, but is entered in public record
Seller to place disputed amount in escrow with county clerk
154 ©2011 Kaplan, Inc.
155. Release of Lien When a lien has been paid or considered satisfied
Party that benefited from the lien is required to remove the lien
Removal through recording of a release of lien or satisfaction of lien 155 ©2011 Kaplan, Inc.
156. Judgments Decrees issued by a court
Takes priority from date docketed in county
Lien for ten years, renewable once
Differs from a mortgage
A specific parcel never given as security for debt.
Judgment becomes general involuntary lien
On all real property in the county that is owned by debtor when docketed with county clerk
Transcripts of lien may be docketed in any other county in New York against debtor’s other real property
156 ©2011 Kaplan, Inc.
157. Judgments – Satisfaction Enforced through sheriff’s sale
Of debtor’s real or personal property
Record will be cleared of the judgment
If sheriff’s report of sale shows sale yielded sufficient money to satisfy the debt after any liens with priority have first been satisfied 157 ©2011 Kaplan, Inc.
158. Judgments — Satisfaction (cont.) Judgment can be satisfied by payment of debt in full
Debtors should record a satisfaction piece
If not, may show on their credit report for years
Currently in New York, a judgment lien bears statutory interest rates of 9 percent
Interest calculated as simple interest
158 ©2011 Kaplan, Inc.
159. Lis Pendens Lis pendens immediately recorded
When a lawsuit is filed that affects title to a parcel
Before decree or judgment rendered
Recording gives notice of cloud on title
To interested parties
159 ©2011 Kaplan, Inc.
160. Inheritance Taxes Federal estate taxes, state inheritance taxes
Debts of deceased persons
General involuntary liens
Encumber a deceased person’s real and personal property
Normally paid or cleared in surrogate court proceedings 160 ©2011 Kaplan, Inc.
161. Vendor and Vendee Liens Vendor’s lien
Seller did not receive full agreed-upon purchase price
Buyer’s claim against seller
Seller failed to deliver title
Can occur under installment contract
161 ©2011 Kaplan, Inc.
162. Corporation Franchise Tax New York levies a corporation franchise tax on corporations
As a condition of allowing them to do business in the state
Is a lien on all property, real and personal, owned by the corporation
New York City also imposes a tax on corporations doing business in the city
Becomes a lien on corporation’s property
162 ©2011 Kaplan, Inc.
163. Federal Liens An environmental lien may be levied by the federal government
For costs and damages incurred in removal or remedial action under CERCLA
Lien attaches only to the property subject to the cleanup
An IRS tax lien
Results from failure to pay any portion of federal income or withholding taxes
Is a lien on all taxpayer’s real and personal property
163 ©2011 Kaplan, Inc.
164. Other Liens Municipalities given right to lien property
If furnish water or services
Surety bail bond
A real estate owner who must stand trial for a crime may put up real estate instead of cash
Or other family members may pledge their real estate
The execution and recording of such a surety bail bond creates a lien enforceable by the state if the accused person does not appear in court 164 ©2011 Kaplan, Inc.
165. Other Liens (cont.) Unpaid condominium common charges
In favor of board of managers or condominium association
Liens for unpaid maintenance
Or other charges in favor of a cooperative corporation
Liens for New York State income and transfer taxes, and some UCC filings
165 ©2011 Kaplan, Inc.
166. Deed Restrictions and Covenants Private agreements that affect the use of land
Usually placed by owner when property sold
May be included in deed
Deed restrictions typically are imposed by a developer
To maintain specific standards in a subdivision, or
To require a property be used for a specific purpose 166 ©2011 Kaplan, Inc.
167. Easements Right acquired by one party to use the land of another party for a special purpose
Four types of easements
Easements commonly created by written agreement between the parties
167 ©2011 Kaplan, Inc.
168. Easement Appurtenant Permanent right to use another’s land for the benefit of a neighboring parcel
Easements appurtenant involve two adjoining parcels of land
The public often refers to such an easement as a right-of-way.
The property that benefits is called the dominant estate.
The one that is used is the servient estate.
168 ©2011 Kaplan, Inc.
169. Easement in Gross A mere right to use the land of another
Does not involve any adjoining estate
169 ©2011 Kaplan, Inc.
170. Easement by Necessity Owner may acquire an easement by necessity
In certain cases
If the only access to a parcel is through another’s property
Easement by necessity terminated
If the need for it no longer exists 170 ©2011 Kaplan, Inc.
171. Easement by Prescription Permanent right to use another’s property
Under specific circumstances
In New York
One may acquire easement by doing so for a period of ten years.
Tacking allows consecutive owners to accumulate the ten years’ usage.
The parties must have been successors in interest, such as an ancestor and heir, a landlord and tenant, or a seller and buyer.
Adverse possession similar
Could allow user to acquire actual ownership 171 ©2011 Kaplan, Inc.
172. Other Types of Easements Easement by grant
Usually through a deed, by the landowner
Easement by condemnation
The government’s right to use land
For example, as a sidewalk 172 ©2011 Kaplan, Inc.
173. Party Walls Walls shared by two buildings
Constructed on the boundary line between two owners’ lots
Each owns respective side of the party wall
Each has an easement right in the other half
A party wall may not be demolished without the consent of both owners
Each owner is responsible for maintaining own half 173 ©2011 Kaplan, Inc.
174. Encroachments Building, fence, or driveway extending illegally beyond the land of its owner
Covering some land of an adjoining owner or a street
Usually disclosed by physical inspection or survey
Neighbor may recover damages or secure removal of the encroaching portion 174 ©2011 Kaplan, Inc.
175. Encroachments (cont.) Encroachments of ten years
May give rise to ownership by adverse possession
Method by which title to real property is acquired if
possessed but not owned,
for a statutorily prescribed period of time, and
under certain conditions
May give rise to an easement by prescription 175 ©2011 Kaplan, Inc.
176. Licenses Not classified as an encumbrance because it is not a permanent right
To enter the land of another
For a specific purpose
The permission given by a license may be withdrawn
The license is terminable at the will of the licensor 176 ©2011 Kaplan, Inc.
177. Real Estate Instruments: Deeds Chapter 6 177 ©2011 Kaplan, Inc.
178. Legal Descriptions Documents affecting interests in real estate must contain a legal description
Accurately identify the property involved
Land is described by one of the following:
Metes and bounds
Rectangular (government) survey
Recorded plat of subdivision 178 ©2011 Kaplan, Inc.
179. Metes and Bounds The actual location of monuments is an important consideration
The description always must enclose a tract of land.
The boundary line must end at the point at which it started. 179 ©2011 Kaplan, Inc.
180. Rectangular (Government) Survey System The rectangular survey system is not used in New York
Surveys based on principal meridians
Land is surveyed into squares 36 miles in area called townships.
Townships are divided into 36 sections of one square mile each.
Each square mile contains 640 acres. 180 ©2011 Kaplan, Inc.
181. Recorded Plat of Subdivision Land can be subdivided into lots by means of a recorded plat of subdivision
An approved map giving the size, location, and designation of lots
Specifies the location and size of streets
Filed in the county clerk’s or recorder’s office of the county where the land is located 181 ©2011 Kaplan, Inc.
182. Preparation and Use of Survey A survey is the usual method of certifying the legal description of a parcel of land.
Surveys often are required when a mortgage or new construction is involved. 182 ©2011 Kaplan, Inc.
183. Measuring Elevations U.S. National Geodetic Survey datum
Air lots, condominium descriptions, and other measurements of vertical elevations
May be computed from the mean sea level in New York harbor
Most large cities have established local datums
Elevations from these datums further supplemented by reference points called benchmarks 183 ©2011 Kaplan, Inc.
184. Deeds The voluntary transfer of an owner’s title is made by a deed
Executed (signed) by the owner as grantor
To the purchaser or donee as grantee
All deeds must be in writing
In accordance with the requirements of the statute of frauds 184 ©2011 Kaplan, Inc.
185. Valid Conveyance Requirements for valid conveyance by deed
Grantor having the legal capacity to execute (sign) the deed
Grantee named with reasonable certainty so that he or she can be easily identified
Recital of consideration
Granting clause (words of conveyance)
Habendum clause (to define the type of estate being conveyed) 185 ©2011 Kaplan, Inc.
186. Valid Conveyance (cont.) Designation of any limitations on the conveyance of a full fee simple estate
Adequate description (a legal description) of the property conveyed
Exceptions and reservations affecting title
Signature of the grantor
Acknowledgment (if the deed is to be recorded)
Delivery of the deed and acceptance by the grantee to pass title
186 ©2011 Kaplan, Inc.
187. Acknowledgment A declaration made by a person signing a document before an authorized public officer
Usually made before a notary public; can also be taken by a judge, justice of the peace, or other qualified person 187 ©2011 Kaplan, Inc.
188. Acknowledgment (cont.) The signing party acknowledges that it is in fact the party signing the document.
The notary public acts as the legal witness to the acknowledging party signature.
An acknowledgment is not required to make a deed valid.
In New York all deeds, mortgages, and similar documents must be acknowledged before they can be recorded (entered in the public records).
188 ©2011 Kaplan, Inc.
189. Execution of Corporate Deeds A corporation can convey real estate only after a resolution passed by its board of directors.
If all or a substantial portion of a corporation’s real estate is being conveyed, the holders of at least two-thirds of the stock also must approve.
189 ©2011 Kaplan, Inc.
190. Types of Deeds Full covenant and warranty deed
Bargain and sale deed with covenant against grantor’s acts
Bargain and sale deed without covenant against grantor’s acts
190 ©2011 Kaplan, Inc.
191. Types of Deeds (cont.) Warranty deeds
Provide the greatest protection of any deed
Covenant of seisin
Covenant against encumbrances
Covenant of quiet enjoyment
Covenant of further assurance
Covenant of warranty forever
These covenants extend back to all previous owners 191 ©2011 Kaplan, Inc.
192. Types of Deeds (cont.) Warranty deeds (cont.)
In New York, the seller need not deliver a full covenant and warranty deed unless the purchase agreement requires it.
192 ©2011 Kaplan, Inc.
193. Bargain and Sale Deed with Covenant Bargain and sale deed with covenant against grantor’s acts
Known as special warranty deed in other states
A bargain and sale deed with covenant warrants only that the real estate has not been encumbered by the grantor 193 ©2011 Kaplan, Inc.
194. Bargain and Sale Deed without Covenant Bargain and sale deed without covenant
Contains no warranties
A bargain and sale deed without covenant carries with it no warranties but implies that the grantor holds title to the property 194 ©2011 Kaplan, Inc.
195. Quitclaim Deeds A quitclaim deed carries no warranties whatsoever
Conveys only whatever interest, if any, the grantor may or may not possess in the property
195 ©2011 Kaplan, Inc.
196. Executors’ and Referees’ Deeds An executor’s deed is a bargain and sale deed with covenant
A referee’s deed contains no covenants or warranties
Although it does imply seisin (ownership)
The full consideration (sales price) usually stated in these cases so that it is a matter of public record 196 ©2011 Kaplan, Inc.
197. Dedication by Deed Developer who transfers certain areas within a new subdivision or development to a municipality does so by the process known as dedication, or dedication by deed.
A quitclaim deed is often used for the process.
197 ©2011 Kaplan, Inc.
198. Natural Processes to Gain/Lose Land Natural processes
198 ©2011 Kaplan, Inc.
199. Conveyance after Death Transfer is either
by operation of law or
by executor’s deed
199 ©2011 Kaplan, Inc.
200. Real Estate Instruments: Leases Chapter 7 200 ©2011 Kaplan, Inc.
201. Leasing Real Estate A lease grants someone the right to use the property of another for a certain period in return for consideration. 201 ©2011 Kaplan, Inc.
202. Leasing Real Estate A lease is a contract between an owner of real estate (lessor) and a tenant (lessee) that transfers the right to possession and use of the owner’s property, usually for a specified period of time.
It is a nonfreehold estate.
The statute of frauds requires that a lease for a term of more than one year be in writing to be enforceable. 202 ©2011 Kaplan, Inc.
203. Statute of Frauds The statute of frauds requires that to be enforceable a lease for a term of more than one year must be in writing.
Statute also requires that all agreements involving the conveyance of a partial or whole interest in real property must be in writing.
Leases should be signed by both lessor and lessee.
Under the statute of frauds, a lease for one year or less need not be in writing to be legally enforceable. 203 ©2011 Kaplan, Inc.
204. Leasehold Estates Generally classified as personal property
Estate for years
Tenancy at will
Tenancy at sufferance 204 ©2011 Kaplan, Inc.
205. Estate for Years A leasehold estate that runs for a specific length of time creates an estate for years.
An estate for years need not last for years or even for one year.
It always has a specific starting and ending time. 205 ©2011 Kaplan, Inc.
206. Periodic Estate A leasehold estate that runs for an indefinite period creates a periodic tenancy.
Year to year; month to month
Agreement automatically renewed for similar succeeding periods
Lasts until one of the parties gives notice to terminate
Month-to-month tenancy created when tenant takes possession with no definite termination date and pays rent monthly
206 ©2011 Kaplan, Inc.
207. Periodic Estate (cont.) A New York tenant who remains in possession of leased premises after lease expires is known as a holdover tenant (tenancy at sufferance).
If the landlord accepts rent, a tenancy from month to month is created. 207 ©2011 Kaplan, Inc.
208. Termination of Periodic Estate If the lease term is longer than one month
The landlord may commence proceedings to remove a tenant who has held over.
Legal process to remove tenant in possession is “holdover proceeding”
To terminate a periodic estate, either the landlord or the tenant must give proper notice.
30-day notice in New York City
One-month notice in New York State
Must be given at least one day before rent is due
208 ©2011 Kaplan, Inc.
209. Tenancy at Will An estate that gives the tenant the right to possess with the consent of the landlord
No definite period of time
Tenancy may be terminated by giving proper notice
Unlike other tenancies, an estate at will is automatically terminated by the death of either landlord or tenant 209 ©2011 Kaplan, Inc.
210. Tenancy at Sufferance When a tenant continues to occupy the premises without the consent of the landlord after tenant’s rights have expired
Many New York commercial leases contain clauses stating a tenant may be charged up to double rent for the period tenant is in possession as a tenant at sufferance or holdover tenant.
Although used, these clauses may not be enforceable. 210 ©2011 Kaplan, Inc.
211. Term of Lease Term of Lease
In New York, an oral lease is valid if it is for a period of one year or less.
A lease for three years or more may be entered in the public records if properly acknowledged.
With a written nonresidential lease of more than three years, a lien for a commission may be placed if brokerage services were performed pursuant to a written contract.
Brokers have up to eight months to assert a lien. 211 ©2011 Kaplan, Inc.
212. Typical Lease Provisions: Essentials of Valid Lease Capacity to contract
A demising clause
Description of the premises
A clear statement of the term (duration)
Specification of rent and how it is to be paid
Lease must be in writing
Delivery 212 ©2011 Kaplan, Inc.
213. New York General Obligations Law Landlord to hold all security deposits in trust
Must not commingle
Such deposits continue to belong to the tenants who have advanced them.
State law requirements
Owners of six or more residential units hold security deposits in interest-bearing New York bank account with all interest, less a 1 percent fee, due the tenant.
Landlords who convey rental property must turn over any security deposits to new owner within five days of the deed’s delivery. 213 ©2011 Kaplan, Inc.
214. Emergency Tenant Protection Act New York’s Emergency Tenant Protection Act (ETPA)
Certain apartments are rent stabilized in New York City and some other locations throughout the state.
For a rent-stabilized apartment, no more than one month’s rent may be charged for security deposit.
214 ©2011 Kaplan, Inc.
215. Lead Paint Notification Applies to any residence built before 1978
Federal law requires that before signing a lease, the tenant be given a booklet about lead paint hazards and any information the landlord has about lead hazards on the premises.
The requirement does not apply to rentals for fewer than 100 days, studio apartments, zero-bedroom lofts, housing exclusively intended for the elderly, and premises already determined to be lead-free by a certified inspector. 215 ©2011 Kaplan, Inc.
216. Improvements The tenant may make improvements to the demised premises only with the landlord’s prior permission.
Any such alterations generally become the property of the landlord.
They become fixtures.
Trade fixtures may be removed by the tenant before the lease expires, provided the tenant restores the premises to original condition. 216 ©2011 Kaplan, Inc.
217. Maintenance of Premises Every residential New York lease, oral or written, is considered to contain an implied warranty (and covenant) of habitability.
Tenant will not be subjected to any conditions that might endanger life, health, or safety.
The tenant must return the premises in the same condition as it was received with allowances for ordinary wear and tear. 217 ©2011 Kaplan, Inc.
218. Assigning and Subleasing If lease terms do not prohibit:
A tenant who transfers the entire remaining term of a lease assigns the lease.
One who transfers less than all of the term but retains some rights and obligations, subleases.
State law gives the tenant in any building with four or more residential units the right to sublet subject to the landlord’s consent, which may not be unreasonably withheld.
218 ©2011 Kaplan, Inc.
219. Assigning and Subleasing (cont.) Novation is
a substitution of an old party for a new party or
a substitution of an old agreement for a new agreement.
a sublandlord or an assignor can be held liable and accountable for all remaining unperformed financial and legal aspects of the lease.
219 ©2011 Kaplan, Inc.
220. Apartment Sharing In New York, a lease may not restrict occupancy of an apartment to the named tenant and that tenant’s immediate family.
Landlords may limit the total number of occupants to comply with health laws on overcrowding.
The apartment may be shared with one additional occupant and that occupant’s dependent children.
220 ©2011 Kaplan, Inc.
221. Renewals A lease containing a clause that it will be automatically renewed unless the tenant gives notice of intent not to renew is not valid in New York.
Exception: The landlord reminds the tenant about the automatic renewal provision 15 to 30 days before the tenant’s notice is due.
The occupant of a rent-stabilized apartment is entitled to a one- or two-year renewal. 221 ©2011 Kaplan, Inc.
222. Termination of Lease Leases may be terminated by the following:
Expiration of the lease period
Mutual agreement of the parties
Breach of the lease by either landlord or tenant
Neither the death of the tenant nor the landlord’s sale of the rental property terminates a lease.
222 ©2011 Kaplan, Inc.
223. Breach of Lease Tenant default on any lease provisions
Landlord may sue as follows:
For a money judgment
For actual eviction where a tenant has improperly retained possession of the premises
Premises become uninhabitable
Does not have to be result of landlord negligence
Tenant may refuse to pay rent until problem remedied 223 ©2011 Kaplan, Inc.
224. Breach of Lease (cont.) In New York
Grounds for which the landlord can institute proceedings are as follows:
Nonpayment of rent
Illegal use of the premises
Remaining in possession after expiration of the lease without permission
Bankruptcy or insolvency of the tenant 224 ©2011 Kaplan, Inc.
225. Suit for Possession — Actual Eviction Tenant breaches a lease or improperly retains possession
Landlord may regain possession through a suit for possession or summary proceeding to recover possession.
Landlord must serve notice on the tenant before commencing the suit.
In New York, only a three-day notice must be given before filing a suit for possession based on a default in payment of rent.
225 ©2011 Kaplan, Inc.
226. Tenants’ Remedies — Constructive Eviction Landlord breach of any clause of a lease agreement
The tenant has the right to sue, claiming a judgment for damages against the landlord.
Constructive eviction terminates the lease.
The tenant must be able to prove that the premises have become unusable because of the landlord’s neglect.
To claim constructive eviction, the tenant must actually move from the premises while the uninhabitable condition exists. 226 ©2011 Kaplan, Inc.
227. Pro-Tenant Legislation in New York Retaliatory evictions are illegal.
Landlords may not legally retaliate because a tenant joins a tenants’ organization.
If landlord fails to furnish heat as stipulated, tenants may pay utility company directly and deduct the sum from rent due.
In New York City, at least one-third of tenants of a multiple-unit dwelling acting together may start a special court proceeding to use rent money to remedy conditions dangerous to life, health, or safety.
227 ©2011 Kaplan, Inc.
228. Types of Leases Classified according to the method used in determining the rental rate of the property
228 ©2011 Kaplan, Inc.
229. Gross Lease Tenant pays a fixed rental and the landlord pays all taxes, insurance, mortgage payments, repairs (operating expenses and debt service).
This type of lease is most often used for residential rentals. 229 ©2011 Kaplan, Inc.
230. Net Lease The net lease provides that in addition to the rent, the tenant pays some or all of the operating expenses.
The monthly rental paid is net income (profit) for landlord. 230 ©2011 Kaplan, Inc.
231. Percentage Lease Either a gross lease or a net lease may be a percentage lease.
Normally used for retail business locations
Provides for the following:
Minimum fixed rental fee
Plus a percentage of the tenant’s business income that exceeds a stated minimum
231 ©2011 Kaplan, Inc.
232. Other Lease Types Several types of leases allow for increases in the rent during the lease period.
Provides for increases in rent at set future dates
Allows rent to be increased or decreased periodically based on changes in the government cost-of-living index
232 ©2011 Kaplan, Inc.
233. Other Lease Types (cont.) Proprietary leases
Owner of a cooperative apartment who buys shares in the corporation that owns the building
Owner receives a proprietary lease to the living unit, which acts as the shareholder’s occupancy agreement
A long-term lease made on unimproved land generally for the purposes of constructing an improvement
Oil and gas leases
Constitutes a cloud on title, and buyer may refuse to purchase unless specifically agrees to take title subject to such a lease 233 ©2011 Kaplan, Inc.
234. Real Estate Instruments: Contracts Chapter 8 234 ©2011 Kaplan, Inc.
235. Contract Law Express or implied
Unilateral or bilateral
Executory or executed
Valid, void, voidable, or unenforceable 235 ©2011 Kaplan, Inc.
236. Express or Implied Contracts Express
Implied 236 ©2011 Kaplan, Inc.
237. Unilateral or Bilateral Contracts Unilateral
Bilateral 237 ©2011 Kaplan, Inc.
238. Executory or Executed Contracts Executory
Executed 238 ©2011 Kaplan, Inc.
239. Valid Contract The contract complies with all the essential elements required to be binding and enforceable on both parties. 239 ©2011 Kaplan, Inc.
240. Five Essential Elements to Valid Contract Competent parties
Offer and acceptance
Legality of object
Agreement in writing and signed 240 ©2011 Kaplan, Inc.
241. Competent Parties In New York, requirements to enter into a binding contract
Must be at least 18 years old
Must be of sound mind
Married persons younger than 18
Considered an adult for the purposes of buying a principal residence
In New York, the consent of a parent or guardian required for a minor to get married
241 ©2011 Kaplan, Inc.
242. Offer and Acceptance Also called mutual assent
Must be a clear meeting of the minds
Contract must express all agreed-on terms
Must be clearly understood by the parties
242 ©2011 Kaplan, Inc.
243. Consideration The agreement must be based on good and valuable consideration.
Consideration is what the parties promise in the agreement to give to or receive from each other.
Consideration may consist of money, exchange of value, or mutual promises.
Promises may consist of pledge to perform some act or of forbearance, a promise to refrain from an act.
The price or amount must be stated definitely and be payable in exchange for the deed or right received.
243 ©2011 Kaplan, Inc.
244. Legality of Object Must not involve a purpose that is illegal or against public policy 244 ©2011 Kaplan, Inc.
245. Agreement in Writing and Signed New York’s statute of frauds
Requires that certain types of contracts be in writing
Includes all contracts for the sale of real estate and for leasing real property for more than one year
Parol evidence rule
States that written contract takes precedence over oral agreements or promises
A promise that is not in written contract may not be legally binding
245 ©2011 Kaplan, Inc.
246. Void Contract Has no legal effect because it does not meet the essential elements of a contract 246 ©2011 Kaplan, Inc.
247. Voidable Contract Seems to be valid but may be voided, or disaffirmed, by one of the parties
A voidable contract is considered by the courts to be valid if the party that could disaffirm the agreement does not do so within a reasonable period. 247 ©2011 Kaplan, Inc.
248. Voidable Contract (cont.) Undue influence and duress
Contracts signed by a person under duress or undue influence are voidable (may be canceled) by such person or by a court.
To be valid, every contract must be signed as the free and voluntary act of each party. 248 ©2011 Kaplan, Inc.
249. Unenforceable Contract On the surface, appears to be valid
But neither party can successfully sue the other to force performance
Unenforceable contracts are said to be “valid as between the parties” because if both desire to go through with it, they can do so. 249 ©2011 Kaplan, Inc.
250. Performance of Contract The contract may call for a specific time by which the agreed-on acts must be completely performed.
Some contracts state “time is of the essence”
Contract must be performed within the time specified
Any party who has not performed on time is deemed to have breached the contract
When a contract does not specify date
The acts it requires should be performed within a reasonable time
250 ©2011 Kaplan, Inc.
251. Assignment and Novation Assignment
Refers to a transfer of all of one’s rights and/or duties under a contract
The substitution of a new contract for an existing agreement
May also involve the substitution of a new party for an old party 251 ©2011 Kaplan, Inc.
252. Discharge of Contract Completely performed
Partial performance of terms
Impossibility of performance
Mutual agreement of the parties to cancel
Operation of law 252 ©2011 Kaplan, Inc.
253. Breach of Contract A violation of any of the terms or conditions of a contract
Without legal excuse 253 ©2011 Kaplan, Inc.
254. Default The failure to perform on the terms of the contract
Failure can be by either party to contract
Party suffers a loss
Loss is because of the other party’s default
Party may sue for damages to cover the loss 254 ©2011 Kaplan, Inc.
255. Default in Real Estate Contract If seller defaults, buyer may
rescind the contract,
file for specific performance, and
sue seller for compensatory damages.
If buyer defaults, seller may
declare contract forfeited,
file for specific performance,
sue seller for compensatory damages. 255 ©2011 Kaplan, Inc.
256. Statute of Limitations and Laches New York allows a specific time limit.
Six years during which parties to a contract may sue to enforce rights
Applies to contracts, foreclosures, mortgages, and cases of fraud
Lawsuits to recover real property have a ten-year statute of limitations in New York
The principle or doctrine of laches is similar.
An undue delay or failure to assert a claim or right can result in the loss of that claim or right 256 ©2011 Kaplan, Inc.
257. Contracts Most Commonly Used Independent contractor agreements
Buyer’s broker agreements
Real estate sales contracts
Contracts for deed
Leases 257 ©2011 Kaplan, Inc.
258. Broker’s Authority to Prepare Documents New York Department of State (DOS)
States the broker’s license does not confer right to draft legal documents or give legal advice
New York appellate court has stated that broker has right to complete a simple contract
Preparation of legal documents by a broker
May result in the loss of commissions, loss of license, or other penalties or damages
In upstate areas, many brokers fill in the blanks on forms or simple sales contracts
In the New York City area, the seller’s attorney usually prepares the sales contract 258 ©2011 Kaplan, Inc.
259. Duncan and Hill Decision Recommended that New York State brokers and salespersons who prepare purchase and sales contracts do the following:
Protect themselves against charges of unauthorized practice of law by making contracts subject to approval by attorneys for both parties
An attorney may ask for changes to protect the client’s interests.
Any such changes constitute a counteroffer and need not be accepted by the other party. 259 ©2011 Kaplan, Inc.
260. Use of Forms per Attorney General New York attorney general conclusions
Broker may use contract form as follows:
Must be approved by a recognized bar association along with a recognized REALTORS® association
Requires only fill-in nonlegal provisions
Names of the parties, date and location of the closing, description of the property, and sales price
Clearly and prominently indicates the following:
On its face that it is a legally binding document and recommends that the parties seek advice from their attorneys before signing
Also states that brokers may not add provisions to standard contracts unless they make the entire contract subject to the review and approval of each party’s attorney 260 ©2011 Kaplan, Inc.
261. Printed Contract Forms Use of printed forms raises three issues:
What information should be used to fill in the blanks?
What printed matter is not applicable to a particular sale and can be ruled out by drawing lines through the unwanted words?
What clauses (called riders) are to be added?
All changes and additions usually initialed by both parties
Additional agreements should be drawn up by attorneys, not brokers 261 ©2011 Kaplan, Inc.
262. Listing Agreements Contracts that establish the rights of the broker as agent and of the buyer or seller as principal
Considered the employment contract between the principal and the agent in a real estate transaction 262 ©2011 Kaplan, Inc.
263. Sales Contracts The contract sets forth all details of the agreement between buyer and seller.
Are for the purchase and sale of a parcel of real estate or shares of stock and proprietary lease appurtenant thereto and related to a cooperative unit
May be known as offer to purchase, contract of purchase and sale, earnest money agreement, binder and deposit receipt, or other variations
New York does not mandate any specific form of listing or sales contract. 263 ©2011 Kaplan, Inc.
264. Sales Contract (cont.) A real estate sales contract binds buyer and seller to a definite transaction as described in the contract.
The buyer is bound to purchase the property for the amount stated in the agreement.
The seller is bound to deliver title, free from liens and encumbrances, except for those allowed by the contract. 264 ©2011 Kaplan, Inc.
265. Offer and Acceptance A meeting of the minds
Buyer and seller agree on the terms of the sale
One of the essential elements of a valid contract
Usually accomplished through the process of offer and acceptance
Upstate, an offer to purchase is drawn up, signed by prospective buyer, and presented by broker to seller.
In other areas of the state, the broker prepares a precontract agreement, known as a binder. 265 ©2011 Kaplan, Inc.
266. Steps for Binding Contract Attorneys prepare and negotiate the contract of sale
Seller’s attorney sends buyer’s attorney a draft contract
Which buyer can agree to or modify by suggesting acceptable changes through buyer’s attorney
Buyer’s attorney sends contract with down payment to seller through seller’s attorney for acceptance (now considered offer)
Is considered accepted
When and after it is signed by seller and delivered to office of buyer’s attorney
At this point, is binding on both parties 266 ©2011 Kaplan, Inc.
267. Memorandum of Sale Notably in and around New York City
Brokers prepare a nonbinding memorandum of sale, data sheet, or terms sheet.
Sheet of information stating essential terms of the agreement
Parties agree to have a formal and complete contract of sale drawn up by an attorney
Throughout the state
A preliminary memorandum might be used.
In any situation in which the details of the transaction are too complex for a standard sales contract form 267 ©2011 Kaplan, Inc.
268. Counteroffer Any attempt by parties to change the terms creates counteroffer.
Essentially cancels the original offer
A contract is not considered valid until the person making offer has been notified of other party’s acceptance.
Any offer may be pulled or rescinded
Must be prior to acceptance by the offeree and communication of the acceptance
268 ©2011 Kaplan, Inc.
269. Equitable Title A buyer who signs a contract to purchase real estate does not receive title to the land.
Only the delivery of the deed actually conveys title.
After the contract is signed, the buyer has a contract right known as equitable title.
In New York, a buyer under a land contract also acquires equitable title.
Is also known as a contract for deed or installment sales contract 269 ©2011 Kaplan, Inc.
270. Destruction of Premises New York State has adopted the Uniform Vendor and Purchaser Risk Act.
The seller bears any loss that occurs before the title passes or before the buyer takes possession. 270 ©2011 Kaplan, Inc.
271. Earnest Money Deposits Cash not essential when making offer
Earnest money deposit held in escrow account
Evidence of buyer’s intent o carry out contract terms
Often held by party holding the escrow involved in sale (upstate) or the seller’s attorney (New York City area)
Each sales contract must identify the party holding it and the bank where held
If the offer is not accepted, the earnest money deposit returned immediately to the would-be buyer 271 ©2011 Kaplan, Inc.
272. Parts of a Sales Contract In New York, the six essentials of a valid contract for the sale of real property are as follows:
Contract in writing
Agreement to buy and sell
Adequate description of the property
Consideration (price and terms of payment)
Signatures of the parties (the signature of a witness is not essential for a valid contract) 272 ©2011 Kaplan, Inc.
273. Miscellaneous Provisions Disclosures required in New York
Possible problems with lead paint, agricultural districts, and electric service
Seller’s property disclosure
FHA or VA loan rider and notices
In some transfers, certificate of occupancy required from a municipality
273 ©2011 Kaplan, Inc.
274. Contingencies Events that excuse performance of either party to the contract
Another home to be sold first
274 ©2011 Kaplan, Inc.
275. Liquidated Damages Amount of money, agreed to in advance by buyer and seller
It serves as total compensation if one party does not live up to the contract.
If the sales contract specifies that earnest money deposit will serve as liquidated damages, the seller will be entitled to only the deposit if the buyer refuses to perform for no good reason.
The seller who agrees to accept deposit as liquidated damages may not sue later.
275 ©2011 Kaplan, Inc.
276. Plain-Language Requirement (Sullivan Law) New York law requirement
Certain written agreements for the sale or lease of residential property must be written in clear and coherent manner.
Words used must be common in everyday usage
The copy also must be appropriately divided and captioned in its various sections.
The requirement does not apply to agreements involving amounts over $50,000.
276 ©2011 Kaplan, Inc.
277. Lead-based Paint Hazard Disclosure Buyer who purchases almost any residential property built before 1978
Buyer must be furnished with a booklet discussing lead-based paint hazards.
The seller must disclose any hazards known by the seller.
277 ©2011 Kaplan, Inc.
278. Additional Contracts and Agreements Cooperative apartment contracts
Rescission 278 ©2011 Kaplan, Inc.
279. Cooperative Apartment Contracts In a transaction involving the sale of personal property, a Uniform Commercial Code financing instrument is utilized.
The financing instrument used in a transaction involving the sale of real property is a mortgage.
The IRS treats the owner’s interest on the loan for a co-op as it does a mortgage.
279 ©2011 Kaplan, Inc.
280. Condominium Sales Buyer of a condominium
Receives fee simple title to unit “from the plaster in”
Receives a percentage of ownership of the common elements
Special contracts used for condominium sales 280 ©2011 Kaplan, Inc.
281. Option Agreements Contract by which optionor gives optionee the right to buy or lease property
At a fixed price within a stated period of time
Optionee pays a fee for this right
The owner is bound to sell if requested.
The optionee is not bound to buy.
Often used by a tenant who may buy, or remain as a tenant
Options must contain all the terms required for a valid contract of sale 281 ©2011 Kaplan, Inc.
282. Land Contracts A real estate sale can be made under a land contract (contract for deed or installment contract).
Typically, the seller (vendor) retains ownership.
The buyer (vendee) moves in and has an equitable interest in the property.
Seller is not obligated to execute (sign) and deliver a deed to buyer until the terms of the contract have been satisfied.
282 ©2011 Kaplan, Inc.
283. Rescission With contracts for the purchase
No right of rescission applies to contracts for the purchase of real estate
With some personal property, the buyer has three days to reconsider and rescind
With mortgage loans
Borrower has three days to cancel if refinancing presently owned and owner-occupied property
No right of rescission applies to mortgage loans used for the purchase of real estate 283 ©2011 Kaplan, Inc.
284. Title and Closing Costs Chapter 9 284 ©2011 Kaplan, Inc.
285. Public Records and Recording Recording acts
Necessity for recording
Recording sales contract
Chain of title
285 ©2011 Kaplan, Inc.
286. Recording Acts Parties interested in real estate may record, or file, documents affecting real estate in the public records to give notice to the world of their interest. 286 ©2011 Kaplan, Inc.
287. Necessity for Recording In New York to give subsequent purchasers constructive notice of a person’s interest
All deeds, mortgages, or other written instruments affecting an interest in real estate must be recorded in the county clerk’s office where the real state is located (in four of New York City counties, the register’s office).
All documents must be properly acknowledged and show proof of payment of real estate transfer tax on deeds or the mortgage tax on mortgages before the documents will be accepted for recording.
Affidavit also must be filed.
In New York City, multiple dwelling registration statement 287 ©2011 Kaplan, Inc.
288. Notice Courts hold prospective buyers or lenders responsible for inspecting property and searching public records to find out the interests of other parties.
Constructive notice is what a person can find out.
Actual notice is what the person actually knows.
An individual who has searched the public records and inspected the property has actual notice. 288 ©2011 Kaplan, Inc.
289. Unrecorded Liens A special search may be needed for unrecorded liens.
Estate taxes and franchise taxes are placed against all real estate owned either by a decedent at the time of death or by a corporation at the time the franchise tax became a lien.
These liens are not recorded. 289 ©2011 Kaplan, Inc.
290. Recording Sales Contracts Occasionally, it is desirable to record a real property sales contract.
Any document to be recorded must be acknowledged. 290 ©2011 Kaplan, Inc.
291. Chain of Title Shows record of ownership of the property over period of time, back to original owner
An abstract of title is condensed history of all the instruments affecting a particular parcel
In New York, chains of title may date back to a grant from the king of England or a grant to a Dutch patroon.
Gap or a break in the chain
Ownership usually must be established by a suit to quiet title, or an Article 15 proceeding. The lifting of a “cloud on the title” usually results.
Courts issue a quitclaim deed or judicial deed. 291 ©2011 Kaplan, Inc.
292. Evidence of Title Abstract of title and lawyer’s opinion
The Torrens system
Certificate of title
Marketable title 292 ©2011 Kaplan, Inc.
293. Abstract of Title and Lawyer’s Opinion Brief history of the instruments appearing in the county
Abstractor does not pass judgment on or guarantee the condition of the title
Attorney must evaluate all material and prepare written report for the purchaser
Not customary in New York
293 ©2011 Kaplan, Inc.
294. Title Insurance A title insurance policy protects the policyholder against loss if a defect in the owner’s title is challenged by anyone at any time.
The policy is paid for only once and is in force for the whole period of ownership. 294 ©2011 Kaplan, Inc.
295. Torrens System The Torrens system is a legal registration system used to verify ownership and encumbrances.
Registration in the Torrens system provides evidence of title without the need for an additional search of the public records.
The Torrens system is no longer used in New York. 295 ©2011 Kaplan, Inc.
296. Certificate of Title Older system, which still may be used for transfers where no lending institution is involved; a certificate of title prepared by an attorney used
No abstract prepared
296 ©2011 Kaplan, Inc.
297. Marketable Title Usually seller required to deliver marketable or insurable title to the buyer at closing
Free from significant defects
If a deed with unmarketable title is accepted by the buyer
Only available legal recourse is to sue seller under the covenants or warranty (if any) contained in the deed 297 ©2011 Kaplan, Inc.
298. Closing the Transaction Where closings are held and who attends
Broker’s role at closing
Lender’s interest in closing
Characteristics of homeowners’ packages
Federal Flood Insurance Program
RESPA requirements 298 ©2011 Kaplan, Inc.
299. RESPA Requirements Special information booklet
Good-faith estimate of settlement costs
Uniform Settlement Statement
Prohibition against kickbacks
299 ©2011 Kaplan, Inc.
300. The Title Procedure The title company will ask the seller to sign an affidavit of title
Checking the premises
Homeseller’s tax exclusion
Releasing existing liens
300 ©2011 Kaplan, Inc.
301. Homeseller’s Tax Exclusion The IRS (and New York State)
Allow a homeseller’s exclusion from capital gains tax of up to $250,000 ($500,000 for a married couple filing jointly)
If the home has been owned and occupied as a principal residence for at least “an aggregate” of 24 months during the five years before the sale
301 ©2011 Kaplan, Inc.
302. Releasing Existing Liens When the purchaser pays cash or obtains a new mortgage to purchase the property
The seller’s existing mortgage usually is paid in full and released in the public record.
The release is called a satisfaction of mortgage. 302 ©2011 Kaplan, Inc.
303. The Title Procedure Checking the premises
Homeseller’s tax exclusion
Releasing existing liens
303 ©2011 Kaplan, Inc.
304. Preparing Closing Statements How the closing statement works
State mortgage tax
Tax reserves and insurance reserves (escrows)
304 ©2011 Kaplan, Inc.
305. Preparing Closing Statements (cont.) Prorations
General rules for prorating
Accounting for credits and charges
Items credited to buyer
Items credited to seller
305 ©2011 Kaplan, Inc.
306. The Arithmetic of Proration: Basic Methods Yearly charge is divided by a 360-day year or 12 months of 30 days each.
Monthly charge is divided by the actual number of days in the month of closing to determine the amount.
Yearly charge is divided by 365 to determine the daily charge.
306 ©2011 Kaplan, Inc.
307. Mortgages Chapter 10 307 ©2011 Kaplan, Inc.
308. Mortgage Defined A pledge of property
Given by a borrower as security for a loan
Mortgage loans involve borrower (mortgagor) and lender (mortgagee)
Security/collateral instruments based on the theory of hypothecation
New York interprets a mortgage purely as a lien on real property and is called a lien theory state
308 ©2011 Kaplan, Inc.
309. Loan Instruments The borrower signs a note, a personal promise to repay the loan.
The borrower also signs a mortgage that pledges the real estate as security for the loan.
The documents are entered into the public record.
Like all liens, mortgages take priority in the order in which they are recorded. 309 ©2011 Kaplan, Inc.
310. Deeds of Trust In some areas of the country, and in certain situations, such as title theory states
Lenders use a trust deed, rather than mortgage.
In these states, it is a three-party, two-instrument transaction.
The parties to these trust deed transactions consist of the following:
Trustee/third neutral party that holds the title 310 ©2011 Kaplan, Inc.
311. Duties of the Mortgagor Paying the debt as promised in the note
Paying all real estate taxes on the property
Maintaining adequate hazard insurance to protect the lender if the property is destroyed or damaged
Obtaining the lender’s authorization before making any major alterations
Maintaining the property in good repair at all times
311 ©2011 Kaplan, Inc.
312. Provisions for Default A mortgage may include an acceleration clause to assist the lender in a foreclosure.
If a borrower defaults, the lender has the right to accelerate the debt.
To declare the entire debt due and owing immediately
312 ©2011 Kaplan, Inc.
313. Foreclosure Two types of proceedings
Deed in lieu of foreclosure
Deficiency judgment 313 ©2011 Kaplan, Inc.
314. Sale of Mortgaged Property Anyone who purchases real estate and takes over the mortgage presently on it may take the property subject to the mortgage or may assume the seller’s mortgage and agree to pay the debt
When property is sold subject to a mortgage, the purchaser is not personally obligated to pay the debt in full
When new owners not only purchase the property subject to the mortgage but assume and agree to pay the debt, they become personally responsible
Reduction certificate (estoppel certificate)
Assignment of the mortgage 314 ©2011 Kaplan, Inc.
315. Recording the Mortgage Mortgage document must be recorded in the recorder’s office of the county in which the real estate is located.
First and second mortgages 315 ©2011 Kaplan, Inc.
316. Satisfying the Mortgage Lien When all payments have been made and the note is paid in full, the mortgagor wants the public record to show that the debt has been paid and the lien satisfied
Release of mortgage or satisfaction of mortgage 316 ©2011 Kaplan, Inc.
317. Mortgage Terminology Down payment
Loan-to-value (LTV) ratio
317 ©2011 Kaplan, Inc.
318. Primary Sources of Real Estate Funding Institutional lenders
Mortgage banking companies
The State of New York Mortgage Agency (SONYMA)
Rural Development Agency
318 ©2011 Kaplan, Inc.
319. Primary Sources of Real Estate Funding (cont.) Low down payments
Private mortgage insurance (PMI) 319 ©2011 Kaplan, Inc.
320. State of New York Mortgage Agency The State of New York Mortgage Agency (SONYMA), Sonny Mae
Provides lower-interest loans for specific purposes in specific locations
Program varies from time to time
320 ©2011 Kaplan, Inc.
321. Rural Development Agency Formerly the Farmer’s Home Administration, this federal agency under the Department of Agriculture provides credit to rural residents.
321 ©2011 Kaplan, Inc.
322. Types of Mortgages: Amortization Payments set high enough to include not only interest due but also a portion of the principal owed
By the end of the term, the full amount of the principal has been paid off.
Fully amortized loan
Straight or term loan
Partially amortized loan and balloon payment
322 ©2011 Kaplan, Inc.
323. Types of Mortgages: Amortization (cont.) Adjustable-rate mortgages (ARMs) shift the risk or reward of changing interest rate from the lender to the borrower
323 ©2011 Kaplan, Inc.
324. Negative Amortization Negative amortization occurs when the payment under the loan is not enough to cover the interest due for that period.
When this occurs, the deficient amount is added to the remaining unpaid principal balance.
The result is a higher principal balance amount.
324 ©2011 Kaplan, Inc.
325. Interest Lender charges certain percentage of the principal as interest each year the debt is outstanding
Annual percentage rate
Buydowns 325 ©2011 Kaplan, Inc.
326. Usury New York has a floating usury rate.
The maximum rate that may be charged is adjusted up or down at specific intervals by the New York State Banking Board.
326 ©2011 Kaplan, Inc.
327. Tax-Deductible Interest Payments Taxpayers may deduct on income tax returns the interest paid on mortgage loans up to a total of $1 million
If borrowed to acquire and/or improve both a first and a second (vacation) residence
Interest on additional borrowing (second mortgages, home equity loans) of up to $100,000
Also qualifies for income tax deduction
Additional homeowner deductions
Prepaid interest points
Any mortgage prepayment penalties
327 ©2011 Kaplan, Inc.
328. Prepayment of Mortgage Some mortgage notes charge a prepayment premium, or penalty, if the loan is paid off before its full term.
For a one- to six-family dwelling used as a principal residence, the maximum prepayment premium a lender may charge in New York is 90 days’ interest on the unpaid balance if the loan is paid in full during the first year.
No prepayment penalties may be charged on FHA or VA loans.
328 ©2011 Kaplan, Inc.
329. Tax and Insurance Reserves Many lenders require that borrowers provide a reserve (escrow) fund to meet future real estate taxes and insurance premiums.
The Real Estate Settlement Procedures Act (RESPA) limits the amount of tax and insurance reserves a lender may require. 329 ©2011 Kaplan, Inc.
330. Real Estate Finance Chapter 11 330 ©2011 Kaplan, Inc.
331. Types of Loans Short-term or temporary loans
Participation loans or shared-equity mortgages
Reverse annuity mortgages
331 ©2011 Kaplan, Inc.
332. Types of Loans (cont.) Purchase-money mortgages
Imputed interest loans
Home equity loans
Interest-only and optional-payment mortgages
332 ©2011 Kaplan, Inc.
333. Imputed Interest A purchase-money mortgage held by the seller is exempt from usury limitations on interest rate.
If seller financing is at an artificially low interest rate, however, the Internal Revenue Service assumes a higher rate (imputed interest). 333 ©2011 Kaplan, Inc.
334. Methods of Finance Mortgage loans have several classifications:
Loans direct from the government
334 ©2011 Kaplan, Inc.
335. Methods of Finance (cont.) Conventional loans
Private mortgage insurance
Lower LTV than government-backed
Initial interest rate
Assumability 335 ©2011 Kaplan, Inc.
336. Methods of Finance (cont.) FHA-insured Loans
Mortgage insurance premium
Other FHA programs
336 ©2011 Kaplan, Inc.
337. Government Backing via the Secondary Market Fannie Mae
337 ©2011 Kaplan, Inc.
338. Financing Legislation Regulation Z
Three-day right of rescission
338 ©2011 Kaplan, Inc.
339. Federal Equal Credit Opportunity Act Prohibits lenders and others who grant or arrange credit to consumers from discriminating against credit applicants on the basis of the following:
Dependence on public assistance
339 ©2011 Kaplan, Inc.
340. Lender’s Criteria for Granting a Loan Evaluating the property
Evaluating the potential borrower
Different loans have different criteria
340 ©2011 Kaplan, Inc.
341. Mortgage Brokerage Chapter 12 341 ©2011 Kaplan, Inc.
342. What Is a Mortgage Broker? An individual or entity
Registered by the New York State Banking Department
Has the ability to do the following:
Process residential or commercial mortgage loans
These services performed for a fee
Fee may be paid by the borrower or the lender 342 ©2011 Kaplan, Inc.
343. Types of Transactions Mortgage brokers assist borrowers
In obtaining financing necessary to conclude their transactions
Will arrange financing in the following types of real property transactions:
Refinancing of an existing mortgage on owned property
Loan financing falls into two primary categories of debt: debt financing and equity financing 343 ©2011 Kaplan, Inc.
344. Mortgage Broker versus Mortgage Banker A mortgage banker is an individual or entity that is licensed by the New York State Banking Department
Able to originate a loan to a qualified borrower
Utilizes own funding, generally composed of borrowed funds, to originate loans 344 ©2011 Kaplan, Inc.
345. Types of Financing Debt financing
Equity or mezzanine
Financing 345 ©2011 Kaplan, Inc.
346. Debt Financing The most common form of borrowed funds
The debt placed on the property is combined with the borrower’s down payment (initial investment) to equal the purchase price required by the sale.
The loan has two components: borrowed funds (loan amount) and borrower funds (down payment).
In programs that provide for greater than 80 percent debt financing, the borrower is required to purchase private mortgage insurance (PMI). 346 ©2011 Kaplan, Inc.
347. Equity Financing (Mezzanine Financing) The use of borrowed funds to help the borrower fulfill down payment requirement
The need to borrow funds to satisfy the down payment requirement most often occurs as a result of one of two circumstances:
Outright shortage of funds required to meet down payment requirements
A property’s appraised value at the time financing is sought falls short of the borrowers anticipated value amount or purchase price 347 ©2011 Kaplan, Inc.
348. The Role of a Mortgage Broker in a Real Estate Transaction The purpose and role of mortgage broker
To obtain a mortgage commitment
Lender issues a loan commitment letter to borrower to demonstrate willingness to fund the loan
Analyzing the financial capability of the borrower
Preparation, handling, and submission of the preapplication loan papers
Shopping the borrower to all interested lenders
accumulating the paperwork for lender to underwrite
Obtaining, analyzing, and communicating terms to the borrowers
Explaining the differences between loans
Concluding the matter 348 ©2011 Kaplan, Inc.
349. Requirements and Responsibilities of a Mortgage Broker Introduce lenders and borrowers to each other for a fee
Register with New York State Banking Department
Have at least two years’ previous experience in analysis of credit
Have underwriting education or experience
Licensed real estate brokers and attorneys need not show experience or education; licensed salespersons must have two years’ prior experience in business of residential mortgages
Supply credit reports
Supply fingerprints for background checks
License is for one year and is renewable; fee is $500 349 ©2011 Kaplan, Inc.
350. Dual Agency Disclosure under Banking Law When a mortgage broker is also a real estate licensee, the potential for dual agency exists as well
Prior to the creation of any dual agency two elements must exist:
The agent must give full disclosure to all interested parties to the transaction of the creation of the dual agency.
The agent must subsequently receive the informed consent of all interested parties to the transaction. 350 ©2011 Kaplan, Inc.
351. Land-Use Regulations Chapter 13 351 ©2011 Kaplan, Inc.
352. Planning for the Future Governments on all levels have an interest in private property.
The government protects its interest in the use of private property.
Uses broad land-use regulations
Range from zoning to environmental protection laws 352 ©2011 Kaplan, Inc.
353. Private Land-Use Controls Individual property owners and subdivision developers
Can restrict the uses to which land can be put
Individual seller or donor can set deed restrictions
When a deed restriction and a zoning provision cover the same subject, the more limiting restriction will prevail
Enforcement of deed restrictions
353 ©2011 Kaplan, Inc.
354. Enforcement of Deed Restrictions Each lot owner has the right to apply to the court for an injunction
To prevent a neighboring owner from violating the recorded restrictions
If granted, the court injunction will direct the violator to stop the violation or be in contempt
If neighbors stand idly by while a violation is being committed, they can lose the right through the doctrine governing laches
In New York, neighboring owners have a two-year statute of limitations from the completion of the alteration or construction for objecting to violations of the general plan (type of building, height, setbacks) 354 ©2011 Kaplan, Inc.
355. Protesting Assessments Taxpayers who feel assessment is unfair
They can research tax records to see how their valuation compares with that of their neighbors.
The taxpayer who wants to take matters beyond that point may go to court.
They may take advantage of New York State’s simple small claims procedure intended for review of grievances on residential property. 355 ©2011 Kaplan, Inc.
356. Eminent Domain Eminent domain; condemnation
For this to occur, three primary conditions must be met:
Proposed use must be declared by the court to be a public use.
Just compensation must be paid to the owner.
Rights of the owner must be protected by due process of law. 356 ©2011 Kaplan, Inc.
357. Public Land-Use Controls The government controls and regulates land use
Public land-use controls
Public ownership of land, including parks, schools, and expressways
By the federal, state, and local governments 357 ©2011 Kaplan, Inc.
358. Government Land-Use Controls Public land-use controls
The master plan
Environmental protection legislation
Direct public ownership
358 ©2011 Kaplan, Inc.
359. The Master Plan A local government recognizes development goals through a comprehensive master plan, also called a general plan.
The federal government’s statistical gathering of information for small census tracts aids in the process.
Plans take demography into account. 359 ©2011 Kaplan, Inc.
360. Zoning Use of land and structures within designated districts
Zoning regulates such things as the following:
Use of the land
Types of structures permitted
Transfer of air rights
360 ©2011 Kaplan, Inc.
361. Zoning (cont.) In New York
The power to regulate zoning is given to municipal governments.
Often the purpose of zoning is to implement a local master plan.
There are no statewide zoning ordinances.
New York has set definitions for what constitutes allowable occupation of a single-family home:
Persons related by blood, marriage, or adoption, or a group of up to 3 people who are not related, living together as a household unit 361 ©2011 Kaplan, Inc.
362. Tests to Determine if Zoning Violates Rights of Individuals Power is exercised in a reasonable manner
Provisions are clear and specific
Ordinance is free from discrimination
Ordinance promotes public health, safety, and general welfare under the police power concept
Ordinance applies to all property in a similar manner 362 ©2011 Kaplan, Inc.
363. Building Permits Zoning laws are enforced through local requirements that building permits be obtained before property owners build on their land
Building permits also act as property information to the taxing authorities
Use variance requires “unnecessary hardship”
Area variance requires “practical difficulty”
Spot zoning 363 ©2011 Kaplan, Inc.
364. Building Codes Construction standards
Building codes set minimum requirements as follows:
Kinds of materials
Fire prevention standards
Other similar items
New York has a statewide building code that applies where no local code exists or where local codes are less restrictive 364 ©2011 Kaplan, Inc.
365. Subdivided Lands Among the requirements before land can be subdivided or built on are those set by
the Interstate Land Sales Full Disclosure Act and
the environmental impact statement mandated by the State Environmental Quality Review Act (SEQRA).
Where several agencies may be involved, the one that makes final decisions is known as the lead agency. 365 ©2011 Kaplan, Inc.
366. Subdivision Regulations Subdivision regulations usually provide for the following:
Location, grading, alignment, surfacing, and widths of streets, highways, and other rights-of-way
Installation of sewers and water mains
Minimum dimensions of lots
Building and setback lines
Areas to be reserved for public use, such as parks or schools
Easements for public utilities 366 ©2011 Kaplan, Inc.
367. Development Rights In areas where the right to build commercial buildings is limited in height or square footage, particularly in New York City, the owners of small parcels that do not intend to use their rights may sell their unused development rights.
These unused development rights are called air rights. 367 ©2011 Kaplan, Inc.
368. Environmental Protection Legislation The New York Environmental Conservation Law
The federal Comprehensive and Environmental Response, Cleanup, and Liability Act of 1980 (CERCLA)
The Superfund Amendments and Reauthorization Act (SARA)
The New York State Navigation Law includes an Environmental Lien Amendment
Wetlands 368 ©2011 Kaplan, Inc.
369. Landmarks Preservation Regulations setting up local historic areas or landmark preservation districts may restrict owners’ rights to alter the exteriors of certain old buildings. 369 ©2011 Kaplan, Inc.
370. Direct Public Ownership A certain amount of land is owned by the government for such uses as the following:
State legislature houses
Direct public ownership is a means of land control. 370 ©2011 Kaplan, Inc.
371. Municipal Agencies Chapter 14 371 ©2011 Kaplan, Inc.
372. Municipal Agencies State and local government officials monitor and regulate growth in New York
Variety of governmental agencies involved
The various agencies perform specific functions to uphold federal, state, and local laws as follows:
City and town councils and village boards of trustees are granted the power to adopt new laws and ordinances to protect the health, safety, and general welfare of their constituents.
Adaptation of zoning ordinances is one of the most important powers available to councils and village boards.
Zoning ordinances are designed to ensure appropriate urban/suburban planning. They control and dictate all development within those municipalities. 372 ©2011 Kaplan, Inc.
373. City/Town Council Lawmaking body, meetings open to public
New York City
Elected members from 51 council districts from five boroughs
Purpose of the council
Provide a balance of power
Monitor the performance of city agencies
Make land-use decisions
Approve the city’s budget
Legislate over various other issues that arise
Nine members and the council president
No law can be passed without council approval 373 ©2011 Kaplan, Inc.
374. Village Board of Trustees Members of a village board of trustees are elected officials.
Board’s responsibility is the creation of functions and policies on behalf of its constituents. 374 ©2011 Kaplan, Inc.
375. Adaptation of Budget and Tax Rate Each county, city, school board, or other taxing district adopts a 12-month budget
Must include an estimate of all expenditures for the year
Must indicate the amount of income expected from all fees, revenue sharing, and other sources
Net amount remaining to be raised from real estate taxes is then determined from these figures 375 ©2011 Kaplan, Inc.
376. Subdivision Process of dividing a single tract of land into smaller parcels
No uniform city planning and land development legislation affects the entire country
Most laws governing subdividing and land planning are controlled by state and local governmental bodies.
New York State sets standards for villages, cities, and towns. Local governments may adopt more restrictive policies.
Subdivision development plans must comply with any overall local master plan adopted by the county, city, village, or town. 376 ©2011 Kaplan, Inc.
377. Municipal Agencies and Officials Planning board—establishes criteria for community development, dedication of land, and compliance with zoning ordinances, and advises other boards on land-use matters
Zoning board of appeal—hears complaints about the effects of zoning ordinances on specific parcels of property
Architectural review board—approves new construction and remodeling
Buildings department—ensures safe, lawful use of properties and buildings by enforcing municipality’s building and electrical code, zoning regulation, New York State Labor Law, and New York State Multiple Dwelling Law
Planning department—generally responsible for the municipality’s physical and socioeconomic planning 377 ©2011 Kaplan, Inc.
378. Municipal Agencies and Officials (cont.) Tax assessors—responsible for making assessments in New York
Receivers of taxes/treasurers—collect real property taxes on all properties contained within the assessment roll
Engineer—works with buildings department, public works department, and water department to ensure construction projects are performed properly and the municipal infrastructure is in good working order
378 ©2011 Kaplan, Inc.
379. Planning Board and Master Plan Most villages, cities, and other areas incorporated under state laws
Have planning boards and/or planning commissioners
Local governments recognize development goals through a comprehensive master plan, also called a general plan
Cities and counties
Develop master plans to ensure that social and economic needs are balanced against environmental and aesthetic concerns 379 ©2011 Kaplan, Inc.
380. Zoning Boards of Appeal Established in most communities to hear complaints about the effects of zoning ordinances on specific parcels of property
Petitions may be presented to the appeal board for exceptions to the zoning law 380 ©2011 Kaplan, Inc.
381. Zoning Variances A special-use permit may be granted to allow a use of the property that is in the public interest.
A property owner who has suffered hardship as a result of a zoning ordinance may seek a variance.
Area variance 381 ©2011 Kaplan, Inc.
382. Architectural Review Boards Primary goal and purpose
Approval of new construction and remodeling
Must be pertinent to individualized municipal ordinances
Provides regulation and guidance
For maintaining the quality of the exterior appearance of buildings and signs 382 ©2011 Kaplan, Inc.
383. Wetlands Commission New York has legislated requirements to protect designated wetlands
Areas listed by state as having groundwater on or near the surface of land or meeting other definitions
Improvements may be constructed only with state permit
Most agricultural uses are exempt from the law
Federal government’s Clean Waters Act
Requires permit from the Army Corps of Engineers and EPA approval for building on designated wetland
Cities and counties
Frequently pass environmental legislation 383 ©2011 Kaplan, Inc.
384. Landmarks Preservation In New York, local governments may enact regulations
Are intended to preserve individual buildings and areas of historic or architectural significance
May restrict owners’ rights to alter the exteriors of certain old buildings
Interior remodeling is typically free from regulation 384 ©2011 Kaplan, Inc.
385. Buildings Department In all municipalities, buildings departments
Primary focus is on the safety, health, and welfare of the general public
Entrusted with ensuring the safe and lawful use of properties and buildings via enforcement of the
New York State Labor Law
New York State Multiple Dwelling Law 385 ©2011 Kaplan, Inc.
386. Planning Department City, town, or village planning department
Generally responsible for the municipality’s physical and socioeconomic planning
Responsible for any land use requiring an analysis in support of the commission’s review of proposals for
special permits under the zoning resolution;
changes in the city, village, or town map;
acquisition and disposition of public-owned property;
acquisition of office space for municipality use;
any site selection process used to determine public facilities;
any urban renewal plans and amendments; and
landmark and historic district designations. 386 ©2011 Kaplan, Inc.
387. Tax Assessor and Treasurer Assessments in New York are made by municipal officials known as tax assessors.
Assessments are made by towns, villages, cities, counties.
Assessment rolls, open to public inspection, contain assessments for all lands and buildings within the area.
Each municipality has a party or entity.
Party or entity acts as the receiver of taxes/treasurer for the city, town, or village.
New York City has Department of Finance.
387 ©2011 Kaplan, Inc.
388. City/Town/Village Engineer City, town, or village engineer
works closely with the buildings department, public works department, and water department
to ensure that construction projects are performed properly and
to ensure the village’s infrastructure are in good working order. 388 ©2011 Kaplan, Inc.
389. Septic Systems A septic system consists of the following:
A large storage tank (septic tank)
This is where the wastewater is partially broken down by bacteria.
An absorption (leach) field, which receives and filters the wastewater
Before septic tank can be installed
The property owner must have the soil tested.
Test determines how much wastewater the soil can process (percolation test).
Tank must be adequate for number of occupants 389 ©2011 Kaplan, Inc.
390. Introduction to Construction Chapter 15 390 ©2011 Kaplan, Inc.
391. Site Preparation A site is a parcel of land that has been prepared for construction of some sort of an improvement.
Site preparation involves the following:
Clearing the land
Grading the land to provide drainage and a building location
Marking trees for retention
Other considerations for comfort and to meet building and health codes 391 ©2011 Kaplan, Inc.
392. Regulation of Residential Construction Plans and specification
Inspections and approvals
Certificate of occupancy
New York State has a minimum standards building code, but local municipalities may add to or impose tighter restrictions 392 ©2011 Kaplan, Inc.
393. Wood-Frame Construction Architectural styles
Pier and beam
393 ©2011 Kaplan, Inc.
394. Exterior Construction Walls and Framing
Platform frame construction
Balloon frame construction
Post-and-beam frame construction
Window and door units
394 ©2011 Kaplan, Inc.
395. Exterior Construction (cont.) Roof framing and coverings
Joist and rafter roof framing
Truss roof framing
Exposed rafter and roof framing
Roof sheathing and roofing
395 ©2011 Kaplan, Inc.
396. Interior Construction Walls and finishing
Heating and air-conditioning
Electrical services 396 ©2011 Kaplan, Inc.
397. New York Home Improvement Law Sale of home improvement goods and services costing more than $500
To homeowners, co-op owners, or tenants
Must conform to certain regulations
A copy of a written plain-English contract must be given to the customer before any work is done
Contractors required to put into a trust (escrow) account in a New York bank any contract payments by a customer
Or they may deliver a bond
Money to be withdrawn only under a reasonable payment schedule or upon substantial completion 397 ©2011 Kaplan, Inc.
398. New York New Home Warranty One year’s protection against faulty workmanship and defective materials
Two years’ protection against defective installation of plumbing, electrical, heating, cooling, and ventilation systems
Six years’ protection against major structural defects
There are some exceptions 398 ©2011 Kaplan, Inc.
399. Valuation Process Chapter 16 399 ©2011 Kaplan, Inc.
400. Characteristics of Real Estate Economic characteristics of land
Permanence of investment
Physical characteristics of land
Nonhomogeneity 400 ©2011 Kaplan, Inc.
401. Real Estate — The Business of Value Value is not the same as price.
Value is the amount of goods or services that will be offered in the marketplace in exchange for any given product; it is the present worth of future benefits.
Cost relates to the past.
Price relates to the present.
Value relates to the future. 401 ©2011 Kaplan, Inc.
402. 7 Basic Principles Constituting Value Supply and demand
Foundation for the three approaches to appraisal valuation
Highest and best use
External property influences
Increasing and decreasing returns
402 ©2011 Kaplan, Inc.
403. Supply and Demand in Real Estate Market Because real estate is fixed (immobile), the real estate market is relatively slow to adjust to changes in the factors that influence supply and demand. 403 ©2011 Kaplan, Inc.
404. Factors Affecting Supply Product availability
Potential for new inventory
Labor supply and construction costs
Governmental controls and financial policies 404 ©2011 Kaplan, Inc.
405. Factors Affecting Demand Population
Employment and wage levels
Interest rates 405 ©2011 Kaplan, Inc.
406. Appraisal An estimate or opinion of value
Appraisers are governed by the Uniform Standards of Professional Appraisal Practice (USPAP).
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) requires any appraisal involving federally related transaction to utilize a licensed certified or general appraiser.
406 ©2011 Kaplan, Inc.
407. Comparative Market Analysis (CMA) Not all estimates of value are made by professional appraisers.
Real estate licensees help a seller arrive at a market value without the aid of a formal appraisal report.
Such assistance is known as an opinion of value, or CMA.
License law prohibits calling any opinion of value or CMA an “appraisal” unless it is prepared by a licensed, certified, or general appraiser.
The usual penalty for doing so is the revocation of the real estate license. 407 ©2011 Kaplan, Inc.
408. Appraisals May Be Required Appraisals may be needed for the following:
Fair market value determinations
Fee appraiser—works as an independent contractor
Staff appraiser—in-house employee of an organization
408 ©2011 Kaplan, Inc.
409. Some Types of Value Market value
Value in use 409 ©2011 Kaplan, Inc.
410. Market Value Market value is the probable price a property will bring in a competitive and open market, offered by an informed seller, and allowing a reasonable time to find a purchaser who buys the property with knowledge of all the uses to which it is adapted, neither buyer nor seller being under duress
Presupposes an arm’s-length transaction
Market value versus market price
Market value versus cost 410 ©2011 Kaplan, Inc.
411. Approaches to Appraisal Real estate is usually appraised in one of three ways:
Sales comparison approach
Income capitalization approach 411 ©2011 Kaplan, Inc.
412. Sales Comparison Approach Study of properties recently sold
Adjustments are made up or down
Three categories of adjustments
Physical characteristics 412 ©2011 Kaplan, Inc.
413. Cost Approach Estimates the amount needed to reproduce or replace the property being studied
Used when subject of appraisal is single use
Also where comparable sales are nonexistent
Depreciation taken into account
Economic or locational obsolescence
413 ©2011 Kaplan, Inc.
414. Cost Approach (cont.) Physical deterioration and functional obsolescence
Events that occur within the property line and can be curable or noncurable events
Occurs from forces outside the property line that are not in the control of the property owner
As a result, external obsolescence is considered to be a noncurable event 414 ©2011 Kaplan, Inc.
415. Cost Approach (cont.) Reproduction cost—cost to create an exact replica of the subject property
Replacement cost—amount of capital necessary to construct the improvement using modern-day materials when a reproduction of the improvement is unachievable 415 ©2011 Kaplan, Inc.
416. Three Steps to Appraised Value: Cost Step 1
Determine the reproduction/replacement cost
Determine the amount of accrued depreciation and deduct from amount in step 1
Determine the site value (land value) and add it to the figure calculated in step 2 416 ©2011 Kaplan, Inc.
417. Income Capitalization Approach Estimates value by analyzing the income generated by the property being considered
Uses three types of ratios:
Gross income multiplier (GIM)—a measure of annual income
Gross rent multiplier (GRM)—a measure of monthly income
Overall capitalization rate (OAR)—a measure of income and value as it relates to an investor’s return on invested capital 417 ©2011 Kaplan, Inc.
418. Three Steps to Appraised Value: Income Capitalization Step 1
Examine potential gross income (PGI)
Calculate the vacancy and collection (V&C) loss
Deduct this V&C from the PGI, add other income
Arrive at effective gross income (EGI)
Deduct fixed and variable expenses and reserves from the EGI to calculate net operating income (NOI) 418 ©2011 Kaplan, Inc.
419. Seven Steps in the Appraisal Process 1. Definition of the assignment
2. Preliminary analysis
3. Analysis of highest and best use
4. Estimation of land value
5. Application of the three approaches to appraisal
6. Reconciliation of the values toward a final estimate of value
7. Appraisal report 419 ©2011 Kaplan, Inc.
420. Comparative Market Analysis Compares the prices of recently sold homes
Similar in location, style, and condition to the home being put on the market
Normally a free service
Used as a market tool to establish listing price 420 ©2011 Kaplan, Inc.
421. The Real Estate Agent’s Role Real estate agent must act competently and with due diligence when presenting a CMA
Should keep a copy and all documentation used to prepare CMA
Should explain process to owner 421 ©2011 Kaplan, Inc.
422. Basic Economic Principles of Value Plottage
Change 422 ©2011 Kaplan, Inc.
423. The Profession of Appraising Licensing and certification
Required only for federally related appraisal assignments with a transaction value of at least $250,000
Federal and state governments suggest licensing or certification for all appraisals
A number of private sector professional appraisal societies
They do not license but offer various designations.
Some appraisers belong to more than one society. 423 ©2011 Kaplan, Inc.
424. New York’s Appraisal Licensing and Certification Process Four types of licenses or certifications:
Appraiser assistant license
Licensed residential appraiser
Certified residential appraiser
Certified general appraiser
Three components for licensure/certification:
424 ©2011 Kaplan, Inc.
425. Human Rights and Fair Housing Chapter 17 425 ©2011 Kaplan, Inc.
426. Equal Opportunity in Housing Federal, state, and local laws about human rights and fair housing affect rentals, sales, and every phase of the real estate sales process from listing to closing
Failure to comply with fair housing practice is not only grounds for loss of license, but also an unlawful act 426 ©2011 Kaplan, Inc.
427. Federal Fair Housing Laws Civil Rights Act of 1866
Federal Fair Housing Act of 1968
Race, religion, national origin
Amendment 1974 added
Added in 1988
427 ©2011 Kaplan, Inc.
428. Prohibited Acts Prohibited acts if done to discriminate:
Refusing to sell, rent, or negotiate
Changing terms, conditions, or services
Practicing discrimination through statement or advertisement
Representing dwelling is not available
Making a profit by inducing owners to sell or rent
Altering the terms or conditions for a home loan
Denying people membership in an association or facility related to the sale or rental of dwellings 428 ©2011 Kaplan, Inc.
429. Exceptions to Federal Fair Housing Act Home owned by an individual who does not own more than three such homes at one time
No licensees involved
Rental of units exempted in an owner-occupied one- to four-family dwelling
Owned by religious organizations
Private club that is not open to the public and the lodgings are not operated commercially 429 ©2011 Kaplan, Inc.
430. HUD Advertising Guidelines In New York, real estate advertising is often monitored by state and federal government agencies
to detect evidence of discriminatory practices; and
in an effort to clarify federal regulations regarding real estate advertising.
HUD issued policy guidelines in January 1995 430 ©2011 Kaplan, Inc.
431. Jones v. Mayer 1968 Supreme Court ruling
Civil Rights Act of 1866 “prohibits all racial discrimination, private or public, in the sale and rental of property.”
Although 1968 federal law exempts homeowners and certain groups, persons can still sue under the 1866 law.
In 1987, Supreme Court decision implied the “no exceptions” rule includes ethnic and/or religious groups.
431 ©2011 Kaplan, Inc.
432. Federal Fair Housing Laws Equal housing poster
Threats of acts of violence
Americans with Disabilities Act of 1992 432 ©2011 Kaplan, Inc.
433. New York Human Rights Law Protected classes
Race, creed, color, national origin, sex, disability, age, sexual orientation, and marital status (some exceptions)
Specifically mentioned in New York Human Rights Law
Parties may sue privately.
Alternatively, parties may file complaint within one year with New York State Division of Human Rights.
New York DOS may issue “cease and desist” order. 433 ©2011 Kaplan, Inc.
434. New York Human Rights Law (cont.) Denial of rental housing because of children or eviction because of a tenant’s pregnancy or new child is forbidden
An owner may discriminate under listed exemptions, but a licensee may not participate in the transaction
Under sections of the Executive Law, New York statutes broaden nondiscrimination rules to cover commercial real estate 434 ©2011 Kaplan, Inc.
435. New York Human Rights Law (cont.) New York statutes added other categories
The age provisions apply only to those 18 and older.
Local governments may add other groups
435 ©2011 Kaplan, Inc.
436. Code for Equal Opportunity The National Association of REALTORS® has adopted a Code for Equal Opportunity.
Sets forth suggested standards of conduct for REALTORS®
The National Association of REALTORS® has a voluntary cooperative agreement with HUD.
Stipulates HUD and National Association of REALTORS® will work together to identify fair housing issues, concerns, and solutions 436 ©2011 Kaplan, Inc.
437. Implications for Brokers and Salespersons To a large extent, the laws place the burden of responsibility for effecting and maintaining fair housing on real estate licensees, brokers, and salespeople.
Brokers can take steps to ensure compliance with fair housing laws.
437 ©2011 Kaplan, Inc.
438. Environmental Issues Chapter 18 438 ©2011 Kaplan, Inc.
439. Pollution and Environmental Risks in Real Estate Transactions The actual dollar value of real property can be affected significantly by both real and imagined pollution.
Pollution is an impurity in the environment that was not there originally.
Mortgage and title insurance approvals may depend on inspection of property for hazardous substances and proof of their absence. 439 ©2011 Kaplan, Inc.
440. Long-Standing Issues Water contamination and Safe Drinking Water Act
Waste disposal sites—landfills
Septic systems—percolation test
Lead poisoning—pre-1978 testing
Indoor air quality—SBS & BRI
Polychlorinated biphenyls (PCBs)—EPA & DEC
440 ©2011 Kaplan, Inc.
441. Future Concerns Underground storage tanks (USTs)
Chlorofluorocarbons (CFCs) 441 ©2011 Kaplan, Inc.
442. Environmental Assessments New York’s State Environmental Quality Review Act (SEQRA) requires the submission of an environmental impact statement for any activity where environmental concerns may be present. 442 ©2011 Kaplan, Inc.
443. Legal Considerations EPA created at federal level
Several other federal and state agencies
Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), 1980
Superfund Amendments and Reauthorization Act (SARA), 1986
LUST 443 ©2011 Kaplan, Inc.
444. Implications of Environmental Law Sellers often carry majority of liability
Liability of real estate professionals
Ascertain that environmental screening done on property 444 ©2011 Kaplan, Inc.
445. Independent Contractor/Employee Chapter 19 445 ©2011 Kaplan, Inc.
446. Salesperson Employment Status Employee status
All licensed salespersons and associate brokers required to work under sponsoring broker
Licensee may either be hired as an employee or associated with a broker as an independent contractor
Independent contractor status
Tests of employment
Errors and omissions (E&O) insurance
446 ©2011 Kaplan, Inc.
447. New York State Independent Contractor Licensee’s compensation
Substantially all is directly related to sales or other output
Written contract for services
Executed within past 15 months
Not signed under duress
Multiple required provisions
Written agreement will not prevent employee status from being implied as a result of the conduct of the broker and salesperson 447 ©2011 Kaplan, Inc.
448. Unemployment Insurance Notice New York State Department of Labor Unemployment Insurance Division
Notice to employers
Services performed by a licensed real estate broker or sales associate are excluded from coverage
If it can be proven that all required conditions are met
448 ©2011 Kaplan, Inc.
449. Income Reporting Requirements Broker for employee
Obtain accurate Social Security number
Require employee fill out W-4
Prepare/deliver W-2 and W-3 at year’s end
Broker for independent contractor
Obtain accurate Social Security number
Require employee fill out W-9
Prepare/deliver 1096 and 1099 at year’s end 449 ©2011 Kaplan, Inc.
450. Antitrust Laws Illegal price-fixing
Sherman Antitrust Act
Restraint of trade
450 ©2011 Kaplan, Inc.
451. Income Tax Issues in Real Estate Transactions Chapter 20 451 ©2011 Kaplan, Inc.
452. Taxpayer Relief Act of 1997 Beneficial to property owners of all types
Impact of taxation affects decisions regarding acquiring, holding, or disposing of real property
Primary (principal) residence is location where a taxpayer has resided for at least two out of the previous five years before the sale of the property
In addition, the residence must be used as the primary place of residence 452 ©2011 Kaplan, Inc.
453. Using IRA Funds Taxpayers may withdraw up to $10,000 of IRA funds for down payment.
If first-time homebuyers
Taxpayers may withdraw IRA funds at 59½ without penalty but pay income tax on funds as ordinary income. 453 ©2011 Kaplan, Inc.
454. Deductions: Primary/Principal Residence Two categories of tax deductions for homeowners
If property used as principal residence
Includes special assessments
Business improvement district (BID) 454 ©2011 Kaplan, Inc.
455. Deductions: Primary Residence (cont.) Mortgage interest
Home acquisition financing
Used to purchase, improve, build
Up to $1,000,000 if married filing jointly; $500,000 if married filing separate
When replacing previous loan with new loan for amount equal to or less than the previous loan
Home equity loans
Borrow against property equity; deduct up to $100,000 455 ©2011 Kaplan, Inc.
456. Discount Points and Up-front Charges Mortgage interest may deduct any discount points (origination fees) paid when obtaining mortgage.
One point equals 1 percent of borrowed amount.
Mortgage interest can include any up-front charges a borrower is required to pay.
They are deductible in the year paid.
With refinanced loans, IRS requires amortizing the costs over the remaining life of the loan. 456 ©2011 Kaplan, Inc.
457. Closing Costs Fees associated with services
By each participating party who assists buyer in concluding a real property transaction
When added to purchase price represent the purchaser’s total acquisition costs
On owner-occupant property—not deductible in the year of acquisition
On income-producing property included and cost recovered or depreciated (cost recovery) as part of the depreciable basis 457 ©2011 Kaplan, Inc.
458. Second Homes Includes vacation homes
May deduct property taxes and interest up to certain limits
May lease out for less than 15 days to not be considered income-producing property and income need not be reported 458 ©2011 Kaplan, Inc.
459. Capital Gains Short-term gains
Property held for one year or less
Taxed at ordinary income rates
Property held for more than one year
Taxed at maximum of 15 percent
If taxpayer is in 15 percent bracket, long-term capital gains are taxed at 5 percent
Income-producing property: recapture depreciation 459 ©2011 Kaplan, Inc.
460. Sale of Primary Residence When a primary/principal residence is sold
A taxpayer filing return as “single filer” may exclude up to $250,000 from total gain
A taxpayer filing return as “married filing jointly” may exclude up to $500,000
Location where taxpayer has resided for at least two of previous five years prior to sale
Surviving spouse may deduct $500,000 if sale within two years of death of spouse
Still must fulfill two-year residency requirement 460 ©2011 Kaplan, Inc.
461. Sale of Investment Property Three separate categories
Portfolio income 461 ©2011 Kaplan, Inc.
462. Formula for Calculating Taxable Income on Investment Property Taxable income × Marginal rate = Income tax
Net operating income
+ Reserves for replacements
– Mortgage interest
– Annual depreciation
– Carryover/suspended losses (if any)
= Taxable income
462 ©2011 Kaplan, Inc.
463. Calculating the Gain or Loss Income Taxes on Sale of Property
Realized amount from sale – Adjusted basis = Capital gain
+ Closing costs
+ Capital improvements made during holding period
– Accrued depreciation
= Adjusted basis 463 ©2011 Kaplan, Inc.
464. Depreciation Income-producing properties deduction
Decrease or loss in the value of real property
Attributable to any of three events
Three events in investment property ownership
Reversion 464 ©2011 Kaplan, Inc.
465. Straight-Line Depreciation Method Only two straight-line cost recovery periods
27½-year cost recovery period applies for all residential income-producing property
80 percent of the income attributable to the property is derived from the improvement
39-year cost recovery period applies for commercial investment property
Includes but is not limited to office buildings, shopping centers, industrial parks, and professional buildings such as medical office complexes
465 ©2011 Kaplan, Inc.
466. Depreciation Applies in “Tax World” Net operating income
+ Reserves for replacements
= Adjusted net operating income
– Mortgage interest
– Annual depreciation
– Carryover/suspended loss
= Taxable income
× Marginal rate
= Income tax 466 ©2011 Kaplan, Inc.
467. No Depreciation in “Cash World” Potential gross income
– Vacancy and collection loss
+ Other property income
= Effective gross income
– Operating expenses
= Net operating income
– Annual debt service
= Before-tax cash flow
– Income tax
= After-tax cash flow 467 ©2011 Kaplan, Inc.
468. Calculating the Depreciable Basis Total acquisition cost of an interest in real property minus the value of the land
+ Legal fees
+ Broker commission
+ Title insurance
= Adjusted total acquisition cost
x Improvement ratio
= Depreciable basis 468 ©2011 Kaplan, Inc.
469. Calculating Annual Depreciation Allowance
÷ Recovery period in years
= Depreciation allowance 469 ©2011 Kaplan, Inc.
470. SECTION 1031 (LIKE-KIND) EXCHANGE Exchange must include like-kind property.
Exchanging party must utilize a qualified intermediary.
Any realized gain or unlike-kind property received is called boot and is subject to tax.
Seller must identify replacement property or properties within 45 calendar days of closing on relinquished property.
Replacement properties must follow identification rules.
– Three-property rule; 200 percent rule; 95 percent rule
Seller must close on replacement properties at the earlier of 180 days from sale of original property or before the tax return due date (including extension).
A reverse exchange occurs when exchanging party purchases a replacement properties before selling subject of exchange. 470 ©2011 Kaplan, Inc.
471. Terms Used in Section 1031 Exchanges The terms sale, downleg, exchange, and Phase I property
Refer to relinquished property
The terms purchase, upleg, target, and Phase II property
Refer to replacement property
The intermediary facilitates
Handles all funds, documents, and title issues
Taxpayer: No possession of/access to funds 471 ©2011 Kaplan, Inc.
472. Property Qualifying for Section 1031 Exchange Qualifying property for 1031 exchange
Income-producing residential property
Vacant property held for investment purposes (dealers excluded)
Hotels, motels, and leaseholds that bear lease terms greater than 30 years
472 ©2011 Kaplan, Inc.
473. Low-Income Housing Tax Incentives Tax credits
Dollar-for-dollar credits against one’s tax that can be used to reduce both active and passive income tax consequences
Incentive programs include the following:
4 percent credit per year for a property converted to low-income housing that has not been used for it before
4 percent credit per year is offered when construction entails federal subsidies
Federal government offers 9 percent credit of cost to construct or rehabilitate low-income housing per annum for ten years; cost must be greater than $2,000 per unit 473 ©2011 Kaplan, Inc.
474. Commercial and Investment Properties Chapter 21 474 ©2011 Kaplan, Inc.
475. Characteristics of Real Property Investments Investor’s goal is to purchase income
Income equates to the returns on their invested capital
Prior to investing large amounts of capital the investor will examine and measure three basic elements:
Leverage 475 ©2011 Kaplan, Inc.
476. Risk The types of risk that any investor will examine include the following:
Financial risk 476 ©2011 Kaplan, Inc.
477. Liquidity Ability to convert an asset into cash quickly
Examples of liquid assets would include cash, savings accounts, and investment vehicles such as stocks and bonds 477 ©2011 Kaplan, Inc.
478. Leverage The use of borrowed funds
Dependent on the availability of funds within the debt credit markets
478 ©2011 Kaplan, Inc.
479. Types of Investment Property Unimproved land
Commercial properties, such as offices, retail stores, shopping centers and malls, hotels and motels
Residential properties (single-family and multifamily)
Manufacturing properties, such as industrial, light manufacturing, and loft properties
Fee simple ownership rather than leasehold property 479 ©2011 Kaplan, Inc.
480. Property Financial Analysis Investment property undergoes three primary phases of financial analysis and property ownership:
Reversion 480 ©2011 Kaplan, Inc.
481. Cash World versus Tax World In the cash world, properties are bought and sold, which establishes their market value.
The tax world involves the tax consequences resulting from a property’s income operations, which establish a property’s book value. 481 ©2011 Kaplan, Inc.
482. Reconstructed Income and Expense Statement Purpose of reconstructed income and expense statement
To derive property’s net operating income (NOI)
Reconstructed income/expense statements
Reflect changes in income stream of a property
Show expenses attributable to running the property
Used to formulate a property’s annual budget 482 ©2011 Kaplan, Inc.
483. Creating a Reconstructed Income and Expense Statement Step 1: Income analysis
Examination of potential gross income (PGI).
PGI = gross receipts from rentals if 100 percent leased
Step 2: Operating expense analysis
Reserves for replacements
NOI represents cash flow after deducting all property-related expenses prior to deducting debt service or income taxes 483 ©2011 Kaplan, Inc.
484. Formula for Calculating Effective Gross Income
Potential gross income (PGI)
– Vacancy and collection loss (V&C)
+ Other income (OI)
= Effective gross income (EGI) 484 ©2011 Kaplan, Inc.
485. Formula for Calculating Net Operating Income
Effective gross income (EGI)
– Operating expenses (OE)
= Net operating income (NOI) 485 ©2011 Kaplan, Inc.
486. Leveraging The use of borrowed funds in real property transactions
Borrowed funds are added to the borrower’s own available funds and are used to complete the acquisition of property. 486 ©2011 Kaplan, Inc.
487. Capitalization The investor calculates overall return on investment through capitalization
The present value of the income stream a property produces
Capitalization rates normally market driven and subjectively arrived at by investor’s needs
Income can be reported as a rate of return (ROI) on the overall investment.
ROI is the annual profit (based on a prescribed interest rate) sought by the investor on the overall cost of acquisition. It is based on the purchase price. 487 ©2011 Kaplan, Inc.
488. Formulas for Income, Rate, and Value (IRV)
Income = Rate x Value
Rate = Income ÷ Vale
Value = Income ÷ Rate 488 ©2011 Kaplan, Inc.
489. Return on Equity Investors who perform a financial analysis
If the purpose is to acquire property, they are concerned about their return on equity.
They may include the use of borrowed funds in completing the acquisition.
Using borrowed funds creates added expense to the investor, which is called debt service.
Debt service is the incremental cost of periodic (usually monthly) principal and interest payments required to repay borrowed funds. 489 ©2011 Kaplan, Inc.
490. Formula to Calculate Before-Tax Cash Flow Before-tax cash flow is the cash flow attributable to a property after deducting the annual cost of debt service.
Net operating income (NOI)
– Annual debt service (ADS)
= Before-tax cash flow (BTCF) 490 ©2011 Kaplan, Inc.
491. Final Step in Cash World Financial Analysis Determine the property’s after-tax cash flow
The amount of remaining cash flow
After deductions are made from before-tax cash flow
For income taxes from property’s income activities
Before-tax cash flow (BTCF)
– Income taxes (IT)
= After-tax cash flow (ATCF) 491 ©2011 Kaplan, Inc.
492. Formula to Calculate Income Taxes To calculate income taxes attributable to income activity and derive after-tax cash flow
Net operating income (NOI)
+ Reserves for replacements (RR)
– Mortgage interest (MI)
– Annual depreciation (AD)
– Carryover/suspended losses, if any (CSL)
= Taxable income (TI)
× Marginal rate (MR)
= Income tax (IT) 492 ©2011 Kaplan, Inc.
493. Notes on Reserves for Replacements In the cash world
Reserves for replacements is deducted as an operating expense to arrive at the NOI.
Reserves for replacements consists of cash on hand.
If unspent, it is carried over as an asset into the following year’s ledger.
In the tax world
Reserves are added back in.
You cannot take a deduction on unspent funds. 493 ©2011 Kaplan, Inc.
494. Commercial Property Space Measurement Rentable Area
The difference between the usable and rentable square footage when added to the usable square feet
494 ©2011 Kaplan, Inc.
495. Four Types of Commercial Leases Gross Lease
Loft lease 495 ©2011 Kaplan, Inc.
496. Lease Clauses Use clause
Subordination/nondisturbance clause 496 ©2011 Kaplan, Inc.
497. Electric Service in New York Direct meter electric service
Submetered electric service
Rent-inclusion electric service 497 ©2011 Kaplan, Inc.
498. Lease Escalation Clauses Lease provisions covering passing on the increased cost of operational property expenses to tenants
Incorporation of complex language in lease escalation clauses can yield greater amounts of money than necessary to cover intended operational costs 498 ©2011 Kaplan, Inc.
499. Lease Escalation Clauses (cont.) Proportionate share/occupancy
Indicate the tenant responsibility with respect to increased costs in property operations
Operating/real estate tax stop
Real property tax clause
Direct operating escalation clause
Porter’s wage escalation formula
Fixed percentage increases
Consumer price index (CPI)
499 ©2011 Kaplan, Inc.
500. Property Management Chapter 22 500 ©2011 Kaplan, Inc.
501. Property Management Any person or entity that performs property management services on behalf of another must be licensed as a real estate broker
Salaried employees within the employ of a broker need not hold a real estate license
If services are strictly maintenance, real estate broker’s license not needed
Collect rent or place tenants in vacant spaces on behalf of your landlord client, license needed 501 ©2011 Kaplan, Inc.
502. The Property Manager Maximizes income while maintaining the value of the property 502 ©2011 Kaplan, Inc.
503. Types of Property That Are Managed Residential property
Industrial property 503 ©2011 Kaplan, Inc.
504. The Management Agreement Creates an agency relationship between the owner and the property manager
Property manager is usually considered a general agent.
A real estate broker is usually considered a special agent.
As agent, the property manager is charged with the usual fiduciary duties. 504 ©2011 Kaplan, Inc.
505. The Management Agreement (cont.) Should be in writing, and cover the following:
Identification of the parties
Description of the property
Time period the agreement will be in force
Definition of management’s responsibilities
Extent of manager’s authority as an agent
Allocation of costs 505 ©2011 Kaplan, Inc.
506. Operations Functions of Property Manager Interior and exterior maintenance
Preserve the value of the property while generating income
Merchandise the property
Control operating expenses
Maintain and modernize the property
506 ©2011 Kaplan, Inc.
507. Financial Reporting Budgeting
Keeping proper accounts
Reporting income and expense activity
Conducting income analysis 507 ©2011 Kaplan, Inc.
508. Included in Management Proposal/Plan Market analysis
Regional, neighborhood, and property
Recommendations for managing a property 508 ©2011 Kaplan, Inc.
509. Planning and Budgeting Market analysis
Detailed operating budget
509 ©2011 Kaplan, Inc.
510. Marketing Marketing activities
Must comply with fair housing laws
510 ©2011 Kaplan, Inc.
511. Managing Leases and Tenant Relations Renting the property
Setting rental rates
Tenant’s and landlord’s obligations
New York City and Buffalo have security requirements
Mobile home parks
511 ©2011 Kaplan, Inc.
512. Maintaining the Property Balance of service and cost
Protect physical integrity of building
512 ©2011 Kaplan, Inc.
513. Managing the Property Hiring employees versus contracting for services
513 ©2011 Kaplan, Inc.
514. Owner Relations, Reports, and Insurance Owner relations
Fire and hazard
Contents and personal property
Liability and workers’ compensation
Boiler and machinery
514 ©2011 Kaplan, Inc.
515. Skills Required of a Property Manager Human relations
Research and planning
Knowledge of physical operations
515 ©2011 Kaplan, Inc.
516. The Management Field Office building
Homeowners’ association of condominium, corporation of cooperative
516 ©2011 Kaplan, Inc.
517. Rent Regulations Rent control
Rent stabilization extended June 2011
Luxury decontrol can occur
Registered rent level of $2,500 or more
Household income of $200,000 for two consecutive tax years
Occupant not maintain as principal residence
517 ©2011 Kaplan, Inc.
518. Taxes and Assessments Chapter 23 518 ©2011 Kaplan, Inc.
519. Tax Liens Imposed by state and local governments
Levied against specific parcels
Automatically become liens
Two types of real estate tax
General estate tax
Also known as ad valorem tax
Amount of tax determined by value of property being taxed
Special assessment tax
Also known as improvement tax 519 ©2011 Kaplan, Inc.
520. General Tax (Ad Valorem Tax) Levied by state, cities, towns, villages, and counties
Other taxing bodies
School, park, lighting, drainage, water, sanitary districts
Municipal authorities operating recreational preserves—forest preserves, parks
520 ©2011 Kaplan, Inc.
521. Special Assessments (Improvement Taxes) Levied only on parcels in a limited area
Area will benefit from improvements
Example: sidewalks, curbs, streetlights in neighborhood
May be proposed by the following:
Give notice to owners of affected properties
Ordinance may be adopted 521 ©2011 Kaplan, Inc.
522. Taxation Process Assessment
Enforcement of tax liens 522 ©2011 Kaplan, Inc.
523. Assessment In New York
Made by municipal officials: assessors
Made by towns, villages, cities, counties
Assessment roll open to public inspection
Contains assessments for all lands and buildings in area
Full value assessment repealed
“Uniform percentage of value”
New York City, Long Island
Divide property into four classes
523 ©2011 Kaplan, Inc.
524. Assessment (cont.) Differences in assessment
Differ from municipality to municipality
Differ from one property to another
Older construction, lower land values
Protect the health, safety, welfare of general public
Reassess property by at least the value of improvement 524 ©2011 Kaplan, Inc.
525. Reassessment When property is sold
Assessment for the year of the sale is measured against the “target” assessment resulting from the sale
Target is the new assessment determination 525 ©2011 Kaplan, Inc.
526. Sale in New York City Sale will trigger reassessment
Three items to consider
Tax base in the year of sale
Transitional tax (difference between the tax in year of sale and target tax)
Phase in property’s transitional assessment over five years
First, determine annual transitional assessment
Second, arrive at target assessed value 526 ©2011 Kaplan, Inc.
527. Equalization Factor To arrive at uniformity among districts that assess at different rates
New York State Board of Equalization and Assessment
Receives reports on sales prices and calculates equalization rate for each municipality
This factor is intended to equalize the assessments in every taxing jurisdiction across the state.
Assessed value of property is multiplied by equalization factor, and the tax rate then is applied to the equalized assessment.
No equalization factor applies where full-value assessment is used
527 ©2011 Kaplan, Inc.
528. Tax Rates Each county, city, school board, or other taxing district adopts a budget
Fiscal or calendar year
Estimate expenditures and expected income
Difference to be raised from real estate taxes
Tax shares may be negotiated
Between different taxing authorities
Example: Two towns support one school district or villages share the expense for county sheriff’s department
528 ©2011 Kaplan, Inc.
529. Homestead Real Estate Separate tax rates may be established
Homestead real estate
In New York
Dwellings with no more than four units
Mobile homes if owner occupied and separately assessed
Some vacant land suitable for homestead-qualified buildings
Nonhomestead real estate
In New York
Industrial and commercial property
Most vacant land 529 ©2011 Kaplan, Inc.
530. Appropriation Authorizes expenditure of funds
Provides for sources of money
Appropriation involves the adoption of an ordinance or passage of a law setting forth the specifics of the proposed taxation
A levy (formal action taken to impose tax)
Imposed on property owners for the amount to be raised from general real estate tax
Tax rate for individual taxing bodies
Computed separately 530 ©2011 Kaplan, Inc.
531. Tax Bills Property owner’s tax bill
By applying tax rate to assessed valuation
Sent by New York cities, towns, villages, school districts
Include county levy
State, town, county tax period
Village tax period
Payment due dates
Due date also is called the penalty date
Penalties in the form of monthly interest charges are added to all taxes that are not paid when due
531 ©2011 Kaplan, Inc.
532. Exemptions Possibility of exemptions
Licensee should ascertain true tax figure, before any special exemptions held by the present owner are subtracted
Property used for tax-exempt purposes
Other common exemptions
STaR 532 ©2011 Kaplan, Inc.
533. Protesting Assessment Property owners may present objections
To municipality’s grievance board
Disagreement on full value
Unequal assessment ratios
Procedure for petitioning
Tax certiorari, through court system 533 ©2011 Kaplan, Inc.
534. Enforcement of Tax Liens Taxes must be valid
May be in rem, against property not owner
Equitable right of redemption
Statutory right of redemption 534 ©2011 Kaplan, Inc.
535. Tax Sales and Periods of Redemption Cities
Villages 535 ©2011 Kaplan, Inc.
536. Condominiums and Cooperatives Chapter 24 536 ©2011 Kaplan, Inc.
537. Cooperative Ownership Cooperative, cooperative association, or co-op
A structure that contains two or more units
Occupancy and possession of the units vests with ownership of stock in a corporation that owns fee simple interest or has a leasehold interest in the structure and
The shareholder receives an occupancy agreement known as the proprietary lease
The proprietary lease is the agreement that gives the shareholder the right to occupy a particular unit.
Ownership is for the life of the cooperative corporation.
The shareholder pays monthly maintenance to the co-op corporation rather than rent. 537 ©2011 Kaplan, Inc.
538. Cooperative Ownership (cont.) Real estate taxes
Paid on the whole building by the corporation
Cooperative tenants/owners control the property through their elected board of directors
Board elected unless bylaws call for appointments 538 ©2011 Kaplan, Inc.
539. Loans on Cooperative Property Single mortgage, known as the underlying mortgage, covers the entire building.
If enough owner-occupants become unable to make prompt payment of their monthly assessments, corporation may be forced to allow underlying mortgage and property tax payments to go unpaid.
Entire property could be sold by court order in a foreclosure suit.
Accumulation of a substantial reserve fund offers some protection to the cooperative as a whole.
Proprietary leaseholders may individually finance their apartments with a cooperative loan.
Most proprietary leases may not be assigned, transferred, or sublet without the consent of the board of directors.
539 ©2011 Kaplan, Inc.
540. Tax Treatment IRS offers the owner of a cooperative unit
The same income tax treatment as the owner of a condominium or a single home
Mortgage Forgiveness Debt Relief Act of 2007
Allows housing cooperatives to determine commercial rents without sacrificing tax benefits to shareholders of the cooperative
540 ©2011 Kaplan, Inc.
541. Mortgage Forgiveness Debt Relief Act Requirements Cooperative housing must meet one or more requirements for taxable year:
80 percent or more of gross income is derived from tenant-shareholders.
80 percent or more of total square footage is utilized for or is available for residential purposes or purposes that are ancillary to residential use
90 percent or more of the expenditures of the corporation are paid or incurred for the acquisition, construction, management, maintenance, or care of the corporation’s property for the benefit of the tenant-shareholders 541 ©2011 Kaplan, Inc.
542. Due Diligence Items to be studied include the following:
Cooperative’s financial statements (two years)
The board meeting minutes (two years)
A lien search
Determination of type of estate being granted
Leasehold 542 ©2011 Kaplan, Inc.
543. Purchase and Sale Documents Proprietary lease
Credit authorization form
Purchase application, contract of sale, references 543 ©2011 Kaplan, Inc.
544. When Purchase Includes Financing Signed bank commitment letter
Aztech form recognition agreement 544 ©2011 Kaplan, Inc.
545. Interview Preparation Timing is important
Due to loan locks and date of board’s meeting
Buyer should be familiar with package
Should always provide full disclosure
If an applicant does not receive approval of co-op board of directors, the cooperative is not required by law to issue a reason
545 ©2011 Kaplan, Inc.
546. Primary Residency and Subletting Issues Lenders’ liability less when owner-occupied
Types of co-operative shares
Any shares held by the original sponsor of the co-op
Shares held by any person or legal entity; holder and family may not reside in unit
Shares purchased by parties with the intent of residing within the unit 546 ©2011 Kaplan, Inc.
547. Condominiums Buyer of a condominium
Receives a deed conveying fee simple ownership of unit and an undivided interest in the common elements
The law regards a residential condominium owner as it would the owner of a single detached house
Owners bound by owners’ association bylaws and CC&Rs
Usually managed by professional managers
547 ©2011 Kaplan, Inc.
548. Selling Condominiums Buyer of a condominium must receive detailed statements about the property
Should read the CC&Rs
Must be alerted to any unpaid common charges against the unit
Prospective buyers should also examine the reserves 548 ©2011 Kaplan, Inc.
549. Condominium/Cooperative Construction and Conversion Many condos are conversions
From rental properties
Others are new construction
Sale of shared housing
Public offering, under New York attorney general
If condo, file with county clerk
Declaration and floor plan for each unit
After review, preliminary prospectus (red herring) available to current tenants
When accepted for filing, black book to buyers 549 ©2011 Kaplan, Inc.
550. Conversion Restrictions Noneviction plans
Inside salespersons not required to hold real estate license 550 ©2011 Kaplan, Inc.
551. Condo Issues Sponsor creates and sells the condominium.
Sponsor creates the initial offering plan.
When the offering plan is approved by the attorney general’s office, the sponsor is then permitted to commence with the sale of the condominiums to others.
As sales continue, the sponsor is required to relinquish any control of the board to the owner-purchasers. 551 ©2011 Kaplan, Inc.
552. New Development Letters of intent
Certificate of occupancy
Same financial information
Contained in a cooperative board package and can also be found in a condominium package
Purpose of the package is to establish the buyer’s financial qualification 552 ©2011 Kaplan, Inc.
553. Condops Cooperatives generally organized
As not-for-profit entities
IRS places restrictions on cooperatives
Regarding the co-op’s passive income activities
Condop was a condominium
Developer solved previous 80/20 issue (repealed) through ownership retention in project’s income-producing sources
Cooperative’s organizational structure
Offers higher tax benefits than those of a condominium
Benefit consists of a unit per share deduction of interest attributable to the underlying mortgage on cooperative 553 ©2011 Kaplan, Inc.
554. Property Insurance Chapter 25 554 ©2011 Kaplan, Inc.
555. Insurance Coverage Purpose of property insurance
Protect the integrity of property from and against all major insurable risk
Dynamic risk is uninsurable.
Static risk is insurable. 555 ©2011 Kaplan, Inc.
556. Types of Coverage Fire and hazard
Contents and personal property
Boiler and machinery coverage
Umbrella coverage 556 ©2011 Kaplan, Inc.
557. Insurance Policies Highly protected risk may lower premiums
For apartment and business buildings
Only one line or area of coverage
Variety of different coverage types
Certificate of insurance
Advance proof of coverage 557 ©2011 Kaplan, Inc.
558. Commercial Claims Insurance policies utilize the cost approach to valuation
In determining the amount of loss under what is called actual cash value
The cost of new material would be reduced by the estimated depreciation, based on the time the item had been in the building.
Alternate method is to cover replacement cost 558 ©2011 Kaplan, Inc.
559. Residential Claims Homeowners’ insurance policies also contain a coinsurance clause
Typically requires the insured maintain fire insurance on the property equal to at least 80 percent of replacement cost of dwelling 559 ©2011 Kaplan, Inc.
560. Homeowners’ Insurance Where mortgage financing is involved
Buyer must bring to the closing proof of insurance on the property and occasionally proof of flood insurance
Most residential property owners obtain packaged homeowners’ insurance policy
Includes liability insurance for personal injuries to others
560 ©2011 Kaplan, Inc.
561. Characteristics of Homeowners’ Packages Four major forms
Basic form, HO-1
Broad form, HO-2
Comprehensive forms, HO-3 and HO-5
Cover all perils but flood, earthquake, war, nuclear attack
Other policies include
Renters’ policy, HO-4 (co-ops are similar)
Broad-form policy for condominium owners, HO-6 561 ©2011 Kaplan, Inc.
562. Federal Flood Insurance Program Property owners in certain areas must obtain flood damage insurance before they can obtain federally related mortgages.
Owners may be able to avoid purchasing flood insurance if they can furnish a survey showing that the lowest part of the building is above the 100-year flood mark. 562 ©2011 Kaplan, Inc.
563. Reserves/Impounds Tax reserves/impounds and insurance reserves (escrows)
Mortgage lender generally requires that the borrower establish and maintain a reserve with sufficient funds
to pay property taxes and
to renew hazard insurance when these items become due. 563 ©2011 Kaplan, Inc.
564. Cancellation and Nonrenewals of a Policy Insurance policies covering real property
Are for a term of one year (generally)
Have a commencement and expiration date
Notice to renew will be sent, and include declaration pages indicating the cost of the premium to renew the policy
Insurance providers may refuse coverage
Due to results in a loss run schedule
The insurance term for a schedule showing previous claim history 564 ©2011 Kaplan, Inc.
565. Real Estate Mathematics Chapter 26 565 ©2011 Kaplan, Inc.
566. Percentages A percentage expresses a portion of a whole.
A whole is always expressed as 100 percent.
Percent x Whole = Part
Whole = Part ÷ Percent
Percent = Part ÷ Whole
Income = Rate x Value 566 ©2011 Kaplan, Inc.
x Rate per unit = Total
567 ©2011 Kaplan, Inc.
568. Areas and Volumes Area of square or rectangular parcel:
Area = Width x Depth
Surface in a triangular area:
Area = ½ (Base x Height)
Cubic or rectangular volume:
Volume = Length x Width x Height
Volume of triangular space
Volume = ½ (Length x Height x Width)
568 ©2011 Kaplan, Inc.
569. Land Units and Measurements Rod
Section 569 ©2011 Kaplan, Inc.