Modern Real Estate Practice in New York for Salespersons, 11th Edition

1. Modern Real Estate Practice in New York for Salespersons, 11th Edition by Sam Irlander

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 3 ©2011 Kaplan, Inc.

4. Who Must Be Licensed? Broker Salesperson Associate broker Exceptions 4 ©2011 Kaplan, Inc.

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 5 ©2011 Kaplan, Inc.

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 6 ©2011 Kaplan, Inc.

7. License Examinations May take exam before or after prelicense coursework Walk-in test centers Online reservation test centers Multiple-choice questions Test results processes vary 7 ©2011 Kaplan, Inc.

8. Licensing Procedure Real estate salesperson’s application Only individuals licensed Registration for corporations, partnerships, and other legal entities Fees Issuing the license Principal broker displays broker license Broker may display salesperson’s license separately Pocket card with photo must be shown on demand 8 ©2011 Kaplan, Inc.

9. Maintaining a License Change of business address, status, or name Commissions All commissions through broker Kickbacks Referrals Disclosure of interest Offers to purchase Present promptly 9 ©2011 Kaplan, Inc.

10. Termination or Changes in Association Supervising broker must file termination of association notice online Submit fee Return license to licensee Licensee moves to new sponsoring broker and establishes new record of association with DOS  10 ©2011 Kaplan, Inc.

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  11 ©2011 Kaplan, Inc.

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 12 ©2011 Kaplan, Inc.

13. Brokerage Management in Accordance with License Laws Place of business Business name and sign Branch offices Maintaining documents Delivery of documents Care and handling of funds Obligations to other parties and other brokers 13 ©2011 Kaplan, Inc.

14. Other Licenses or Registrations Involving Real Estate Apartment information vendor’s license Apartment-sharing agent Appraisers  14 ©2011 Kaplan, Inc.

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 Mortgage brokers Registered with State Banking Department Bring borrowers and lenders together Home inspectors License and continuing education required  15 ©2011 Kaplan, Inc.

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 16 ©2011 Kaplan, Inc.

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 Mutual recognition 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 17 ©2011 Kaplan, Inc.

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. 18 ©2011 Kaplan, Inc.

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 19 ©2011 Kaplan, Inc.

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 Penalties 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 Appeal 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 24 ©2011 Kaplan, Inc.

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: Buyer Seller Landlord Tenant 25 ©2011 Kaplan, Inc.

26. Types of Agents Universal agent Able to enter into any contract on behalf of principal Requires prior written notarized power of attorney General agent Authority limited to specific assignment or one contract May be created by power of attorney 26 ©2011 Kaplan, Inc.

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 27 ©2011 Kaplan, Inc.

28. Creation of Agency Express agency Created orally or in writing Agreement describes responsibilities of agent Best to put agreements in writing Implied agency 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 Ratification An after-the-fact acceptance of relationship or agreement Estoppel Accept benefits of previously unauthorized acts 29 ©2011 Kaplan, Inc.

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 30 ©2011 Kaplan, Inc.

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 Seller Prospective buyer 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 33 ©2011 Kaplan, Inc.

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 34 ©2011 Kaplan, Inc.

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 Self-dealing Broker acting as seller’s agent when purchasing property for self Agent attempts to acquire or dispose of own property for own account 35 ©2011 Kaplan, Inc.

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 36 ©2011 Kaplan, Inc.

37. Fiduciary Responsibilities Care Licensee considered an expert under the law Confidentiality Confidential information must not be disclosed, even after closing Loyalty Place client’s interests above all others Obedience Carry out lawful instruction for assignment 37 ©2011 Kaplan, Inc.

38. Fiduciary Responsibilities (cont.) Accounting Provide copies of documents Account for funds Never commingle Deposit funds in special account Include words “trust” or “escrow” Disclosure Agent required to pass on to principal facts and information that could affect decision Includes material facts agent should have known 38 ©2011 Kaplan, Inc.

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 39 ©2011 Kaplan, Inc.

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 40 ©2011 Kaplan, Inc.

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 41 ©2011 Kaplan, Inc.

42. Opinion versus Fact Statement of opinion allowed If offered as opinion, not intended to deceive Puffing allowed Legal exaggeration often used as sales tactic Fraud illegal Intentional misrepresentation of material fact with intent to harm Misrepresentation Violates obligation to deal honestly 42 ©2011 Kaplan, Inc.

43. Disclosures Concerning the Property Environmental concerns Disclosure of environmental health hazards may be required Latent Defects 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 43 ©2011 Kaplan, Inc.

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 Stigmatized properties Site of felony HIV Megan’s Law 44 ©2011 Kaplan, Inc.

45. The Broker’s Compensation Amount specified in contract with principal Negotiated 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 45 ©2011 Kaplan, Inc.

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 46 ©2011 Kaplan, Inc.

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 48 ©2011 Kaplan, Inc.

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. 49 ©2011 Kaplan, Inc.

50. Antitrust Violations Price-fixing Group boycotts Market allocation agreements Tie-in arrangements 50 ©2011 Kaplan, Inc.

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 Businesses 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 Seller’s agents Buyer’s 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 57 ©2011 Kaplan, Inc.

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 Exclusive-right-to-sell listing Exclusive-agency listing Open listing 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 Internet 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 Taxes Possible financing 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 Truth-in-Heating Law 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 Some Municipalities 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 Listing broker Selling broker Per DOS, buyer’s broker has right to be present 77 ©2011 Kaplan, Inc.

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 Secure financing Seller’s agent must avoid undisclosed dual agency 79 ©2011 Kaplan, Inc.

80. Buyer-Agency Agreements Also known as buyer listings Fiduciary relationship High degree of representation Buyer retains broker as agent Services expected should be spelled out Similar to seller listing agreements Termination Extension clause 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 Possession Control of property Within the law Enjoyment Use property in legal manner Exclusion Keep others from entering or occupying Disposition Sell or transfer 84 ©2011 Kaplan, Inc.

85. Real Estate Transactions (cont.) Additional rights of ownership Devise (leave by will) Mortgage and/or encumber Cultivate Explore 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 Littoral rights 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 Through avulsion 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 Mobile home Personal property unless permanently attached to land by foundation 93 ©2011 Kaplan, Inc.

94. Trees and Crops Two classes Real estate If do not require yearly cultivation Personal property Annual crops 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 Residential All property used for housing Includes acreage, city lots, single- and multifamily In urban, suburban, and rural areas Commercial Business property 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 Mixed-use Lawful combination of other categories zoning permits Agricultural Farms, timberland, pastureland, orchards Special purpose 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 Freehold estates Exist indefinitely, for a lifetime, or forever Four freehold estates recognized in New York Fee simple Qualified (determinable) fee Fee on condition Life estates 99 ©2011 Kaplan, Inc.

100. Estate (Ownership) in Land (cont.) Leasehold estates Personal property 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 Interchangeable terms Most complete type of real estate ownership Runs forever 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 Life tenant 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 The remainderman (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: Dower Interest wife has in real estate of dead husband Curtesy Interest husband has in real estate of dead wife Community property Property acquired during marriage presumed to belong equally to husband and wife Homestead 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: In severalty Title held by one owner In co-ownership Title held by two or more persons In trust 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 In severalty Sole 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 Joint tenancy 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 Time All joint tenants acquire interest at same time Title All joint tenants acquire interest in same deed Interest All joint tenants hold equal ownership interests Possession 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 Testamentary Established by will after owner’s death 117 ©2011 Kaplan, Inc.

118. Parties to a Trust Trustor Creator of trust; conveys asset to trustee Trustee Assumes certain duties Care of asset, investment, pay expenses and fees Income paid to or for benefit of beneficiaries 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 Business types Sole proprietorship, business owned by one individual Partnerships Corporations Syndicates 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 General partnership 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 Run business 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 In perpetuity Death of shareholder, officer, director does not affect title to property owned by corporation Artificial person or legal entity Federal EIN 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 Maximum 100 125 ©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 Like partnership Income tax advantages Limited liability Like corporation 127 ©2011 Kaplan, Inc.

128. Syndicates A joining together Of two or more people or firms To carry out one or more business projects Allowed forms Co-ownership (joint tenancy, or in common) Partnership Trust LLC 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 Fiduciaries Approve/disapprove purchasers 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 Individual owner 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 Income-producing potential Sells off residential units Co-op unit owners Tax advantage 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 Adverse possession Land acquired through long use without owner’s consent Rare 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 Usage encumbrances Restrictions Easements Encroachments 140 ©2011 Kaplan, Inc.

141. Voluntary or Involuntary Liens Voluntary liens Created by owner’s action Example is a mortgage loan Involuntary lien Created by law Example is real estate tax lien 141 ©2011 Kaplan, Inc.

142. General Liens Affect all personal and real property Judgments 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 Mortgage lien Mechanic’s lien Municipal utility lien Vendor’s 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: Construction Improvement 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 Vendee’s lien 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 Appurtenant In gross By necessity By prescription 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 Created deliberately 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 A privilege 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 Quitclaim deed Executor’s deed Referee’s deed 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 Accession Alluvion Avulsion 198 ©2011 Kaplan, Inc.

199. Conveyance after Death Transfer is either by operation of law or by executor’s deed Probate Testate Intestate 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 Periodic estate 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 Signatures 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. Without novation, 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 Gross lease Net lease Percentage lease 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. Graduated lease Provides for increases in rent at set future dates Index lease 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 Ground leases 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 Consideration 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 Novation 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 Breached Partial performance of terms Substantial performance 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 Listing agreements Buyer’s broker agreements Real estate sales contracts Option agreements 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 After negotiation 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 No commingling 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) State requirements 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 Competent parties 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 Agency relationships 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 Loan 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 Condominium sales Option agreements Land contracts Local forms 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 Notice Unrecorded liens 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 Title insurance 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 Homeowners’ insurance Characteristics of homeowners’ packages Claims 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 HUD-1 form 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 Expenses Broker’s commission Attorney’s fees Recording expenses Transfer tax State mortgage tax Title expenses Loan fees Tax reserves and insurance reserves (escrows) Additional fees Appraisal fees Survey fees 304 ©2011 Kaplan, Inc.

305. Preparing Closing Statements (cont.) Prorations Accrued items Prepaid items 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: Trustor/borrower Beneficiary/lender 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 Strict foreclosure Judicial foreclosure 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) Alienation clause 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 Loan servicing Equity Principal Interest 317 ©2011 Kaplan, Inc.

318. Primary Sources of Real Estate Funding Institutional lenders Credit unions Insurance companies Mortgage banking companies Mortgage brokers 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 FHA VA SONYMA 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 Biweekly mortgages 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 Usury Points 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 Property taxes 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 Package loans Open-end mortgages Blanket mortgages Wraparound mortgages Reverse annuity mortgages 331 ©2011 Kaplan, Inc.

332. Types of Loans (cont.) Purchase-money mortgages Imputed interest loans Construction loans Land contracts Sale-and-leaseback arrangements 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: Conventional loans Government-backed loans Loans direct from the government Private loans 334 ©2011 Kaplan, Inc.

335. Methods of Finance (cont.) Conventional loans Private mortgage insurance Lower LTV than government-backed Adjustable-rate mortgages Adjustment period Index Margin Cap Ceiling Negative amortization Convertibility Initial interest rate Assumability 335 ©2011 Kaplan, Inc.

336. Methods of Finance (cont.) FHA-insured Loans FHA 203(b) Owner/occupants Mortgage insurance premium Refinancing Other FHA programs VA-guaranteed loans Eligibility Assumability Refinancing 336 ©2011 Kaplan, Inc.

337. Government Backing via the Secondary Market Fannie Mae Ginnie Mae Freddie Mac Nonconforming loans 337 ©2011 Kaplan, Inc.

338. Financing Legislation Regulation Z Three-day right of rescission Advertising Penalties 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: Color Religion National origin Sex Marital status Age Dependence on public assistance 339 ©2011 Kaplan, Inc.

340. Lender’s Criteria for Granting a Loan Evaluating the property Evaluating the potential borrower Preapproval Predatory lending Qualifying ratios 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: Place Negotiate Solicit 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: Acquisition Gut renovation Conversion Construction/development 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 Restrictive covenant When a deed restriction and a zoning provision cover the same subject, the more limiting restriction will prevail Enforcement of deed restrictions Laches 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 Laches 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 Zoning Accessory building/use Nonconforming use Zoning variations Spot zoning Building codes Subdivision regulation Development rights Environmental protection legislation Landmarks preservation 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 Lot sizes Types of structures permitted Building heights Transfer of air rights Setbacks Density 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 Accessory buildings Nonconforming use Zoning variations 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 Sanitary equipment Electrical wiring 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: Municipal buildings State legislature houses Schools Military stations 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 Syracuse 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. Use 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 Building code Electrical code Zoning resolution 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 zoning amendments; 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 Building permit(s) 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 Foundations Concrete slab Pier and beam Termite protection 393 ©2011 Kaplan, Inc.

394. Exterior Construction Walls and Framing Platform frame construction Balloon frame construction Post-and-beam frame construction Lumber Exterior walls Insulation 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 Exterior trim Roof sheathing and roofing 395 ©2011 Kaplan, Inc.

396. Interior Construction Walls and finishing Plumbing Heating and air-conditioning Solar heating Ventilation 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 Relative scarcity Improvements Permanence of investment Area preference Physical characteristics of land Immobility Indestructibility 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 Substitution Foundation for the three approaches to appraisal valuation Anticipation Highest and best use External property influences Conformity 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 Vacancy 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: Estate purposes Divorce proceedings Financing Taxation Relocation Condemnation Insurance Damage loss Feasibility 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 Assessed value Liquidation value Insurable value Investment value Salvage 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 Cost approach Income capitalization approach 411 ©2011 Kaplan, Inc.

412. Sales Comparison Approach Study of properties recently sold Called comparables Adjustments are made up or down Three categories of adjustments Transactional differences Locational differences 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 Physical deterioration Functional obsolescence External obsolescence 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 External obsolescence 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 Step 2 Determine the amount of accrued depreciation and deduct from amount in step 1 Step 3 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) Step 2 Calculate the vacancy and collection (V&C) loss Deduct this V&C from the PGI, add other income Arrive at effective gross income (EGI) Step 3 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 Contribution Competition 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: Education Experience Exam 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 Familial status Disabled Seniors Amendment 1974 added Gender Added in 1988 Handicaps Familial status 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 No advertising 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 Blockbusting Steering Redlining Enforcement 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) Blockbusting forbidden 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 Age The age provisions apply only to those 18 and older. Sexual orientation Military status Marital status 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 Termites Asbestos Lead poisoning—pre-1978 testing Radon gas Indoor air quality—SBS & BRI Polychlorinated biphenyls (PCBs)—EPA & DEC 440 ©2011 Kaplan, Inc.

441. Future Concerns Underground storage tanks (USTs) Electromagnetic fields 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 Due diligence 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 Group boycott Market allocation 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 Property tax 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 Refinanced loans 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 Long-term gains 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 Active income Passive income 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 Purchase price + 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 Physical deterioration Functional obsolescence External obsolescence Three events in investment property ownership Acquisition Holding period 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 Purchase price + Legal fees + Broker commission + Appraisal + Survey + Title insurance = Adjusted total acquisition cost x Improvement ratio = Depreciable basis 468 ©2011 Kaplan, Inc.

469. Calculating Annual Depreciation Allowance Depreciable basis ÷ 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 Commercial property Industrial property 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: Risk Liquidity Leverage 475 ©2011 Kaplan, Inc.

476. Risk The types of risk that any investor will examine include the following: Business risk Capital risk 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) Mixed-use properties 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: Acquisition Holding 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 Created annually 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 Fixed expenses Variable expenses 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 Loss Factor Usable Area Carpetable Area Add-on Factors 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 Net Lease Percentage lease Loft lease 495 ©2011 Kaplan, Inc.

496. Lease Clauses Use clause Attornent Estoppel Sublease/assignment 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 Base year 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 Some exceptions 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 Office space Retail 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 Owner’s responsibilities Reporting Management fee 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 Controlling expenses 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 Owner objectives Operating budget Financing proposals Recommendations for managing a property 508 ©2011 Kaplan, Inc.

509. Planning and Budgeting Market analysis Regional analysis Neighborhood analysis Property analysis Owner objectives Budgeting Detailed operating budget Reserve fund Capital expenses 509 ©2011 Kaplan, Inc.

510. Marketing Marketing activities Advertising Promotions Selecting tenants Must comply with fair housing laws 510 ©2011 Kaplan, Inc.

511. Managing Leases and Tenant Relations Renting the property Setting rental rates Negotiating leases Security deposits Tenant’s and landlord’s obligations Collecting rents Tenants’ rights 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 Preventive maintenance Corrective maintenance Tenant improvements 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 Insurance coverage Fire and hazard Business interruption Contents and personal property Liability and workers’ compensation Casualty Surety bond Boiler and machinery Claims 514 ©2011 Kaplan, Inc.

515. Skills Required of a Property Manager Human relations Research and planning Accounting Marketing Negotiating Knowledge of physical operations 515 ©2011 Kaplan, Inc.

516. The Management Field Office building Retail space Anchor stores Residential Homeowners’ association of condominium, corporation of cooperative 516 ©2011 Kaplan, Inc.

517. Rent Regulations Rent control MBR Rent stabilization extended June 2011 ETPA 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: Property owners Local government Hearings held Give notice to owners of affected properties Ordinance may be adopted 521 ©2011 Kaplan, Inc.

522. Taxation Process Assessment Reassessment Appropriation Exemptions 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 Upstate communities “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 Undeclared improvements Building permits 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 Reassessment triggered 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) Target assessment 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 Residential condominiums Farms 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 Computed 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 Installments 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 Special exemptions Other common exemptions Elderly Veteran’s STaR 532 ©2011 Kaplan, Inc.

533. Protesting Assessment Property owners may present objections To municipality’s grievance board Over assessment Disagreement on full value Unequal assessment ratios Procedure for petitioning County clerk Small claims Tax certiorari, through court system 533 ©2011 Kaplan, Inc.

534. Enforcement of Tax Liens Taxes must be valid Delinquent taxes Tax foreclosure May be in rem, against property not owner Tax sale Equitable right of redemption Statutory right of redemption 534 ©2011 Kaplan, Inc.

535. Tax Sales and Periods of Redemption Cities Counties 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 Fee simple Leasehold 542 ©2011 Kaplan, Inc.

543. Purchase and Sale Documents Proprietary lease Stock certificates Offering plan House rules Alteration agreement Credit authorization form Board package 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 Sponsor shares Any shares held by the original sponsor of the co-op Unsold shares Shares held by any person or legal entity; holder and family may not reside in unit Sold shares 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 Eviction 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 Price changes Certificate of occupancy Title insurance Closing costs 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 Business interruption Contents and personal property Liability Casualty Surety bonds Boiler and machinery coverage Umbrella coverage 556 ©2011 Kaplan, Inc.

557. Insurance Policies Highly protected risk may lower premiums Multiperil policies For apartment and business buildings Monoline Policy Only one line or area of coverage Package policy 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 Most popular 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.

567. Rates Value x Rate per unit = Total Unit 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 Chain Mile Acre Section 569 ©2011 Kaplan, Inc.