Joint Tenants

When two or more people unmarried to each other co-own real estate, they own either as tenants in common, or joint tenants. When married, they own as community property.

For an unmarried couple, ownership as joint tenants may make the most sense. Joint tenants must own in equal shares, which may be a problem. But if both people contribute an equal amount, or if one is comfortable contributing more but only being half owner, then this option is available. The biggest benefit of joint tenancy is that, when one dies, the ownership automatically passes to the surviving owner. So it can be part of a very basic estate plan.

When people own as tenants in common, they have some flexibility in ownership. Tenants in common can own in unequal percentages. When one tenant in common dies, their ownership interest goes according to their will (or the law of intestate succession). So this works generally well when the co-owners are not also in a committed relationship.

For more, here is a good blog post on co-ownership of real property by single people (on FSBOLawyers.org).

FIRPTA (Foreign Investment in Real Property Tax Act) Explained

In 1980, the US enacted the Foreign Investment in Real Property Tax, or FIRPTA. The law requires foreign owners of real property to pay a 15% tax when they sell. In a twist, though, it is the buyer, not the seller, who is responsible for determining whether the tax is due. When due, the buyer must make sure it is paid.

FIRPTA is a law with teeth.

Specifically, the buyer must determine whether the seller is a “foreign person” as defined by the law. The seller is “foreign” if they are either a non-resident alien individual, or a foreign entity (a corporation, LLC, trust, estate, etc., that was legally created and exists in another country).

The law allows a buyer to accept a specific certification from the seller confirming the seller’s status. If the seller is a foreign person, then the buyer is responsible for withholding 15% of the sale proceeds and forwarding the money to the IRS. If the buyer fails to do so, then the buyer is liable for the tax due. Ouch.

Buyers: Make sure to comply with FIRPTA.

Otherwise you could have a very, very nasty surprise from the IRS: a bill for 15% of the sale price. On an average Seattle home, that would be about $100k. Double ouch!

Real estate forms should address FIRPTA

For a long time, the Northwest Multiple Listing Service forms (used by real estate agents) did not address this issue. Nonetheless, the vast majority of closing agents and escrow companies made sure the proper forms were completed, and the tax was paid when due.

In a recent revision, the NWMLS finally included terms to ensure compliance with FIRPTA. The standard contract form today requires the seller to indicate whether they are a “foreign person.”. The seller also must complete and sign a “FIRPTA Certification” (the NWMLS Form 22E). If the seller is “foreign,” then the contract instructs the closing agent to withhold and forward the amount due to the IRS, with the proper forms.

There is some confusion among real estate agents about how to use the NWMLS Form 22E FIRPTA Certification. Nonetheless, the NWMLS at least addresses the issue, meaning compliance is much more likely today.

In addition, I have my own free FIRPTA Certification.

Closing Agents and FIRPTA in WA

in this state, our closing agents are Limited Practice Officers. Licensed through the state Bar Association, they act essentially as legal technicians by preparing the legal documents needed to close a transaction.

Unfortunately, it appears an LPO may not be legally authorized to complete tax forms. If that is the case, then arguably they LPOs may not complete the forms required for FIRPTA compliance. On a practical level, nothing has changed and closing agents continue to honor the instructions in the contract about FIRPTA. But it is unclear how this will play out going forward.

Financing Contingency

A contractual term that requires a buyer to secure financing before the contract becomes binding.  So if the buyer’s financing fails, the buyer gets the earnest money back. However, most contracts require the Buyer to take certain steps in order to retain this protection, such as applying within a certain number of days of contract.

Escrow

Generally, a person or company that holds money or other property on behalf of other people who each have an interest in or claim to the property.  Real estate transactions require escrow because of the many parties (buyer, seller, lender, title insurance) and the many moving parts.

Escrow does a lot: it holds the buyer's earnest money and, when closing is near, the balance of the purchase funds (usually from the buyer and from a lender); it prepares the deed and all other documents needed to close the transaction; it makes sure the lender's documents are executed and recorded; it records the deed and accounts for all funds, disbursing the proceeds to the seller; and otherwise it makes sure the terms of the Purchase and Sale Agreement are given effect.

The person who actually provides the escrow services is the Closing Agent.

Earnest Money

Funds deposited into escrow by the buyer to demonstrate the buyer’s commitment to the contract.  The buyer breaches the contract if he fails to complete the purchase without some legal excuse for not doing so. The most common excuse is due to an unsatisfied contingency. In most instances, if the buyer breaches the contract then the buyer will forfeit the earnest money.

In Washington, a seller can keep up to 5% of the earnest money if the buyer breaches the contract. More than that, and you need specific contractual language in order for the term to be enforceable. So absent unusual circumstances (and the assistance of a lawyer) don't ask for more than 5%.

Real Estate Glossary: Due Diligence

The investigation of all aspects of home to confirm it is the right home for you. Due diligence begins with a physical inspection of the property, but it doesn't end there. It also includes a review of title, to identify any encumbrances on the property that might limit or restrict your use. Common examples include easements, such as a shared driveway, or Conditions Covenants and Restrictions (CC&Rs), which may also obligate you to a homeowners' association.

Speaking of which, if there is one, make sure you (a) know what it is responsible for, and (b) its financial health. If the HOA is essentially broke with expenses on the horizon... well, that's probably not an HOA you want to be a member in.

If you're planning on making any significant changes to the property, then you must also confirm that those changes will be allowed. You should consult your land use code of the city, county, state, etc. to confirm.

Due diligence usually happens once a home is under contract, with contingencies to allow for it. However, if there are multiple competing buyers, then you may want to engage in some abbreviated due diligence pre-offer so that you can eliminate your contingencies.

Finally, if done during a contingency, then defects in the property can be used to re-negotiate the contract. For example, a seller may agree to make certain repairs, or maybe the parties agree to reduce the sale price.

Designated Broker

By law, a real estate firm must have a designated broker. This person has a managing broker license and is legally responsible for the firm to the Department of Licensing. The designated broker must have a degree of control over the real estate firm.  In Washington, Designated Broker is the legal term and is defined by statute.

Contingency

A contractual term that requires a certain act or event before the contract becomes binding on one party, usually the buyer.  Common contingencies include the Financing Contingency, the Title Contingency, and the Inspection Contingency.

Depending on the terms, the contingency may allow the buyer to walk away with a return of the earnest money (most commonly the inspection contingency). Other contingencies allow the seller an opportunity to cure the objection (title contingency) or allows the buyer to walk if something else happens (like a failure of financing).

Conditions, Covenants, and Restrictions (CC&Rs)

Terms that apply to the owner of a property that is subject to them. CC&Rs are set out by a written document that is recorded with the county. Common restrictions include the exterior appearance of the home (remodels may be subject to a Architectural Review Committee's approval) and how the home may be used (e.g. no clothes lines). CC&Rs often create a homeowner's association as well with some responsibility for maintenance of common areas (e.g. gardening, a club house, etc.). These terms are legally enforceable, although you may be able to avoid the obligation if the term at issue has not been enforced before (the law won't allow for discriminatory or random enforcement).

Community Property

When two or more people unmarried to each other co-own real estate, they own either as tenants in common, or joint tenants. When married, they own as community property.

“Community property” is a legal concept in Spanish law. For this very obvious reason, it is more common in Western states*, i.e. the those states previously part of Mexico, and before that Spain.

Unlike tenants in common and joint tenants, community property includes both real property (land and things attached to it, like houses) and personal property (everything else). Owners of community property own it jointly, and when one dies ownership automatically passes to the surviving spouse (like joint tenants).

If people own real property, and then get married, their spouse will likely become part owner as a result of community property. Under this law, the earnings of one spouse belong one-half to the other. So if a paycheck is used for the mortgage after marriage, then the spouse will quickly become a co-owner, regardless of intent.

* The complete list of community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.