IS DAMAGE HISTORY COMPENSABLE UNDER YOUR AUTO INSURANCE POLICY?

            A recent Supreme Court decision has taken up the question whether in addition to replacing damaged parts on a car after an accident, an insurance company has the obligation to pay for the loss in the car’s value simply from having been damaged in an accident.  This case, a class action involving State Farm, involves interpretation only of that company’s policies and therefore may not apply to policies of other insurance companies.

            The case is interesting because it explores the nature of the damage a car suffers in an accident in addition to the replaceable parts that are bent or broken.  It appears that our court accepts that even after all of the replaceable parts affected are in fact replaced, there remains an amount of damage that is compensable under a policy that agrees to compensate for “loss” to the vehicle.  The court differentiated between so-called “stigma damages” and what it called “weakened metal” damages.  “Stigma” damages are those that reflect the loss in resale value that exists for a car that has been damaged in an accident, even if it has been fully repaired.  Such “stigma damages” are not compensable under this Supreme Court decision.  One has in mind the recent news article about the winner of a $380,000 Lamborghini who wrecked his new car after only a few hours’ ownership, and the effect on its value of having been in a nationally reported accident, no matter the extent of repairs.  The “weakened metal” type of damages reflects that some parts of a damaged vehicle under today’s technology of unitized body construction for cars cannot be replaced to as new condition. 

            The court decided that it must interpret the insurance policy from the standpoint of the consumer, and that under such circumstances the alternative in the policy for the company to either repair or “total” the vehicle and replace it, did not eliminate the company’s obligation to pay for loss in value if the company elected to repair the vehicle.  The court determined that the insured had the right to expect to be put in the same position he or she was before the accident, and that having a car whose value was diminished by the existence of “weakened metal” damage would not meet that standard unless the insurance company paid the difference in value to the insured in cash.

            Based on this decision, people who are involved in “fender bender” accidents may be entitled to cash in addition to the repair of their vehicles.  It is important to review the language of the policy involved.

            The foregoing is for education and may not be interpreted as legal advice. 

LEASE TO OWN AS AN EXIT STRATEGY: A PARADISE FOR INVESTORS OR SOMETHING ELSE?

            Some investors have asked over the past few years about using the lease to own or lease option as an exit strategy.  There are lecturers who recommend this method and who describe the process in glowing terms.  The lease option as it is described by such people is ideal for investors who want the benefits of owning rental real estate but who do not enjoy the burdens of being a landlord.  According to what some lecturers say, the investor can, through inserting a few simple phrases in the option agreement and using a method to screen the potential tenant buyers to focus on those who have an owner’s outlook, effectively transfer the burden of maintaining the property to the tenant buyer.  Thus the lease option investor is depicted as being in a type of landlord’s paradise—rent is coming in on time each month, the landlord receives tax benefits, the landlord never receives a call about a problem with the property because the tenant buyer does all maintenance and even some upgrades, and the payday is in sight, when the tenant buyer becomes the buyer in fact. 

            Imagine this scenario: you as investor have found a tenant buyer for your single family residence, and using the instructions in a course you took you insert terms in the option agreement such as “tenant buyer agrees to do all maintenance and repairs necessary to keep the property in compliance with applicable codes,” and “any use by tenant buyer of the fact that there is an associated lease to attempt to have the landlord perform maintenance or repairs will be a default under this option, resulting in its immediate termination.”  Your tenant buyer happily signs the option and the associated three year lease “at the kitchen table,” pays the first month’s rent with deposit and takes possession of the house.

            A few months later, you receive a call from the tenant buyer about some maintenance or repair issue at the property.  Let’s say it is a broken furnace, and let’s say it is wintertime when you receive this call.  Let’s say that the tenant buyer had a furnace repairman come out to the house and look at the furnace and the repairman pronounced the last rites over the furnace.  That furnace is history.  You know enough about the cost of furnaces to gently remind the tenant of the language about repairs in the option agreement, and suggest that if the tenant does not want to pay to replace the furnace, then you and your partners (really just you) would be happy to convert the lease option arrangement to a standard lease.  You remember that the lecturer in the course you took predicted that the tenant buyer would buckle under this implied threat to cancel the option and agree to bear the cost of replacing the furnace in your house.  You helpfully offer to advance the cost to put in the new furnace in exchange for an increase in monthly rent such that the higher rent will have paid for the cost of the furnace in three years.

            But this tenant buyer says, “You know, I thought you might say something like that.  I reread that provision in the option agreement and before I called you just now I asked my uncle, who is a lawyer, about it.  He said that in Washington unless specific requirements are met, a landlord cannot make a tenant do repairs such as replacing a furnace or pay the cost of such repairs to residential property, even if the tenant previously signed an agreement to do the repairs.  He also said that again unless those requirements have been met a landlord cannot threaten to terminate an option in order to make a tenant who is also an option buyer do the repairs, once the tenant has asked the landlord to do the repairs.  And according to what my uncle said, you did not do the things necessary to make the option provision about repairs binding on me.”  The tenant buyer then asks when he can expect your installer to arrive at the house with the new furnace, because the weather is cold, and he says that he is not interested in paying any higher rent than the current level.  You determine that your best course under the circumstances is to pay for the new furnace and hope to recover the cost of the furnace from the profit when the tenant buyer exercises his option and you sell the house.  The net effect is a reduction in your expected profit at the time of exercise of the option.  And this tenant buyer decides not to be shy about calling you for other repairs as well during the term of the lease.

            This example illustrates that it is important for investors who use lease options as their exit strategy in Washington to consider various aspects of the lease option before entering into these relationships.  The key point is that a lease option contains a lease that is not exempt from the normal requirements of such a document simply because an option is also involved.  It is doubtless true that many lease option relationships exist with such provisions as are described above and the tenant buyers in fact do minor or sometimes not so minor repairs and even upgrades to the properties without a complaint or adverse outcome and such buyers reap the benefits when they exercise the options and purchase the properties.  Such a scenario as depicted here is still possible, and unpleasant surprises such as these are always unwelcome.  The good news is that there are ways to achieve many of the investor’s desired objectives without disregarding tenants’ rights.

            The foregoing is intended for education only and should not be interpreted as legal advice.

A New Item for the Investor's Pre Buy Checklist

            You may have seen residential neighborhoods with sidewalks that have some portions that look as if they were lifted by tree roots.  Sometimes these lifted sections can be tripping hazards.  But that is the city’s problem, right?  Not necessarily, according to a recent case.

If you invest in residential property in areas in Washington that have sidewalks, then you may want to know about a recent court case that held the property owner liable for injuries suffered by a pedestrian in a tripping accident on the sidewalk.  The facts are that during the Fifties, the owners purchased a residence in West Seattle and lived in the home for fifty years.  Some time before 1990 they planted three birch trees on the property next to the sidewalk.

            Over the years the roots of these trees grew beneath the sidewalk and according to an expert at the trial, lifted a section of the sidewalk about an inch, although the tripping hazard was “not conspicuous.”  In 2003, a pedestrian tripped on the lifted sidewalk section and broke her wrist.  She sued the city and the property owners.  The property owners asked the court to dismiss the case against them on the basis that they did not have any duty to the pedestrian.

            The court discussed the responsibility of the landowner in terms of whether the tree roots were a natural or an artificial condition.  The court concluded that when the owner plants a tree on the property, that tree is an “artificial condition,” and the owner has a duty to “restrain” the tree from injuring a pedestrian.  The city still has the responsibility to maintain the sidewalk but that is not enough to shield the property owner from damages in such a case.  The court refused to dismiss the case against the property owners.

            For the investor in residential property, what does this mean?  First, it means you should have a good first hand inspection of the property you intend to buy if it is in an area where there are sidewalks.  You should look around to see if there are trees on the property.  Trees can be counted on to send their roots out, and they may be under the sidewalk.  Second, if the inspection discloses that there are trees on the property whose roots may be under the sidewalk, it will be important to know whether the trees were there before the sidewalk.  If the trees were planted by the existing homeowner or a predecessor rather than having been in place when the house was built, then there is the likelihood that the property owner will be responsible for “restraining” the roots from lifting the sidewalk and creating a tripping hazard.  If the trees were planted by the homeowner or a successor it will then be necessary to find out before purchasing, what the cost of “restraining” the roots is likely to be.  If you can establish with certainty that the trees were in place before the house was built, then likely you do not need to be concerned about potential liability from tree roots lifting the sidewalk because such trees are classified as a “natural condition.”  The court made it clear that where an artificial condition is involved, the property owner has the duty to restrain the tree roots, and a reasonable assumption is that this duty would extend to subsequent purchasers of the property, even if they were not the ones who created the artificial condition. 

            This is another case of “let the buyer beware.”
This account is for education only and should not be considered legal advice.

IF IT SEEMS TOO GOOD TO BE TRUE…

            A recent court case has again illustrated the wisdom of the old saying, “If it seems too good to be true, maybe it is not true.”  This case involved an experienced real estate investor who became interested in a property that was the subject of a Notice of Trustee’s Sale.  The property which included land and buildings was worth more than $700,000, and when the investor learned of the pending trustee’s sale he approached the owners about buying directly from them.  The owners said they would not sell and were going to bring the loan current.  Time went on, the investor tracked the status of the sale which was continued several times, then finally the sale was held 161 days after the original notice, and it was delayed from ten in the morning until 11:45.  The investor bid $130,000 although he was prepared to spend up to $450,000, and his low bid was accepted.  The investor must have been very surprised.  The trustee issued a standard deed, incorrectly stating that the original sale date in the original notice was the date of the actual sale, and that the borrowers were in default.  The buyer then began a lawsuit to evict the borrowers.

            In fact the borrowers had entered into a forbearance agreement with the lender and the series of six continuances of the trustee’s sale was to recognize their installment payments under that agreement.  The lender refused to accept the final payment because it was two weeks late but that payment was still more than eleven days prior to the scheduled trustee’s sale.

            The borrowers sued to set aside the sale and argued that because the sale was more than 120-days after the original notice the trustee had no power to sell and the sale was void.  The trial court agreed with the buyer that the conclusory statement in the trustee’s deed that the sale was in compliance with the law shielded the sale from being set aside.  The Court of Appeals disagreed, and held that the fact that the trustee’s deed did not mention the forbearance agreement or the six continuances meant that the borrowers were free to challenge the deed’s claim of compliance with the law and that the fact that the sale was more than 120 days after the original notice meant that the trustee lacked any authority to sell.

            The buyer argued that he was a purchaser for value without knowledge of any procedural defects and was therefore protected by the trustee’s deed which was regular on its face.  The court noted that the buyer was an experienced investor who knew how the foreclosure process worked and who had bought many foreclosure properties.  The court held that this experience plus the fact that the investor had approached the borrowers to buy the property directly and was rebuffed, and the series of continuances of the sale put the buyer on inquiry notice that there were likely defects in the sale that he should have investigated.  The court determined that if the buyer had investigated he would have learned that the borrowers were not actually in default at the time of the sale, and therefore the buyer was not protected against having the sale set aside.

            The court indicated that experienced investors will be held to a higher standard in such cases.  This is a significant development in the law that affects investors in foreclosure auctions.  The court noted that the repeated continuances of the sale and then the delayed start of the sale on the day it was actually held likely chilled the bidding and resulted in a low price that effectively confiscated hundreds of thousands of dollars of the borrowers’ equity.  We can learn that it is wise if a trustee’s sale is repeatedly continued and then the auction price seems unreasonably low, to inquire into the reasons for the continuances.  It is also wise not to bid at an auction that is more than 120 days after the applicable notice of sale. 

The foregoing is for education only and should not be construed as legal advice.  

Please visit my website at http://www.seattle-realestate-lawyer.com/aspx/m/Real-Estate

"Thinking Outside the Box" in Commercial Leasing

            A recent court case has highlighted the importance in some commercial real estate leases of thinking well ahead of the current situation.  In 1994 the owners of an apartment building signed a one page lease form with an advertising company for the placement of a billboard on the roof of the building.  The lease was for ten years with an automatic renewal for another ten years.  The first lease term ended and the lease was renewed.  A few years after the second lease term for the billboard began, the building was converted into condominiums.  The lease had provided that it could be terminated if “the property” were sold. 

            The condominium units on the top three floors of the building were sold to a limited liability company which presumably intended to hold them or sell them.  The previous owners of the building retained two units on a lower floor.  The roof on which the billboard stood was allocated to the owners of the units on the top floor.  The limited liability company that now owned the top floor and hence the roof wanted to remodel its units and its engineers indicated that the billboard must be removed for the remodeling and because of structural damage the weight of the billboard had caused to the roof.  The previous owner of the building, which now owned only two units on a lower floor, assigned its interest in the billboard lease to the owner of the units on the top floor.

The limited liability company that now owned the roof gave notice to the billboard owner that the real estate lease was terminated due to sale of the property and for the billboard owner to remove the billboard.  The billboard owner replied that since the previous owner of the building still owned at least one unit, the billboard owner believed that the lease was still in effect.  When the billboard owner did not remove the billboard the limited liability company that owned the roof had the sign dismantled and removed.  The billboard owner sued the previous owner of the building and the limited liability company for over half a million dollars in damages for the removal of the sign.

The court considered the simple one page lease that said the lease could be terminated if “the property” were sold.  The billboard company argued that “the property” meant the whole building and since the former owner still owned a part of the building, the entire property had not been sold.  The limited liability company argued that “the property” meant the roof on which the sign stood and that had definitely been sold.  The court concluded that the lease was ambiguous because either interpretation could be correct, and decided that because the lease had been prepared by the billboard company the ambiguity would be resolved in favor of the limited liability company.  This case can be found at http://www.courts.wa.gov/opinions/index.cfm?fa=opinions.showOpinion&filename=290247MAJ

This case shows that it can be important to look to the future when working out the terms of a real estate lease of commercial property and try to envision the effect of those terms if certain fundamental conditions change over time.  The preceding is intended as instruction and should not be considered legal advice.  Please visit my website at http://www.seattle-realestate-lawyer.com/aspx/m/Real-Estate for additional information.  Thank you.

When is Board of Health Action a Land Use Decision?

A recent case showed that sometimes an agency that does not have the usual association with land use decisions may nonetheless make land use decisions that can only be challenged under the Land Use Petition Act which has a very short 21 day period for filing such challenges.  In this case a rural homeowner bought an RV for use by overnight guests and put in a holding tank for wastewater.  State law says that holding tanks are illegal for residential purposes but the county health board can grant waivers of this provision on a case by case basis.  The homeowner asked the health board for a waiver but was turned down on the basis that it was perfectly feasible for him to expand his existing septic system or put in a new one just for the RV.  About two months later the homeowner filed a lawsuit in superior court, challenging the sections of the county code under which the county health board had denied his request for a waiver.  The Court of Appeals decided that since the effect of the health board's decision was to regulate the homeowner's use of his land, that decision was a "land use decision" that could only be appealed under the Land Use Petition Act.  Since the lawsuit was filed more than 21 days after the denial of the waiver request, the homeowner was out of time and his arguments could not be heard.  The court has said that "even illegal decisions must be challenged in a timely, appropriate manner."  So it is important in deciding to challenge government administrative action to decide whether that action is a land use decision that is subject to the shorter appeal period, rather than other types that are subject to a thirty day period.

The preceding is for instruction and should not be considered legal advice.  Please see my website at http://www.seattle-realestate-lawyer.com/aspx/m/Real-Estate

Medicaid Support-- One Size Does Not Fit All

A recent administrative law case showed that the Department of Social and Health Services cannot adopt rules that have the effect of imposing "one size fits all" measurements on people who require Medicaid assistance due to developmental disabilities.  In this case the Department had determined that a fifteen year old girl with severe developmental disabilities was eligible for twenty-four hour a day institutional care for managing the tasks of daily living.  The girl lived with her mother who was her care giver and was enrolled in a program that allowed her to receive benefits for living at home rather than being institutionalized.  This was reflected in a determination by the Department that the girl should receive Medicaid Personal Care in the amount of ninety hours per month.  Then in 2005 the Department adopted a rule that presumed that a portion of a child's care was for development, not due to medical need, and that a portion of the child's care that was provided by a parent living with the child would substitute for the otherwise required Medicaid Personal Care.  These presumptions could not be challenged by medical evidence.  In fact the girl had a physician's report that said she needed ninety six hours of Medicaid Personal Care per month but there was no place to present that evidence.  The Supreme Court decided that the Department's rule presumptions violated federal law that requires comparability of Medicaid benefits among similarly situated people.  The court invalidated the Department's "one size fits all" rule and upheld an award of over $85,000 in attorneys' fees to the girl. 

The preceding is for instruction and should not be considered as legal advice.  Please see my website on administrative law at http://www.seattle-realestate-lawyer.com/aspx/m/Administrative-Law

Fair Housing Laws and Lease Purchases

            I suggest that there are reasons to consider fair housing laws when one uses a lease purchase or lease option as an exit strategy for a residential investment.  Some people may have the impression that it is of little concern to the investor who is marketing a property through a lease purchase or lease option, how the investor treats the several potential buyers who may come to view the property with respect to one another. 

            It is important to recognize that a lease option or lease purchase still is, for purposes of fair housing laws, a real estate transaction that is subject to those laws.  The fair housing laws are designed to prevent discrimination in housing based on certain categories of potential buyers or renters of housing.  In Washington in the Seattle area there are four levels of government whose mission it is to enforce laws against discrimination in housing.  Those levels are federal, state, county and city.  Each level of government may have slightly different standards of what classes are protected.  For example, the federal classes under Title VIII of the Civil Rights Act of 1968 as amended are race, color, religion, sex, handicap, familial status or national origin. 

            The City of Seattle’s Unfair Housing Practices Law includes all of the federal categories and adds ancestry, creed, housing subsidy, age, sexual orientation, gender identity and political ideology.  Each of these levels of government has its own enforcement mechanism. 

            The investor who has a property to sell under the lease purchase approach may wonder, “How does this affect me?  I am trying to sell a property and all I care about is whether the tenant buyer can pay the rent and become qualified for a mortgage over the term of the lease, which is several years.”  The answer is that if members of a protected class are unsuccessful in leasing or buying the property, they may conclude that the treatment they received was as a result of their membership in the protected class and they may then file a complaint.  The investor may or may not know at the time he deals with a group of potential lease purchasers that there are members of one or more protected classes in that group.

            Assume that the investor is marketing a house and places an ad inviting people to call about the possibility of a lease purchase of the home.  The investor receives several calls and sets up an appointment at which he expects several of the interested callers to appear simultaneously.  This approach is designed to heighten the potential buyers’ enthusiasm for the property.  The several interested callers show up at the appointed time, and based on what the investor knows from the telephone conversations he ignores some of the potential buyers who are on the property and spends all his time with those he finds most promising.  The investor takes applications from several interested people but he does not log them in according to the time of receipt.  The investor then decides among the promising applicants and awards one the lease purchase, but does not document the reasons for rejecting the other applicants.

            Has the investor done anything that would be grounds for a fair housing act enforcement case?  The answer is possibly, depending on whether any of the rejected applicants or those people who came to the home for the showing and were ignored by the investor, are members of a protected class.  By ignoring some potential buyers who came to the showing and courting others, the investor has clearly discriminated.  By selecting one applicant for the lease purchase and rejecting others, the investor has also discriminated by necessity since there was only one house to sell.  The issue is whether the discrimination was legal or whether it was improper based on the protected classes.

            What could happen in a fair housing enforcement case?  At a minimum the investor would have to answer a claim of discrimination.  If the agency pursued the case, the investor could be liable for money damages to the rejected member of the protected class and civil penalties.  The civil penalties under federal law are $16,000 per violation and under state law in Washington are $10,000 for a first violation, up to $50,000 per violation for a person who has a history of violations.  In Washington the Human Rights Commission may go to court to prevent the investor from selling the house to someone other than the complaining member of the protected class.

            It is clear from this information that success by an investor in deflecting any claim of a fair housing law violation will depend both on acting in a nondiscriminatory way toward all potential lease purchasers and in creating and maintaining good records of that behavior.  If a disappointed potential lease purchaser is a member of a protected class and claims that the treatment he received was the product of illegal discrimination, it is going to be records that will stand as the investor’s defense.  Investors should consult their own counsel on how to create appropriate records for this purpose.

The preceding is for instruction and should not be considered legal advice.  Please see my website at http://www.seattle-realestate-lawyer.com/aspx/m/Real-Estate

Condominium Investing -- Look Under the Hood Before Buying

            Condominium investing as a buy and hold strategy can be very worthwhile.  There is a building, and a unit in that building which you rent to a good tenant, and providing you purchase at the right price, life is good.  The tenant’s rent pays the mortgage, taxes, insurance and homeowner’s association dues and some increment over that is left over for positive cash flow.  This is what we all would like to see.

            But sometimes there are hidden financial perils awaiting the condominium investor.  Think again of the building.  You as an investor only own up to the inner surfaces of the unit you have bought.  Everything else is what is called “common area” or “limited common area,” which means you do not have a direct role in maintaining that structure.  Especially in the case of mature buildings this can become a source of financial pain for the unwary buyer.

            The homeowners’ association may be required by the condominium declaration to maintain and replace the structure as parts wear out, and if so it is entitled to assess the owners of the units regular charges to pay for the cost of that maintenance and replacement.  But owners generally do not like high monthly assessments, and that dislike can produce problems of deferred maintenance and a deficiency when it comes time to replace major portions of the building.  And there is no statutory requirement that the homeowners’ association actually maintain the building or replace worn out components.  Any such requirement is in the declaration which is part of the documents the prospective buyer receives before closing the sale.

            Some parts of a building can be expected to last a fixed number of years before they need replacement.  Examples are an asphalt roof, wooden siding and vinyl windows.

When the anticipated time of replacement of such items comes up, there should be a reserve account and there should be money in the reserve account to pay for that replacement.  Otherwise the homeowners’ association has nowhere to look for the money except to the current owners.  And this can be the source of in some cases very large special assessments to replace deteriorated building parts.  Such special assessments, if they are not paid currently, become a lien on the owner’s unit.  In some cases the size of the assessment is enough, if it is financed, to cause an otherwise positively performing rental to become a negative cash flow producer, or “an alligator.”

            Two years ago the Legislature adopted a law that generally requires homeowners’ associations to conduct reserve studies annually of the physical condition of the condominium building.  These studies are to be done after a physical inspection and are to be performed by a professional in the field of reserve studies.  However, the homeowners’ associations are not required by statute to make assessments on condominium owners to fund the reserves that the studies indicate will be required to replace life limited parts of the building when they need replacement.  The declaration of an individual condominium may require such studies and proper funding of reserve accounts to cover expected maintenance and replacement costs.

            It is a good idea therefore, as part of your pre purchase inspection, to obtain a copy of the most recent reserve study for the building in which you are considering buying, and also to obtain the declaration and the most recent financial records of the homeowners’ association.  Check to see first that there is a reserve for building replacement required in the declaration and second that the reserve is “on track” for what it should be at the building’s current stage of its useful life.  Also check to see that the owners are paying reasonable assessments that are calculated to keep the reserve in the proper balance to building replacement cost over time.  If you buy a unit in a building in which previous owners have not paid enough to build a proper reserve for replacement of worn out building elements, then it is you who will have to make up the difference at the time the replacement occurs.  There is no way to recover those deficiencies from the previous owners, or from the homeowners’ association board members or officers.  It is better to pass on purchasing a unit in such a building because once the special assessment occurs, your options as an investor are limited and bleak.  Sometimes the best investments are those you do not make.

      The preceding is for instruction only and should not be construed as legal advice.

Is Assigning Real Estate Purchase Contracts the Unlicensed Practice of Real Estate?

            Some investors “wholesale” properties in such a way as to avoid ever taking title themselves and in order to do this they assign the purchase agreements they have made with sellers to other buyers, prior to closing.  Such investors avoid paying a second real estate excise tax (as would occur in a “double closing”).  The investor’s objective is to profit on the difference between the price the property seller receives and the price the ultimate buyer pays.  Such transactions generally are not practical if the investor’s customer requires conventional financing because today most institutional lenders will not lend on a deal in which the borrower’s name is not the name of the purchaser on the purchase contract.

            However some such transactions may still occur when the investor’s customer uses his or her own cash or has private investors to finance the purchase.  Such deals would then close with the investor receiving an assignment fee from the investor’s customer either in cash before the closing or out of the proceeds of closing, depending on the assignment agreement.  A single real estate excise tax is paid by the seller, and the state is happy with this situation because only one closing occurred.  Or is it?

            A recent publication by the Department of Licensing Real Estate enforcement section suggests that investors who participate in such deals as described above risk having the Department take enforcement action against them for what the Department considers the unlicensed practice of real estate activities.  An investor would likely ask, how can this be?  The investor would say, I signed the agreement as purchaser and I was therefore a party to the purchase agreement, not an agent for someone else.  The investor would point out that the real estate broker licensing law contains an exemption for a person who purchases or disposes of property for his or her own account and a buyer’s interest in a purchase agreement is property.  All of this is true, but the Department’s recently stated view is that if a person obtains this interest in property from a seller with the intent of finding another buyer before closing the sale, then that person is putting transactions together for others which is within the definition of the activity of a broker.  The Department’s view is that such an investor would be misusing the “own account” exemption in order to evade the licensing law.

            How likely is it that the Department would prevail if it brought such a claim against an investor?  It is difficult to predict the outcome with certainty.  No Washington court case has gone so far.  On the other hand, the real estate broker licensing law is what is called remedial legislation.  Such laws are construed broadly by the courts in order to address the potential harms to the public that led to the enactment, here the dangers of unlicensed brokers participating in transactions. 

What happens if the Department does prevail on its claim?  There are no administrative penalties the Real Estate Commission can assess on its own that are clearly applicable to unlicensed practitioners of real estate.  It is possible that the Director of the Real Estate Commission could issue a “cease and desist” order against an unlicensed practitioner and if the person failed to obey, the Director could sue in court for an injunction to require that the activity be stopped.  It is also possible that the Director would refer such cases to the county prosecutors for the filing of criminal charges.  Under the law, operating as a real estate broker without a license is a gross misdemeanor.

            What can an investor who operates in this market do?  Certainly the investor can consult his or her own legal advisor.  Several courses of action appear to be available from the Department’s own statement.  On its face the Department’s stated position addresses the situation in which no licensed broker is involved in the transaction and the transaction supposedly involves putting a deal together for someone else.  The investor could as one alternative take title and then sell to his or her customer in a “double closing.”  That would dispose of the claim that the investor was putting together a deal for someone else but it would expose the investor to the need as a seller of real estate to pay a second real estate excise tax.  Another alternative would be to do a single closing but get a licensed broker or someone legally permitted to perform a broker’s activities such as a lawyer involved in the transaction.  Still another alternative would be for the investor to obtain a broker’s license.

The foregoing is for instruction only and should not be considered as legal advice.

Who supports the warranty in a "statutory warranty deed?"

Experienced real estate investors may buy and sell many properties over the courses of their careers, and may rarely need to consider a feature of the deeds they sign when they sell their properties, namely the warranty.  Most sales of investment properties use the "statutory warranty deed."  The "statutory" part of the description means that the terms of the deed are set by statute in Washington.  The "warranty" part of the description alerts the parties that there are promises contained in the statute that are "read into" the deed.  There are five warranties in a statutory warranty deed, and all of them are given by the seller to the buyer.  So if you are the seller of a property under a statutory warranty deed, you are the one who supports the warranties you give to the buyer.  Why is this significant?  In some cases the value of the warranty obligation can exceed what the seller receives for the property in the sales price.  A recent case decided that an experienced investor who was also a licensed real estate broker breached the deed warranty he gave.  This occurred when the seller refused to defend a boundary dispute by a neighbor of the buyer on the basis that it would be cheaper for the seller to simply refund the purchase price to the buyer than to defend.  The court decided that this option was not open to the seller because of the statutory warranty contained in the deed, and the buyer's lawsuit against the seller for damages including lost profits from the stalled construction of a new house he was building on the land, could go forward.  The preceding is intended as instruction only and may not be construed as legal advice.