Buying, selling or investing in a property is a huge endeavor, which for many happens once in a lifetime. It requires a keen grasp of the local real estate market that experienced realtors can provide to their clients. But less understood and much harder to navigate for both brokers and customers are the legalities that accompany any purchase and sale. From the binding essence of small contractual details to the very human nature of negotiating within the law, the legal side of the industry is downright daunting. Oftentimes, it takes a lawyer to tread ahead.
In an attempt to provide general yet helpful advice, Haute Residence talked to one of our very own real estate partners. Jason Kapit is an experienced South Florida-based real estate agent, who formerly practiced on both sides of the law, first at Miami-Dade State Attorney's Office and later at the Public Defender's Office, before breaking out to the private sector.
Kapit’s training as an attorney has helped tremendously in his real estate career as he has consistently led the way in West Broward in real estate sales, volume and track record over the past decade. Haute Residence recently sat down with him to discuss the ins and outs of the law and how it affects his real estate deals on a daily basis.
What legal matters do you think are hard to grasp for many realtors who do not have a formal training in law?
Unfortunately, being a real estate agent in South Florida is like the Wild West. While many of my colleagues operate with complete professionalism, there are those who operate with reckless disregard in a quest to get a deal done, regardless of what the aftermath looks like. Lack of disclosure, conflicts of interest are phrases that can make for bad business. When selling what is most often, your priciest asset, it needs to be in the hands of someone who is mindful of the law, its intricacies, and has the know-how to get things done in an above-board, professional manner.
When entering a contract, what legal aspects should buyers be particularly paying attention to?
Understanding that you are entering into a legally binding contract that obligates you to perform in a timely manner pursuant to the stipulations agreed upon. If you don't, there is a potential for a default. Pay careful attention to your exposure in these default clauses, as it could cost you time, money, legal fees and potentially specific performance (where the law mandates that you purchase the property).
What about sellers?
Sellers are also obligated by the terms of the contract in a number of ways, most notably to deliver the home timely; if a seller agrees to sell the house on "x" date, delaying can cost you as the buyer may have scheduled around that date (movers, selling their existing home, etc.). Also, it is imperative that you convey the home in the same condition as when it was contracted for. Time and time again, there are battles surrounding the condition of the home. Tip: When you sell your home, don't throw that rager the night before closing. The walkthrough will be unnerving and potentially derail the whole deal.
Some purchase agreements amount to as much as a handshake. What are the benefits of putting it in writing?
While I can't speak to how real estate is done outside of Florida, I can tell you that we are governed by the Statute of Frauds, which essentially mandates that all contracts for residential real estate be reduced to writing. While "handshake" deals do occur, what a buyer and seller should understand is that the enforceability of such agreements is much more difficult in that "he said, she said" environment. Your home or investment property is a valuable asset. Don't leave things to chance. Reduce to writing and set out specific obligations that each party must perform.
When representing a buyer, how do you help them navigate the proposal to the seller?
The best way to represent a buyer is by providing them with the tools and know-how to win when presenting an offer. You do this by being organized, that is, having a qualifying letter for your buyer from a reputable source coupled with accommodating terms. This is how a prepared buyer wows a seller.
For example, suppose you are selling your home and you receive two offers. The first is from an unprepared buyer, who needs a mortgage but has yet to be approved, has yet to even meet with a lender or banker and is not specific about when he wants to close, ultimately submitting an offer, but not a very meaningful one. The second is from my buyer. It has a qualifying letter from either a lender or financial institution that attests to the credit-worthiness of the buyer and comes from a source, who can actually be contacted to confirm. In addition to that letter, there is a contract, with completed terms that are specific to price, deposit structure, inspection period, a reasonable time to procure a loan commitment and a closing date that has been established to "work" for the seller. Who has a better shot, my client or theirs?
What about when you represent a seller?
This is one of the strongest skills I bring to the table when representing a seller. The ability to wade through contracts, to determine pitfalls, potentially fraudulent activity, issues of unenforceability and just time-wasters in general. When you present a contract to my seller, in less than 30 seconds, because of my training as an attorney and because I have literally reviewed thousands of contracts, I am going to know if we have something real. If that isn't a plus, I don't know what is.
What about when you represent both parties?
Representing both parties is the goal of all agents. Who wouldn't want both sides of the deal? The most important aspect when representing both sides is transparency so that there is no conflict of interest. Issues arise when agents seemingly put their own monetary interests ahead of a buyer, a seller or both. That can be nipped by simply disclosing up front and allowing the parties to negotiate openly, honestly and for the benefit of all involved.
What are the most usual complications that can arise once a contract is signed? How do you approach them?
How much time do you have? (Laughs) Essentially you have a contract that contains defined terms and contingencies. Complications can arise from just about anything but most often emanate from lack of timely deposit, inspection issues, appraisal issues, and lending/financing issues. Any one of these can derail a contract so it pays to hire an agent with experience to methodically navigate through all of them.
What legal requirements go into investing in real property as opposed to purchasing a home?
There is no short answer to this question as there are various tangents from which to have a conversation but one of the main differences, which many buyers do not understand is that your taxes are different based upon that one single designation.
For example, in Florida, if you are buying a home as primary residence, you can file for a homestead exemption, which allows you to take qualifying deductions against your home for purposes of defraying your total annual property taxes. When you are an investor, you lose that benefit. What most buyers fail to understand is that there is an additional guarantee to primary homeowners that allows this seemingly benign $25,000 – $50,000 deduction to really shine. Save Our Homes "SOH" is the key for primary homeowners.
In addition to the deduction, establishing this exemption caps the annual rate of assessed value to a maximum of 3%. To understand how truly beneficial this is, let's do some quick math. Suppose you are an investor and do not have the benefit of the Homestead exemption. You buy a home for $1,000,000. Your property taxes are roughly 2% and your first year's taxes amount to $20,000. The following year, your property is assessed at $1,300,000. The good news is that you have increased your equity by $300,000. But from a taxation standpoint, you will pay $26,000 (2% of the new valuation).
Now let's assume you had purchased the same property as a primary homeowner and established the homestead exemption. You purchase for $1,000,000, but for tax purposes you are able to take a double exemption of $50,000 against the value and pay taxes on $950,000. Your tax bill for the first year is $19,000. In year two, the property is assessed at $1,300,000 but because you are exempt and incorporate the SOH exemption, the max increase in value that you are required to pay taxes on is capped at 3% so the taxable value will be $1,030,000 minus the double exemption of $50,000, which leaves your taxable exposure to $980,000 or $19,600 in taxes. Same upside in equity as the investor but a tax savings of $6,400 in the second year alone. So, be careful how you decide to take ownership. There are drastic differences and consequences.
There is often a misunderstanding about earnest money. Is such a deposit required at all times and what is its purpose?
Earnest money or a good-faith deposit is normally made with or within 3 days of an executed agreement. It is essentially the first deposit made and shows the seller the seriousness of the buyer when entering into an agreement. For example, if I am selling a million-dollar home and receive two offers and the first is for $950,000, with $1,000 earnest money deposit, subject to financing, I might question the buyer's wherewithal and ability to get this done. On the flip side, if I get the same price from the second buyer but the earnest money is $50,000 and cash to close with no financing contingency, that offer will go much farther when sitting with the seller and determining which deal, on its terms, sounds more promising.
When a buyer is purchasing a house/apartment that is yet to be built, what financing options are best? What is preferred – putting money in escrow or releasing it to the builder?
This one question has caused so many issues and lawsuits to be filed in Florida, most notably in the condo market. And buyers should be aware of the contract language when entering into these pre-construction deals. The issue is not one of choice but is often dictated by the developer; the reason is a bit complicated but is often a result of the terms from the developer's lender who is ultimately funding the project.
Often times, the developer’s lender will mandate that they will not allow construction to begin unless or until they have a certain amount of hard money deposits from would-be buyers. As such, developers will require non-refundable deposits and in their legalese, it is often stated that these deposits may be used immediately by the developer. It's a catch 22 because as a buyer, you don't want to release money to a developer who hasn't put a shovel in the ground, but if you don't, they don't amass the necessary money to begin the project. Best to get an attorney involved to protect your interest and to seek a project built by developers with a successful track record and reputation.
What are the particularities of Florida law compared to other states?
Each state has its own set of governing laws, and it even goes beyond that as the laws in Florida are different as they relate to single-family residences as opposed to condominiums. There is so much to know and so much legalese, which is why you consistently read about lawsuits. I have a team of AV-Rated real estate attorneys that I consistently do business with that have been practicing in Florida for decades. I don't leave anything to chance.
Jason Kapit is the exclusive agent representing the Southwest Ranches, Parkland, Weston, Florida real estate market as part of the Haute Residence Real Estate Network. View all of his listings here.