Vesting
Sometime before closing escrow you need to decide
on the vesting, that is how you will hold title. This is an important decision
that should be made after careful study and even consultation with an attorney. The
way title is vested can impact estate planning and taxation. In practice,
you will actually have to make this decision prior to applying for financing,
as the vesting can sometimes affect the lender's decision. You should usually
even try to provide the information in your purchase offer, as this might affect
the seller's decision. If you expect the seller to carry any financing,
he will need to know the vesting in order to judge his risks as a lender. Even
if no seller financing is involved, the seller is tying up his property for a
period of time (sometimes several months) and the vesting can affect his decision. While
you may get away with using "John Doe and/or nominee" in your offer, a knowledgeable
seller (or his agent) should not allow you to do so.
The
basic forms of real estate ownership are:
1. Sole Ownership. Sole
proprietorship means that one person has complete ownership of, and control
over, the property. As the sole owner, you decide how you want
to dispose of your property. You may sell it, divide it, gift it, or
bequeath it to your heirs in accordance with your desires. Upon your
death the property would pass in accordance with your wishes pursuant
to your will.
2. Joint
Tenancy With Right of Survivorship. Join
tenancy is the concurrent ownership by two or more persons of a parcel
of property which the ownership and control would be shared equally
among all the joint owners during their lifetimes
The entire property may only be sold or transferred with the written
consent of all joint owners. Upon the death
of one of the joint owners the remaining joint owners would receive
their departed joint owner's interest. The surviving joint owners
would then share equally in the ownership and
control over the property
3. Tenancy by the Entireties. Tenancy
by the entireties is basically a joint tenancy with right of survivorship
between a husband and wife. Only a husband and wife may hold property
as tenants by the entireties. As in joint tenancy, both spouses must
consent in writing for the transfer or sale of the property. as in joint
tenancy, the surviving spouse would receive the entire property upon
the death of his or her spouse.
4. Tenancy in Common. Tenancy
in common is a type of concurrent ownership in which each tenant owns
and controls an undivided interest in the property. The amount of their
interest may not necessarily be equal. The entire property however, can
only be transferred or sold with the written consent of all owners. However,
a co-owner can sell, transfer or dispose of their interest in the property
at any time, including bequeathing it to their heirs by will or otherwise.
There are several problems and
risks in inherent in owning or attempting to transfer your property
to your heirs or others by one of these types of concurrent ownership:
a. Property
which is held as either joint tenancy with right of survivorship,
tenants by the entireties or tenants in common requires
the written consent of all owners to transfer the entire property to
another person. If a parent wants to sell a property which has their
children on the deed, that parent must get their children's consent.
In addition, all of the co-owners are entitled to their undivided proportional
share of the use or income of the property during their lifetimes.
If a co-owner has a falling out with one of their other co-owners,
which occurs quite often, the co-owner would be unable to transfer
the entire property without their co-owner's consent.
b. Property
which is held as joint tenancy or as tenants
in common may be attached by the creditors of any one of the
co-owners as to that co-owner's share. If one co-owner were to have
a creditor, such as from personal injury claim, their undivided interest
in the property could potentially be at risk and attached by such a
creditor. In addition, if any co-owner gets divorced, their spouse
may claim a portion of the co-owner's share in the property.
c. In
either joint tenancy or tenancy
by the entireties, there is no control over the property after
your death. It would go directly to the surviving co owners. in addition,
if all your co-owners predecease you, then the property would not "avoid
probate" nor necessarily be transferred to the persons you intended.
d. Joint
tenancy does not guarantee that all of your heirs would
receive equal shares of your estate. Certain parcels of property
or other accounts may appreciate differently or earn different amounts
of income. Without consent monitoring and changing the shares or
interest of the co-owners, it would be almost impossible to guarantee
that all of your heirs receive their intended shares of your estate.
5. The basic
forms of business ownership are:
- Sole proprietorship. A single person owns the business,
receives all tax benefits, and is personally liable for all matters
related to the business.
- Partnership. In a general partnership, all
partners are jointly and severally liable for the acts of
other partners that are performed on behalf of the partnership. In
a limited partnership, the general partners have the same
liabilities as above, while limited partners are usually
liable only to the amount of their investment. In both
cases tax benefits flow through to the partners, with the
allocations not necessary based upon share of capital contribution.
- Corporation. A "person" created
by state law, a corporation has shareholders (owners), a
board of directors, and officers. These three classes
usually overlap. For example, a director or officer
is usually a shareholder and someone can be all three. Shareholders
are liable only to the amount of their investment. Directors
and officers are also protected from corporate liabilities,
but can incur liability if they commit acts that allow piercing
of the "Corporate Veil.? For a regular "C" corporation
tax benefits are not passed through to shareholders, the
corporation is taxed on profits, and shareholders are taxed
on dividends (double taxation). By electing to be an "S" corporation,
certain tax benefits can be passed through to shareholders
and double-taxation can be avoided.
- LLC, Limited Liability Company. The LLC attempts
to combine the benefits of the corporation and the partnership
Pre-Closing Tasks
Licenses & Permits
Depending upon the city, county, and/or state
in which the property is located, it is possible that a variety of licenses and/or
permits might be required for rental properties. Many jurisdictions require
business licenses, with the cost usually depending upon number of units or the
gross income. While these items are not legally required for you until
close of escrow, it is best to know what's needed and have your all your ducks
in a row prior to closing. You also need to know whether any inspections
are required to obtain the licenses or permits. If required, it is best
to have them performed before close of escrow.
Some locations have a rental tax at the city,
county, or state level, some at two or even all three levels. Some jurisdictions
tax only commercial properties, while others also tax residential at the same
or a different rate. The frequency of reporting and paying taxes owed often
depends upon gross income. For example, under a certain total gross rent
for the property requiring quarterly reports and payments and over that amount
requiring monthly.
At least get all the necessary forms and fill
them out so that you can get your account set up soon after closing.
Estoppel Certificates
If closing is delayed, it might be necessary to
get updated amendments to the certificates to cover rents collected since the
previous versions were executed or certain other special changes in circumstances. It
is even possible that a lease could have been amended or a new lease executed. On
this subject, as discussed in the Lesson about writing offers, your purchase
offer should have given you control over any lease changes after its acceptance.
Insurance
While the lender will usually require that insurance
be in place prior to closing, if you are buying with seller financing or cash
you may not be reminded. The insurance required by the lender will be of
minimum coverage needed to protect the lender's position. You will want
a number of additional coverages beyond those minimums, as well as perhaps higher
levels on some coverages. A good insurance agent can advise you on this
matter.
Using an independent broker rather than a company
agent (such as Allstate, State Farm, and Farmers) gives access to a number of
competitive companies. It doesn't hurt, however, to also get quotes from
the company agents, since they are often competitive with or better than the
independents. Because there are so many varieties and levels of coverages
available, be sure that all the quotes are for the same coverages and dollar
limits.
Preview Loan Documents
If at all possible, try to obtain copies of the
loan documents that you will be signing ahead of the time of signing. The
documents are usually many pages of small type and not easy reading. Accordingly,
it is best that you have plenty of time to read them under relaxed conditions
rather than when several busy people are sitting around waiting for your to sign
them. As an alternative, it may be possible, by prior arrangement, to simply
arrive an hour or so ahead of the scheduled signing appointment review the documents. If
it is not possible to review the documents in advance, take your time prior to
signing no matter how many people are waiting.
Pre-Closing Statement
A pre-closing statement showing credits and debits
to each party should be provided a day to more prior to the closing date. You
should check this over carefully, questioning any amounts that you don't understand
or disagree with. It is much easier to correct errors before closing than
after funds have already been disbursed, which usually happens within two or
three hours after recording. In particular, check pro-rations of
rents, property taxes, and interest and be sure that you received credit for
deposits, as you will be responsible to the tenants for them.
Transfer/Initiate Services
Discontinuance of utilities or other services
by the seller before you have them turned on in your name can create havoc
with your relations with your newly-acquired tenants. You can cover this
issue in your purchase contract, but it is usually handled informally without
serious problems. Do, however, make arrangements for transfer of services
with electric, gas, water/sewer before close of escrow so that everything can
be taken care of by a few phone calls. Unless you are already a large
customer, expect to put up deposits for gas, electric, and maybe even water,
the amounts often equal to or 1-1/2 times the historical monthly bill.
There may be services other than utilities that
must be considered. Find out from the seller if he has contracted services
of pest control, landscape maintenance, or other service and remind him to terminate
those services at close of escrow. Be sure to set up the necessary services
in your own name, using your own new vendors or those of his you'd like to use
at least until you have time to evaluate them and/or get other quotes.
After Closing
Check the final closing statement carefully. Again,
in particular check pro-rations of rents, property taxes, and interest and be
sure that you received credit for deposits, as you will be responsible to the
tenants for them.
Contact the tenants - meet them in person and
give them a written notice including payee and address for rent payments as well
as your phone/fax numbers and/or e-mail address for future communications. Also,
if current information is not already on file from documentation provided by
the seller, obtain current off-premises addresses, phone/fax numbers and/or e-mail
address for each tenant, including for emergencies.
Prepare new leases and other documentation for
tenants whose leases expire in the near future. If you are buying pre-1978
residential property and the seller did not have required lead paint disclosure
documents for each tenant as should have been required by your purchase offer,
get them executed immediately. The required pamphlets and forms are available
on the members-only Forms
Web.
File the closing statement where you will be able
to find it when it's time to prepare income tax returns for the year of purchase.
