My Favorite Uncle Retired to Florida and Here’s How I Helped
By: Michael Rothman, Esq.
I heard from my favorite uncle last week. He’s found a property in Deerfield Beach, Florida, just up the road from where I am, and is ready to submit an offer to purchase. For the past 30 years, he and my aunt have lived the rent-stabilized lifestyles of Upper East Side New Yorkers and are finally ready to retire to Florida. My uncle went on and on about having his own study and a “real” backyard to grill for friends, which I found strange because my uncle doesn’t know a soul in Deerfield Beach and tends to study nothing more than baseball box scores. I didn’t have the heart to tell him that the south Florida barbeque season lasts about six weekends, what with the afternoon thunderstorms, oppressive humidity and the terror-inducing mosquitos. He’d learn soon enough.
I would know. I’ve been in south Florida since Reagan was sworn-in and have been a practicing real estate attorney in Ft. Lauderdale for more years than I care to remember. The reason for my uncle’s call – besides bearing news we’d soon be grilling, sweating and swatting together - was to “get my opinion” (i.e. free advice) on the FR/Bar form purchase and sales contract his real estate agent, Karen, had just prepared and e-mailed him to review. This is the “form” contract that is widely used in Florida, although it comes in different variations. While it’s normally a rule of mine not to represent family members, I made an exception for my favorite uncle, with the only stipulation being that he cook me a porterhouse at his first backyard soiree.
Submit an All-Cash Offer or Insist on a Mortgage Financing Contingency?
It quickly dawned on me that my uncle knows little about buying a house. He is an on-the-ball type, however, and told me he had already gotten himself “pre-approved” by a mortgage company. I began our talk by pointing out that Karen, the selling agent, had checked-off that the offer was all-cash. Didn’t he want a financing contingency?
“Karen asked me if we had the funds available to close without a mortgage,” my uncle explained, “and I told her that we did but wanted the option to explore maybe getting a small loan. You know, rates are so low these days it’s practically free money. But Karen said with all the people interested in this house our best bet was not to include a financing contingency.”
I considered what he said. It’s true that all-cash offers are almost always deemed preferable to sellers.
“If we make it an all-cash offer, can I still get a mortgage loan?” my uncle asked.
“Yes, you can,” I said, “under the FR/Bar contract, even with an all-cash offer the buyer can still use mortgage financing. The trick is you can’t back out and cancel the contract on grounds the loan didn’t go through. So, are you truly comfortable closing all-cash if for whatever reason your loan doesn’t get approved?”
“I am,” he answered. “I’m okay with not having a financing contingency, but I’m glad to know that I’m not precluded from getting mortgage financing.”
Will the Offer be Subject to the Property Appraising?
My uncle’s offer is top-dollar and I’m concerned that in his eagerness to beat-out competing offers he might be overpaying for the property. When obtaining conventional financing, mortgage lenders typically condition the loan on the property appraising for at least the selling price and buyers may be able to cancel the contract if the property fails to appraise. In my uncle’s case, where he was not asking for a financing contingency, the rules are different.
“Okay, uncle, even if you choose to go without a financing contingency, you might want to consider adding language about being able to cancel the contract if the house doesn’t appraise. I know you really want this house but are you willing to pay more than what an appraisal says it’s worth?”
“Hold on,” my uncle countered, “If I choose to go with the all-cash offer but want to get a small bank loan, can I back out of the contract if the bank’s appraisal comes in below the contract price?”
You cannot, I told him. Since it’s an all-cash offer what happens between you and your mortgage lender is your problem.
“I get it. Making an all-cash offer means that I can’t use the bank as an excuse not to close. But let’s forget about the bank and assume I pay all-cash. Can we condition our offer on not having to close if I get my own appraisal and it comes in for less than the selling price?”
You can, I explained, but it will make your offer less attractive than one made without such a contingency.
“Let me talk it over with your aunt. I think we are okay with the price, even if it’s for more than what an appraisal says it’s worth. We really want this house. Wait until you see the backyard grill I’m going to install. Is there anything else we need to discuss?”
Which Form Contract to Submit – the “As Is” or “Repair Clause” Contract?
In most of the state of Florida, residential properties are bought and sold using the FR/Bar contract, a rather evenhanded form contract jointly prepared by Florida lawyers and realtors. There are two versions of the form. The most commonly used form is the “As Is” version. With the As Is contract, the buyer accepts the property in its current condition and can’t require the seller to repair defective items; however, the buyer is afforded a set amount of time (usually 10-20 days) to inspect the property (the Inspection Period) and is given the unilateral right to cancel the contract for any or no reason during the Inspection Period.
The alternate form contract is the “Repairs Clause” version. Here, there is no unilateral right given to the buyer to cancel. Instead, the parties agree that the seller will pay for the repair of defective items revealed by the buyer’s inspection report. The seller will be required to pay for repairs up to a capped amount (typically 1%-3% of the sales price) as negotiated by and agreed upon by the parties at the time of signing the contract, before the inspections are done. (In Florida, unlike some other states, the contract is negotiated and signed, and then the buyer does his inspections.) So long as the cost of repairs are less than the agreed-upon cap, the seller must make the repairs and the buyer must close. There are few, if any, ways for the buyer to cancel the contract.
“I see Karen prepared the Repairs Clause contract, not the As Is version. Did you discuss this with her, uncle? I also see that she capped the seller’s exposure to make repairs at $1,500.00, which is pretty low, in my experience.”
“She said it would make our offer even more attractive and that we should call her to discuss her reasoning,” said my uncle. “But I have a question for you. It has to do with who pays for the cost of the title insurance. It looks like it’s a buyer’s cost. Do I have to pay that expense?”
Who Pays for the Cost of the Title Insurance? And What Does It Cover?
It is the custom in some Florida counties, including Broward County, Florida, where Deerfield Beach is located, for the buyer to select the closing agent and pay the cost of the Owner’s Title Insurance Policy. In other counties, the custom is just the opposite. This meant that as my uncle’s selected closing agent, I will order the Title Insurance Commitment from a title insurance underwriter that I work with, and I’ll be the person to issue the title insurance policies, collect and disburse all funds, including for the payoff of the seller’s mortgage, and otherwise have primary responsibility for handling the transaction as a whole.
“Can I ask the seller to pay the cost of the Owner’s Title Insurance Policy?” my uncle inquired. “And do I really need to buy an Owner’s Title Insurance Policy? Can’t you just review the records and tell me that everything is fine? I trust your opinion.”
“All fair questions,” I replied. “You can try to shift the cost to the seller, but that’s not ordinarily done - and it will certainly make your offer less attractive. Do you need a title policy? Yes, and if you end up getting a bank loan, the bank is going to insist that you purchase for it a separate Mortgagee Title Insurance Policy – it’s a non-negotiable cost of getting a mortgage loan. And before you ask, no, that policy doesn’t protect your equity in the property, just the bank’s interest. But I have some good news. In Florida we have what’s called simultaneous issue rates, meaning that when you buy yourself an Owner’s Title Policy, I can issue the required Mortgagee Title Insurance Policy for as little as $25.00. It’s like a BOGO.”
“I like that!” my uncle exclaimed. “But let’s say I decide not to get the loan. Do I still need a title policy?”
The answer is yes, I advised. No matter how carefully I reviewed the public records and no matter how flawlessly I performed my duties as closing agent, it absolutely behooved my aunt and uncle to protect their ownership interest by purchasing an owner’s title insurance policy.
“Why?” my uncle asked.
“Well, there are certain things that I simply can’t guard against. For example, your sellers bought this house three years ago from the estate of a deceased lady. How do we know the probate administration of that lady’s estate was done correctly? What if she had a child from an earlier marriage that was not included in the probate and that child learns he was cut-out of his inheritance – from a share of the proceeds from the estate sale. He could show up on your doorstep and demand that you get out of “his” house, or pay him off, since he would technically own a percentage of the house. Or how about this … that same deceased lady? She in turn bought the house from a fellow six years earlier. How do we know that the signature of that fellow on his deed is not a forgery? If it was, all subsequent deeds are subject to challenge and you could lose your entire equity in the property.”
“What will an owner’s title insurance policy do to protect your aunt and me in those cases?” my uncle inquired.
A lot, I told him. The title insurance underwriter will hire an attorney at the company’s expense to represent them, and litigate the claim as needed. If it turned out that the claim was legitimate, the insurance company would be responsible to pay all losses suffered up to the “insured amount” – typically the sales price for the property. More often, I explained, it’s the case that the title insurance will involve far less dramatic circumstances, something much more mundane, like the neighbors complaining about the placement of a fence.
“Okay, I’m sold. Please call Karen and figure out why she prefers we submit the Repairs Clause contract and not the As Is version.”
A Discussion with the Real Estate Agent
I haven’t previously worked with Karen, but she has a solid reputation in town as a smart and hard-working agent. It’s critically important for homebuyers to use an agent that really knows the ropes, understands the market and has a good network of connections.
I asked Karen why she elected the Repairs Clause form contract.
“For your uncle’s offer to be accepted, he needs to submit the strongest offer. There’s going to be multiple top-dollar bids on this property. Your uncle told me that he didn’t need financing, so that already makes our offer attractive,” Karen explained, “and going with the Repairs Clause contract makes good sense here.”
“Why’s that?” I asked.
“The sellers need to close. They’re building a home in the suburbs of Las Vegas and are banking on these funds. Their new place is about done and they’ve got their closing coming up.”
“I get it,” I said, “they don’t want to risk losing another few weeks while a buyer decides to proceed under the As Is contract.”
“Correct. And then there’s this: did your uncle mention that this home was under contract until a few weeks ago and then came back on the market? The listing agent sent me a copy of the buyer’s inspection report from the deal that just died. It’s super-clean. No major defects. I don’t know why those buyers canceled, but it wasn’t because of their inspection report.”
I liked Karen’s thinking. Knowing that the sellers were highly motivated and that the house had recently passed inspection, it made sense to go with the Repairs Clause contract. In this case, the sellers had reason to believe that my uncle’s inspection report wouldn’t find any issues. My uncle would be locked into proceeding, which would not be the case with the As Is contract and its built-in super-power allowing the buyer to cancel for any reason during the Inspection Period.
“And you probably noticed that I capped the seller’s exposure to a very reasonable amount,” Karen added. “Between not giving your uncle a period of time to cancel, limiting the seller’s out of pocket exposure for repairs, making the offer all-cash and proposing a fast closing date, I like our chances.”
I had to agree. And as Karen predicted, the offer was accepted. We were on our way towards closing. Nevertheless, I cautioned my uncle not to go out and buy that gas grill just yet. I’ve been doing real estate closings long enough to know that … stuff happens.
Summary
- Relocating seniors and retirees new to an area need to do their research when choosing a real estate agent to work with. In Florida, the seller typically pays all real estate brokerage fees, so costs should not factor into the decision. If your online research has narrowed your focus to a handful of properties, seek out an agent with experience buying and selling homes in the area in which those properties are located. Ask the agent if he or she knows the listing agents and if they’ve worked successfully worked together previously.
- In Florida, real estate agents can and oftentimes do prepare the real estate contract. Speak with your agent about the form of contract that will be used to make your offer. Involve a knowledgeable real estate attorney before you sign the contract. As this article demonstrates, the near-automatic default by many agents to use the As Is contract may not be best in all cases.
- If using the "As Is" form contract, bear in mind that the buyer must timely decide to either cancel the contract or proceed with the transaction by the contractual deadline. Recent Florida case law makes clear that a buyer can’t have it both ways: a buyer can’t condition his willingness to proceed on the seller making repairs.
- If utilizing the Repairs Clause contract, understand that the seller is only required to repair non-functioning items, not items that are not aesthetically pleasing. A refrigerator that has dings and permanent stains but otherwise functioning is not deemed a defective, non-functioning item.
- If financing is needed, learn more about the terms of the financing contingency. It can be confusing. Further, getting “pre-qualified” for a loan is no guarantee that the bank will indeed make the loan.
- In Florida, both real estate attorneys and non-attorney licensed title agents are permitted to issue title policies and otherwise handle real estate closings -- but only an attorney can give legal advice.
- Ask the settlement agent to explain to you what is revealed on the Title Insurance Commitment. Are there easements affecting the property (e.g. in favor of the County or power company) and where are they located? Will municipal or community setback requirements impact plans for home improvements? Ask the settlement agent to order a new boundary survey and insist that the surveyor plot setbacks and easements revealed by the Title Insurance Commitment on the survey map. Will these or other recorded restrictions impact on plans to add a spa, pool or other additions?
About Michael Rothman
MRothman@TheFund.com
Michael Rothman, Esq. is Legal Education Manager for The Fund, a division of Old Republic Title. He is responsible for the production and delivery of all legal education materials for the 4,000 or so Fund Members in Florida, including accredited webinars, in-person and online training classes. Prior to joining The Fund in 2018, Michael was partner in the Miami law office of Rothman & Tobin, P.A., where he handled residential and commercial transactions and litigated real estate and other commercial cases in Florida’s state and Federal courts. He has also served as expert witness and trial consultant in many Florida cases.