Traps for Unwary Real Estate Buyers

I was asked to briefly summarize some of the legal considerations that a buyer might keep in mind while venturing into the real estate market in Washington. I think something like this might prove to be helpful so long as you keep in mind that this is not a comprehensive list of all possible difficulties. Here is a short list of legalities that might be helpful to buyers of real estate to keep in mind.

New Construction. Washington has an extremely harsh “statute of repose.” Six years after the final permit is issued all recourse against anyone working on the project is barred, exect as to damage that has already arisen.

If for example you buyer a building, or bridge that collapses six and one half years after the last permit, you have no recourse against anyone in the construction industry.

The Washington statute of creates false expectations in the minds of consumers.

If you buy a building with a useful life of forty years you expect it to last that long. In Washington you can only count on six, assuming that you are buying a new building. If you are buying a used building, it is very likely that the six years have passed and you have no recourse whatsoever against anyone involved with the construction of it.

People who spend money to retrofit buildings , to make them earth-quake proof, must remember that they have no recourse against the engineers or builders if the work is faulty, assuming that the earth-quake occurs more than six years later.

This puts a premium on investigation and study before buying. It also puts a premium on the purchase agreement and the ability to look to the seller if there are latent defects. With respect to construction, owners should consider taking these things into account in negotiating contracts.

Building Codes. Many residential buyers put stock in representations that the building complies with code or they just rely on the fact that the building had to be inspected and approved by local government before it could be occupied. This does reduce the chances of defective construction but it is a long way from assuring the purchaser that the construction is not defective and there is no assurance that the building in fact complies with code. There is no recourse in the usual case against the city or county if the building was approved in spite of noncompliance — and this happens.

Form 17. The Seller’s Disclosure Statement required in residential sales has recently been interpreted (see my last entry) as unenforceable by one of our three courts of appeals. This can be cured by modifying the standard forms, but it certainly opens the door to using the form as a tool of deception.

Bad Materials and Workmanship. There are a number of cases in Washington in which purchasers have been held to be without recourse when the property they purchased was defective. The “economic loss rule” is invoked to hold the buyer without recourse. This result can be avoided contractually.

Verbal agreements. The form purchase and sale agreement in common use says that there are no other enforceable agreements. That means that agreements — even written agreements — outside the purchase and sale agreement are at least of questionable enforceability.

“Merger into the Deed.” When the transaction closes many of the terms and conditions of the agreement are terminated. Discovery after closing of a false representation may be too late if the representation or assurance is deemed to have been merged into the deed. This can be avoided by care in writing the contract.

There are of course other issues that arise but this at least gives you a sense of the care that must be taken in protecting an important investment such as buying real estate.

Please note that in the last legislative session a very modest bill was introduced to confer limited rights on home buyers. The bill was killed by the Democrats, particularly Frank Chopp.

Don’t Buy Foreclosed Property From Dirty Lenders

There is a hidden risk in buying foreclosed property that nobody seems to be talking about.  Many of the houses being foreclosed upon were subjected to liens securing sub-prime loans.  Many of these loans were made by disreputable lenders, sometimes by now indicted loan officers.

In Washington, like many other states, the purchaser at a foreclosure sale takes the title that existed at the time that the loan was made and the deed of trust recorded.  If the lender had nothing to do with any deceit on the owner and was not on notice of any irregularity, then the lender is deemed a “bona fide purchaser for value.”  This is a legal term meaning that title cannot be recovered by the owner, even if there was fraud.  When the lender was involved in the fraud or had reason to know of it, then the owner can clear title of the deed of trust and the ownership interest of the purchaser at the foreclosure sale.

Thus, a truly prudent buyer at a foreclosure sale or purchaser from a bank after foreclosure should check to see which lender made the loan originally.  Only after finding out about that lender can the purchaser have comfort that title cannot be reclaimed by a defrauded or deceived owner.

Contracts for Custom or Restoration Auto Shops

Generally speaking restoration and custom auto shops have a contract form that is taken off the shelf and used for each customer. This practice can turn out poorly for both the customer and the shop. Sometimes shops have contracts that are so one sided that that a court won’t enforce them and the customer is actually benefited. Furthermore, because the shop owner is responsible for the writing of the contract all ambiguities in it are resolved in favor of the customer. On the other hand the customer can find himself to have waived his rights and to have bound himself to something far from what was understood at the time of discussions. It benefits both sides to have the contract actually fit the parties’ understandings.

Here are some things that should be considered in each contract: There should be an estimate or ceiling on the cost. This can be left a little loose, like saying “plus or minus ten percent” but every contract involving a substantial amount of work should have a total cost reference point. This ceiling is not worth much without a precise description of the parts and services that will be performed. A good restoration shop will sometimes ask for a fee to provide this estimate as a reliable one takes a lot of time, but a reasonable fee is money very well invested by the customer.

With parts, the contract should state the markup if any. Remember most parts are delivered to the shop, so you should not pay for deliveries or trips to pick up parts without prior approval.

The contract should identify what services will be billed. Some shops bill for time phoning in parts orders and for time correcting errors made by mechanics. If this is not agreeable, the contract should say this.

The contract should say what information will be provided with the bill. Information useful to the customer is the name of the person whose work is being billed and a reasonably precise description of what the person did. Avoid generic entries like “worked on body” or “worked on quarter panel.” All of this should be worked out in advance. It is useful to have the bill indicate the estimate for the work and the percentage of completion. It is important that concerns about the bills be worked out at this stage.

The customer should not waive his rights under the Automobile Repair Act.

There should be a process for change orders and for work that exceeds the budget. It should involve something in writing and it should be agreeable to both sides.

It is a good idea with larger shops to see that the contract contains some assurance about the experience level of the people working on the car.

If the salesperson made representations to the customer, the customer should be sure that those are in the contract.

There should be some date by which the shop can give assurance that the work will be done.

The contract should be clear, objectively verifiable, about the standard to which the work will conform.

A wise customer will have an expert make periodic inspections of the work to report on progress. The contract should provide for this and assure the shop’s cooperation with such inspections.

Affordable Housing; EHB 3142

The state house passed HB 3142 last week (94-1) and sent to the senate HB 3142, which amends RCW Chapter 185A., involving the affordable housing land acquisition revolving loan fund. The bill notes that the time taken to process these loans made prospective fund borrowers less competitive than their for-profit developer counterparts. The Act provides for a 30 day turnaround on loans from zero to three percent for the purpose of providing affordable housing. This fund is a great resource, creating a practical means of providing affordable housing. I’m surprised that greater use is not made of it. Perhaps if this bill passes the senate (the session ends March 13) and is signed by the governor, the fund will receive greater use. The bill’s sponsors in the house are representatives Liias, Chase, Walsh, Ericks, Loomis, Miloscia, Rolfes, Linville, Dickerson, Green, Morrell, Kelley, Wood, Nelson, Santos, Ormsby

Incapacity; Undoing the Transactions of the Elderly

Endicott v. Saul, just decided by Div. I of the Court of Appeals, involves a concern of many children with elderly parents: When do you intervene to insist on a guardian and what can you do to unwind ill-advised transactions? The facts in this case arose just a couple of years after the death of an 80 year old woman’s husband and involved property in aptly named community called Mutiny Bay on Whidbey Island. This case in some respects represents the worst case scenario for those considering intervening. The parent and two couples who were close friends were on one side in the lawsuit and two children were on the other side, asking for a guardian and seeking to have the court set aside a real estate sale. The elderly parent did not want a guardian and joined with her friends in saying that the questioned transaction was legitimate and should not be set aside.

The transaction at issue was the sale of property worth $324,000 to a friend for $150,000, plus expenses of short plat. The purchase and sale agreement acknowledged that the price was below market and stated that the transaction was subject to the approval of the seller’s attorney, which was obtained after a very short meeting with the parent. The court’s recitation of the surrounding facts reads like a daytime television serial.

The court first looked at the matter of a guardianship. In order for the court to appoint a guardian of a person it must determine that “the individual has a significant risk of personal harm based upon a demonstrated inability to adequately provide for nutrition, health, housing, or physical safety.” A guardian of financial affairs is called a “guardian of the estate” and that requires proof of the person’s inability “to adequately manage property or financial affairs.” The court held that there was sufficient evidence to warrant guardianship despite expert evidence to the contrary, saying that incapacity was a legal question, not a medical one.

Looking at the elderly person’s reliance on others for financial assistance and instances of erratic or confused behavior, the court also sustained a protective order under the Abuse of Vulnerable Adults Act.

The court labored over the question of the real estate transaction. It ruled that the elderly person had a confidential relationship with the people involved with the transaction and because of that they had a fiduciary duty to her. This shifted the burden of proof to the buyer to prove that there was no undue influence, a standard they did not meet.

This case illustrates a few things of which people should be aware in dealing with elderly or easily influenced people. First, in dealing with them you purchase something at a price below market value at your peril, particularly if you or anyone acting on your behalf is close to the person. The transaction is not immunized form attack by provisions in the contract or by a brief visit to a lawyer. There must be substantive assurance that the transaction is not corrupted by incapacity or undue influence. If you are watching out for such a person, act quickly if you discern exploitation of their condition. It is best to do something before there is a problem but possible to unravel things that were done inappropriately.

Conveyance of Real Estate

The statute of frauds is an example of the path of good intentions often leading into the thicket of dispair. Washington’s statute of frauds for real estate conveyances (RCW 64.04.10) requires that any agreement to convey land be in writing and that there be a sufficient legal description of it. This was intended to prevent people from falsely claiming that they had an agreement to purchase land or that land had been given to them by oral agreement. Rigid adherence to this rule though has often achieved the opposite result. An insufficient description of the property on an earnest money agreement has allowed people, both buyers and sellers, to escape their written agreements.

In 1949 the Washington Supremem Court decided to take a hard line on this matter and follow the monority of states by declairing that any agreement to conveyland must contain a full legal description, thereby allowing people who used a street address or shorthand description to escape from their contracts.

Because legal descriptions are usually not available when contracts are signed this meant that many, if not most, contracts to buy land were avoidable by either party. Trying to avoid the obvious unfairness of this result courts with increasing frequency started applying exceptions to the statute of frauds, trying to prevent it from becoming an instrument of fraud.

The result has been confusion about whether any given contract of sale is enforceable. Real estate agents started using tax lot numbers, as these were usually more accessible than legal descriptions (which more often than not were meaningless to the parties anyway), thinking that this satisfied the statute of frauds. Recent case law however makes this practice unreliable.

Rodney Tom, a representative from Bellevue, sponsored a bill intended to alleviate the plight of real estate agents and their clients. Senate bill 6514, as amended, recently passed the senate and was sent to the state house. This bill provides that henceeforth the use of tax lot numbers, instead of the full legal description, satisfies the statute offrauds with respect to contracts to convey land.

This is an easy solution, or partial solution, to an ill-advised 59 year old decision.

A New Professional Basketball Lease

Yesterday the Seattle City Council voted to start negotiations for a new long term lease for the Seattle Storm when the sale to local ownership is approved by the league owners later this month.  This was done unanimously and without discord of any kind.  The Council voted to work collaboratively with the women’s professional team, to be owned by four women with a history of civic and community involvement.  Together they will try to make Key Arena a successful venue for their games.

Isn’t it nice to see this sort of thing, instead of the loud strong-arm tactics employed by the Sonics to try to wrench concessions (so to speak) from the City.

Contract Drafting/Review Tip

When writing or reviewing a contract, there is often a section called “Background,” sometimes labeled with an obsolete latin term. This section is mostly overlooked but it can be critical to the deal. It should be used to identify the material facts upon which the parties are relying. These facts are usually too numerous to list, but care should be taken to see that — to the extent possible — critical facts are identified. This makes it easier to avoid the contract if the underlying assumptions are wrong.

A well-written contract will also state which party bears the risk of mistake. Normally this should allocate some risks to one party other risks to the other party.