William E. Wood and Associates, Realtors

A carefully drafted power of attorney is crucial in a real estate transaction if one is needed. Powers of attorney that are not prepared by an attorney can raise questions on whether the principle had legal capacity or certification at the time it was drafted. Attorneys have a legal standard to make sure that when preparing the documents that they know the client and their capacity, and are assured that the principle understands what powers that are authorizing in the document.
The agent is the person that has been given the authority to act on behalf of a person, the one that is giving the authority is known as the principle.
In Virginia, powers of attorney must be enumerated. If it does not say you can do it, chances are you do not have the authority to do it. One example is picking up mail at the post office. The authority must be given to you specifically in the power of attorney.
Even though a power of attorney gives reference to an agent to have the authority to buy and sell real estate, it must also have specific information on the property that was owned at the time it was drafted. Without this information it could cause title companies to not accept the power of attorney. A strong power of attorney will have specific language in it that the principle acknowledges the specific property and the ability for their agent to act on their behalf.
Legal capacity is very different than mental capacity. This is another reason it is very important to work with an attorney to help distinguish a person’s capacity. They can make sure that the right language is drafted pertaining to the durability of the power of attorney. Durability language in a power of attorney means that it lasts throughout a principles disability, incapacity or incompetence if that is their intention.
If the attorney has questions concerning a person’s mental capacity they will refer the person to a doctor to make the decision. If the person does not have capacity to sign a power of attorney they must go through guardianship and conservatorship that will make decisions on their behalf. This is done through court and could take a long time.
Gifting under the power of attorney has guidelines also. The agent has a fiduciary responsibility to the principle. Letha pointed out that even if you are a married couple one party cannot gift to themselves (e.g. putting the house in just their name) without repercussions. Gifting authority must be given by the principle.
If there are questions about one it is very important to have an attorney review it as soon as you’re able to ensure that you have a proper power of attorney to complete the transaction. Powers of attorneys also need to be approved by the lender and the title company. If it is presented on the day of closing it could hold up the closing.

The real estate market over the past year has been impacted due to a number of reasons including the media, political climate, and the economy.  During these times it is very important to expand your business by learning alternative ways to help people buy and sell houses.  A few of them are through 1031 exchanges, purchasing homes using your IRA, and through understanding how to do short sales and foreclosures.

One of the very basic guidelines in doing a 1031 exchange is that you have to exchange property for like property.  Like kind real estate means any other investment real estate other than your personal residence. That can mean exchanges from land to condos to commercial property or anything in between as long as it is investment property.   A 1031 exchange allows you to be in what type of real estate that you want to be in. This program allows the purchaser to defer from paying capital gains tax at the time of the exchange. The depreciation recapture is taxed at 25% and a 1031 exchange allows the tax payer to defer the depreciation recapture as well. A 1031 exchange works well for people that want to diversify their estate and it can also help people simplify their lives.   

The general rules are as follows; the tax payer can never control the money during the transaction.  It must go through an intermediary.  The intermediary will prepare all of the paper work and verify that the purchaser has the right intent, has performed all the functions and has followed all the deadlines properly.  They also hold the funds beyond the taxpayers control which is one of the rules.  At the closing, the intermediary receives the funds and then disburses them to the new property closing.  The owner never touches the money.

          The deadlines are very firmly enforced and the only extensions are due to natural disasters when the IRS might give a blank extension to properties or taxpayers impacted by the disaster.  No extensions are granted for weekends or holidays. The taxpayer will have 45 days from the day of closing to identify the new property and 180 days to close on the replacement property (the 180 days is actually the shorter of (i) 180 days or (ii) the date the taxpayer’s tax return is due, including extensions). The 45 day indentifying period is a part of the 180 day deadline to close.   If the taxpayer has not identified a property on the 46^th day or closed on the replacement property by day 181 the taxpayer will receive the exchange’s proceeds and will not qualify for the delayed tax benefit.

The property must be identified so that it can be located. You cannot describe the property generally as a lot or in a subdivision or a unit in a condominium project.  It must be identified specifically in detail such as an address, unit number or lot number.

The indemnification rule is that the taxpayer can identify up to three properties without having to list a value on the identification.  There is also the 200% rule.  If you want to identify more than three replacement properties then you have to list a fair market value next to each property and the aggregate value together cannot be more than 200% more than the property that you have sold.  So, if you have sold something for $200,000 and you want to purchase 4 properties then the aggregate value cannot be more than $400,000.  Finally, there is the 95% rule that comes in effect if the taxpayer is unable to comply with the previous two rules.  It states if you go over the three properties and over the 200% then you have to purchase 95% of the market value of properties that you identified.

To fully defer your capital gains taxes until you sell the property you need to trade equal or up in value, equity and debt.  You have to sell something at a lower value than what you purchase and transfer the equity to the new purchase and also replace the debt of the old property either with new debt or cash that you’re putting in to the new property.

 Anything that you get with an exchange that is not like kind property is called taxable boot.  If you take cash out either upfront or at the end it is called boot.  You can also have mortgage boot if you are paying off the property that you’re selling and you are not offsetting it with another mortgage or cash greater than the sale.

          The requirement for the contract using a 1031 Exchange is that it is assignable to the intermediary and the parties are made aware of it.  The contract actually gets assigned by the seller to the intermediary on the relinquished property.  This is normally not a problem because the contract does not prohibit the seller from assigning it.  It is advised that you include in the contract verbiage that states “Buyers to participate in sellers’ 1031 like-kind exchange transaction at no expense to buyer” On the new purchase it is important to have the language in the contract notifying the seller that it will be assigned to an intermediary as part of a 1031 exchange and will not affect the seller because most contracts prohibit the buyer from assigning the contract to anyone else.

I wanted to touch briefly on TICS.  They are Tenants in Common Interest Sales that are purchased through a 1031 exchange.  The dealers must be licensed as security dealers and they are sold like stock.  Up to 36 people can do a deal together.  It might be an option if you want to get away from traditional tenant and instead invest in a shopping strip or a big project.

Typically, a lease option is when a buyer does not have the credit to finance and purchase a home so they opt to rent and call the option to purchase later.   A couple of ways to structure a lease option is to have the option available under a lease or to have the buyer purchase the property by a certain date.  It is always better for the seller to nail down the date from the buyer at the point of possession but the lease option is more common. Every situation is different so it is best to have an attorney draft the lease option to the particular terms for both parties.  A security deposit is normally required and the heftier the deposits from the tenant/optionee the better it is for the seller.  The tenant will then have a vested interest in the property and will make it more difficult for the tenant to walk away from the option. Virginia Law requires that there must be some form of consideration when doing a lease option.  The security deposit or money toward the option can be a form of consideration. The security deposit should be held by the seller and not indicated on the HUD 1 at closing.  Most of the time the security deposit is forfeited if the option is not exercised.  The time frame of the option is also very important and depending on the financial situation of the buyers, this could be a few months or up to years.  Once the option is exercised, there must be a mechanism of notice.  If the notice does not meet the requirements, it could give the seller a way out of the contract.  For an example if the property value had risen substantially while being rented.   It is also important to address the right of termination.  It is wise to have language in the option stating that if the tenant is in default of the terms that the option will terminate. 

 Tenants need to make sure the sellers keep the mortgage current and if the seller refinances or anyway encumber the property that the tenant is given notice. A buyer should consider having a covenant in the lease option guarding against the seller impairing the title in any way from the time that the lease option is in place.  The lease option should be recorded to provide protection for the buyer giving third parties notice of the option.  The seller would prefer the option not be recorded because it might prevent the seller from getting additional financing and might present a problem if the tenant-optionee defaults and is not willing to sign a release of the rent option.   If the lease option is for more than 5 years than it has to be in a form of a deed.  However, the lease option does not have to be recorded in order for it to be effective. Option agreements are required by Virginia Law to contain all the disclosures required for it to be binding. 

There are not hard and fast rules for when the price is determined for a lease option.  The buyer normally wants the price locked down at the point of the lease and the seller would prefer the right to preserve the price to the later date especially if the lease option is for a long term. The buyer and seller can agree to obtain an appraisal at a later date to help determine the price.

 In a lease option the seller is paid a monthly rent and then the purchase price once the option is exercised.  Agents can try to negotiate an upfront commission or a percentage of the monthly rent.  Unless something else is worked out in advance, the agents are paid at the end of the transaction. 

In many lease options there are possession agreement.  There are two types of possession agreements.  Pre settlement possession (where the buyer takes possession before closing) and post settlement (where the seller stays beyond closing).  Several suggestions are made depending on which party is being represented.   A license agreement instead of a possession agreement is recommended when representing the seller.  This way the buyer has more of a limited authority and would not be perceived as a tenant landlord relationship.  For example; giving the buyer license to use the property to store their belongings rather than giving them possession to the property.  This gives the seller a stronger position if there is a default. A security deposit is recommended and if you are the party granting possession, it is recommended that you get as large of a deposit as you can.  Rent fees are often based on the PITI of the property and are always negotiable.  If it is a pre- settlement possession, make sure that the buyer completed a walk though before the possession and waives their rights to the walk through at closing.  If it is post possession the seller should do a waiver of claims on the buyer.  The buyer might have a provision that the seller will deliver the property in the same condition as before and remedies for any breech. 

 Make sure that the proper insurance policies are in place for both the property and the possessions.  It is suggested that there be an indemnity agreement where either party holds the other one harmless if there is any injury or property damage on the property while they are in possession.  It needs to be spelled out who is responsible for utilities and maintenance and the covenence of the homeowners association while having possession of the property.  There should be a provision for surrendering default that requires the party in default to surrender and pay some kind of steep penalty.  This way it will force the defaulting party to move out of the property sooner.

 When buying a home that has tenants in it, the buyer should have the seller represent and warrant certain things.  For an example; that the rent payments are current, there are no defaults under the lease agreements, no rents were paid in advance, no parties are in possession that are not under written leases and that the tenants and seller are not in default in any other way.

At closing, you should get the original leases, a letter certifying that the tenants have been given notice of change the address for the rent payments, all security deposits and a pro-rated payment for that month’s rent.