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How can lender dictate commission agreeement?

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POSTED June 27, 2013 9:49 p.m.

Q:  I am a real estate lawyer in practice for over 36 years and in the last three months encountered a new situation for which I find troubling. Both closings I conducted were lot purchases as part of a construction/perm loan. In both cases the realtors were to split a 10% commission. The lenders were not the same. The lenders, citing a fed regulation said the commission could not exceed 8%. How can a lender dictate the commission agreed to by the seller and realtors neither of whom have any relationship with the lenders? Hal.
A: Hal. Based on my research, there is no federal regulation that limits real estate commissions. However, I suspect this was just the lenders’ or perhaps their investor  requirements.
But as you told me, banks follow the golden rule: “we have the gold and we rule”.
Q: It has been the practice at our condominium for the Board to permit independent contractors to work on our common elements without proof that they are licensed or that they are properly insured (workers comp. and liability coverage). Everything  I have read insist that it is important that the association  not operate in this manner. There appears to be the added problem that if an “independent contractor” is injured, the cost of his medical care and disability could become the liability of our association. I am concerned about continuing this practice. Even with liability insurance in our Master Condo Policy, this may be a situation that could result in real hardship on all of our Association Members and particularly on the Board Members.
Our legal documents require that our Board approve an expenditure before it is incurred. For this reason, I am asking you 1) Do you think that the board should proceed with a legal opinion of our procedure for hiring contractors to work on our Common Element? 2) Can you give us an estimate of the cost that we would incur for you to proceed with this matter?  Jimmy.
A: Jimmy. Thanks for asking for my assistance, but I do not mix my column writing with my legal practice. I am sure that your board will be able to find a competent community association attorney in your area to assist you – if you really need such assistance.
Frankly, I don’t think you have to spend any money on a legal opinion. It is “condo 101” – or for that matter “common sense 101” – that when anyone hires a contractor, he/she/it must be licensed in your state and must have proof of insurance.

The association’s insurance agent – who handles your master policy – should be able to provide you with the guidance you need to   protect the association, including all board members.
And when you hire a contractor, for jobs over an amount – say $3000 – a written contract must be entered into. Too many contractors use what I call the “two page special”; it spells out a price, gives little detail as to the scope of work, and states that the association (or the homeowner) will be responsible for attorneys fees should they default in payment.
That’s not adequate. Good contracts can be obtained from the American Institute of Architects (AIA.org). They should contain, at a minimum, (1) exactly what work will be done, (2) when it will start and when it is projected to be completed, (3) how payments will be made, (4) what rights do you have if the contractor is in default, and (5) should you litigate or arbitrate if there is a dispute and in either situation, the prevailing party will be entitled to attorneys fees and costs.
Q: I wanted to ask your help and advice on a possible short sale with a property I own.   I have a 1 bedroom  condo as a second home that I am upside down by probably $50,000. Even though it is rented, the mortgage and carrying costs are just killing me. I have been current on the mortgage payments but I don’t know how much longer I can keep up, as things have changed, i.e. retirement, cost of living, another condo that I own outright, as well as our principal residence.
I was thinking about a short sale for this property but I’m not sure about the banks attitude of the forgiveness of the remaining debt and the tax liability where this is not my primary home. I could not afford to pay any taxes due to the forgiven debt if that was the case, or even the bill for the amount of debt if it is not forgiven by my lender. Even if I was to sell this other condo it would probably be worth maybe $70,000.00.
Any helpful advice would be greatly appreciated.  Steve.
A: Steve.   There is an interesting provision in the tax law: if your debt is forgiven, cancelled or discharged, unless you meet one of five exclusions, you have to pay income tax on that amount. The exclusions include (1) bankruptcy, (2) insolvency, (3) qualified farm indebtedness, (4) qualified real property business indebtedness and (5) qualified principal residence indebtedness.
Clearly, your underwater condo cannot be your principal residence. And while I cannot provide specific legal, financial or tax advice, it may be that it will meet the requirements of number 4 above. According to the IRS, “you can elect to exclude cancelled real property business indebtedness” if it meets all of the following: (1) the debt was incurred before 1993 or after 1992 is on property you use or hold for the production of income, including rental income; and (2) the debt is secured by that real property – i.e. there is a deed of trust (or mortgage).
For more information, get a copy of IRS Publication 4681, entitled “Canceled Debts, Foreclosures, Repossessions and Abandonments” (irs.gov/publications).
A RESPONSE FROM A READER: I have just finished reading your article about Timeshare scams. I wanted to thank you for it. It was right on target. I havebeen fighting off these scammers for 3 years already and have a lot of experience dealing with them. They have improved their spiel dramatically over this time and are harder to ferret out.
If you ever write about this again, please inform your readers to document everything and forward the info on a handy complaint form provided on Florida Attorney-General’s web-site  to her office. She goes after them and shuts them down.
On information that I provided, probably together with other people, She has shut down 4 scammer operations in the last 2 years. I have also found that Delaware, Arkansas, California Washington and Iowa are very responsive. These time-share sales guys and gals are very clever. They go to another state and set up operations all over again with changed names and company names. After this much time I recognize their voices on the phone. It is the same people all over again.
No wonder, the latest one, from Key West, told me he was making $18,000 per week average. Better than you and me. Anyway, thanks for your article. Ed.
A:    Ed. Thanks for writing. Your advice to document everything and send your complaint to the various state Attorney Generals is a good one. However, my advise is to be careful before you buy. Get a copy of any documents the time share salesman wants you to sign, and have it reviewed (before you sign) by your attorney. If the salesman does not want to let you review (which unfortunately is often the case), thank him/her and walk away.

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