Category: Residential Transactions

TAX PRORATIONS IN A REAL ESTATE CLOSING: AN EXPLANATION BEHIND THE EQUATION.

TAX PRORATIONS IN A REAL ESTATE CLOSING: AN EXPLANATION BEHIND THE EQUATION.

If you are buying or selling a house, one of the more complicated issues you may encounter is the real estate tax proration.  Properties in Illinois are subject to taxes set by the county in which the real estate sits.  The paid taxes are distributed to the local government.

Real estate taxes are paid in “arears.”  This means that in the year 2021, you are paying the taxes for the year 2020.  Tax bills are payable twice a year in two installments.  If your property taxes are $2,000 per year, you receive a bill for $1,000 generally due in June, and a bill for $1,000 generally due in September.

If you are buying or selling a house, the taxes should be prorated based on the amount of time the seller lived in the house prior to the sale.  In other words, the buyer should not have to pay property taxes during the time that the seller occupied the property.

A tax proration is not necessarily a difficult calculation.  But it can seem tricky without an understanding of the underlying equation.

First, most real estate purchase contracts prorate taxes at a rate of 105%.  This is because taxes generally increase each year.  A higher percentage is better for the buyer because it causes the seller to pay a larger credit to the buyer for past taxes.  In some counties, such as Cook County, a proration of 110% is standard because taxes tend to increase in Cook at a faster rate than in other Illinois counties.

For example, if you are buying property in an Illinois county other than Cook, the real estate taxes on the property you plan to purchase may be $2,000 per year.  To calculate the taxes to be prorated, multiply the yearly taxes by 105%.  Then, divide that number by the number of days in the year.  The sellers should be responsible for the amount of unpaid real estate taxes for the number of days that they lived in the property prior to the sale date.

The equation is as follows:

$2,000 in real estate taxes per year;

x 105% = $2,100;

$2,100 / 365 = $5.75 per day in taxes.

 

Assume that the closing transaction occurs on March 31, 2021.  Remember that the property taxes due in 2021 are actually paying the taxes from the year 2020.  As a result, the seller should provide the buyer a credit for the entire 2020 taxes when the seller lived in the property.  The seller also needs to provide the buyer with a credit for the portion of the 2021 year that the seller continued to occupy the property.

For the year 2020 taxes, the seller would owe the buyer a credit of $2,100 ($2,000 x 105%).  In addition, the seller owes the buyer a credit for the time the seller lived in the property in 2021 – January, February, and March.

The daily property tax amount is multiplied by the number of days in January, February, and March: $5.75 x 90 = $517.50.  The total credit that the seller must provide to the buyer would be the $2,100 in unpaid taxes for the year 2020, plus the $517.50 for taxes in the year 2021 when the seller occupied the property, or $2,617.50.

As a result, when the buyer pays the year 2021 property taxes in 2022, the buyer is only paying for the portion of 2021 that the buyer lived in the property.

The following is another example.  Seller and buyer agree to a closing transaction on July 31, 2021.  Seller already received the bill for the 1st installment of the 2020 taxes and made a timely payment in June 2021.  This payment covered the taxes through June 2020.  But seller still lived in the property from July 2020 to December 2020, and until July 31, 2021.

As a result, and at a 105% presumed increase, the equation would look as follows:

$2,000 in real estate taxes per year;

$1,000 was already paid by the seller for the first installment of the year 2020;

$2,000 – $1,000 = $1,000 x 105% = $1,050;

$1,050 / 365 = $2.88 per day in taxes;

$2.88 per day * 214 days that the seller lived in the property for the year 2020 (sub-total $615.62);

plus $2.88 per day * 182 days that the seller lived in the property for the year 2021 (sub-total $1,046.50);

with a total of $1,662.60 owed as a credit to the buyer at the closing.

If you are buying or selling a home, local attorney Andrew Szocka provides thorough and speedy real-estate assistance in the Chicagoland area.  To schedule a free initial consultation, visit Andrew Szocka, P.C. online or call the office at (815) 455-8430.

 

REO CLOSINGS: WHAT ARE THEY AND HOW DO THEY DIFER FROM A TYPICAL REAL ESTATE TRANSACTION?

REO CLOSINGS: WHAT ARE THEY AND HOW DO THEY DIFER FROM A TYPICAL REAL ESTATE TRANSACTION?

If you plan to purchase real estate via an REO Closing, you should know what to expect and the differences between an REO Closing and a “regular” buy-sell property transaction.

“REO” stands for “real estate owned.”  This term describes a class of real property that is typically owned by a bank or government funded agency.  Fannie Mae and Freddie Mac are two of the most well-known government funded entities (referred to as “GFEs”) and they act as an investor on many loans provided in the United States.  As the investor behind a loan and under Illinois law, GFEs also own the mortgages that secure their investment loans.

Next, it is important to understand the difference between a “lender,” “investor,” and companies that are referred to as mortgage “servicers.”  The lender is the bank that gives the original loan, but then typically sells that loan to a GFE or other investor.  As a result, most loans are owned by GFEs or large banks that operate as investors.  The servicer is a company that is paid to temporarily hold the mortgage that secures the loan.

When an individual does not pay back a loan used to purchase or re-finance a home, the mortgage that secures the loan can be foreclosed.  The foreclosure action is brought by the servicer.  A completed foreclosure results in a foreclosure sale where the property is sold, usually back to the investor.

The investor then proceeds to sell the home to an independent third party.  This process is a REO Closing, and as a home buyer you may be that independent third party.  There are some important differences between and REO Closing and what one may consider a “regular” transaction to buy or sell a house.

First, a typical Illinois closing uses the most recent version of the Illinois Multi-Board Residential Real Estate Contract (the “Illinois Contract”).  This contract is designed to be generally fair to both the property’s buyer and seller.

At an REO Closing, you will likely be required to sign the investor’s contract.  An investor contract is generally more favorable to the investor than the individual or entity purchasing the property.  Although each investor’s contract is different, most have terms that protect the investor in three key areas: 1) the return of earnest money, 2) the level of title insurance provided, and 3) the condition of the purchased property.

 

First, with a “regular” closing pursuant to the Illinois Contract, the party that breached the contract is required to refund, or faces forfeiture, of the earnest money.  An investor contract may not provide a buyer with an opportunity to obtain an earnest money refund if the REO Closing is not successfully completed.

Second, be aware of the level of title insurance that the investor/seller is providing.  A typical Illinois Contract requires the seller to purchase an owner’s policy of title insurance for the buyer.  But as with all insurance, some policies are better than others.

Many investor’s contracts require the investor/seller to purchase only “basic” title insurance for the buyer.  This differs from an Illinois Contract which requires the seller to provide an “extended” title insurance policy.

The main difference between a basic and extended title insurance policy is that an extended policy insures over liens, easements, and encroachments that are not part of the public record.  A basic policy does not.  The cost to purchase a basic policy is cheaper than an extended policy, which is why the investor/seller may include this provision in an REO Closing contract.

Finally, it is likely that the investor’s contract will make no warranties or guarantees as to the condition of the property.  The investor has not lived in the property prior to its sale.  As a result, the investor is unlikely to provide any warranties as to the property’s condition.

If you are thinking about entering into an REO Closing contract, local attorney Andrew Szocka provides thorough and speedy real-estate assistance in the Chicagoland area.  To schedule a free initial consultation, visit Andrew Szocka, P.C. online or call the office at (815) 455-8430.

 

Residential Real Property Disclosure Act

Residential Real Property Disclosure Act

The Residential Real Property Disclosure Act (765 ILCS 77) was passed in 1998 to protect home buyers from sellers who falsely report conditions of their property during a real estate transaction. The disclosure act is intended to provide buyers with a reliable representation on the major conditions of the property. Under this act, the seller has to deliver to the prospective buyer a written disclosure statement before the signing of a written agreement between the seller and the prospective buyer. The goal of the disclosure is to report any damages or material defects to the residential property.

According to the Act, material defects are required to be disclosed by the Seller. Based on a disclosed material defect, a prospective buyer may terminate the contract 3 business days after the receipt of the report (765 ILCS 77/40). Some Sellers fail to disclose material defects to the Buyers, which may result in a Buyer seeking damages. The Act provides a remedy for damages acquired by a prospective buyer of the residential property who discovers false information on the disclosure report before the closing transaction. If a seller knowingly violates the Act, “…he…shall be liable in the number of actual damages and court costs, and the court may award reasonable attorney fees incurred by the prevailing party.” (765 ILCS 77/55)

Under this disclosure act the seller is not liable if (1) the seller had no knowledge of the error, (2) the error was based on reasonable belief that a material defect had been corrected, or (3) the error was based on information provided by a licensed professional. In order to complete the disclosure statement, the seller is not obligated to make an investigation or inquiry into any defects. (765 ILCS 77/25) The seller does become liable if he or she fails to provide the disclosure. The disclosure document must be provided prior to the transfer of the residential real property. If the seller refuses or fails to provide the disclosure, the buyer does have the right to terminate the contract.

If you need assistance with a real estate transaction, local attorney Andrew Szocka provides thorough and speedy real estate transaction assistance in the Chicagoland area. To schedule a free initial consultation, visit the Law Office of Andrew Szocka, P.C. online or call the office at (815) 455 – 8430.

Landlord Leases: How to Protect Your Property and Finances

Landlord Leases: How to Protect Your Property and Finances

Being a landlord includes many challenges. While facing those challenges, it is critical to protect your property and your finances. Bad tenants can result in damages to your property which will incur costs, sometimes in the thousands. However, you can protect your property and finances from bad tenants by writing a good lease.

The Basics

First, remember to have your basics in the lease.

  1. Who is the Lessee?
  2. What time period is the lease for?
  3. How much are you to be paid?
  4. When will you be paid?
  5. Who is responsible for the utilities?

Those are only a few of the basic questions you must ask yourself when preparing a lease. After the basics are laid out, it is time to go into detail.

Always Be Specific.

Beyond the basics, it is important to be specific in the lease just like any other contract. For example, if you do not want pets on your property at all, then make sure that is explicitly stated in the lease. In order to deter tenants from doing what you do not want them to do, make sure the consequences are clearly outlined. For example, if you say that no pets are allowed on your property, then stipulate that there will be a fine for breaking this rule if that is the consequence you choose.

Attorney’s Costs and Fees

The biggest deterrent, and a clause that should always be present in a lease, is that the tenant will be responsible for attorneys’ costs and fees if you must use the legal route to recover money or compensation for damages done by the tenant. Without this clause, you could end up paying for the legal fees out of pocket. The tenant will not be obligated to pay this unless it was stated in the lease. This clause in the lease protects you financially and should always be included in the lease.

Like any other contract, it is in your best interest to have the lease in writing and signed by all parties living on the property.  While many landlords choose to write their own leases, it is never a bad option to have a lawyer write up a lease for your protection.

If you are interested in having an attorney draft a release for your rental property or properties, local attorney Andrew Szocka provides thorough lease writing in the Chicagoland area. To schedule a free initial consultation, visit the Law Office of Andrew Szocka, P.C. online or call the office at (815) 455-8430.

MyDec – Real Property Transfer Tax Declaration

MyDec – Real Property Transfer Tax Declaration:

During any real estate transaction, a tax is imposed to transfer the title of real estate (35 ILCS 200/31-10). In order to facilitate this transaction, a real property transfer tax declaration must be completed by the sellers. The transfer declaration must be presented when the deed or trust document is presented for recording, or within 3 business days after the transfer takes place.

The Illinois Department of Revenue recommends the use of the online filing program called MyDec (MyDec – Online Real Property Transfer Tax Declarations – Property tax (illinois.gov)) to calculate these taxes and to make the declaration.

Through MyDec, the transfer taxes for both the state and the county are automatically generated based on the purchase price of the property. You can review and verify declarations as well as authorize and print real estate transfer tax stamps. You will also be able to run reports on the declarations in your jurisdiction. However, each county has their own requirements for transfer taxes, so always confirm with the county what must be done prior to the closing. Regardless of individual county requirements, MyDec can be used for any county in Illinois.

Title companies, lawyers, individuals and settlement agencies are able to use MyDec too. Title companies use this to calculate the taxes when closing on a property. Title companies can submit, approve, or reject declarations. However, the MyDec tax calculations are paid at the closing. Once the sale is complete, the title company approves the MyDec filing. Attorneys can file the MyDec on behalf of their clients, the sellers.

Information included in the transfer declaration includes:

(a) value of the property

(b) parcel number (PIN),

(c) legal description of the property,

(d) the date of the deed, the date the transfer was affected, or the date of the trust document

(e) the type of deed, transfer, or trust document

(f) the address of the property

(g) the type of improvement if applicable

(h) information as to whom the transfer is between

(i) the lot size or acreage

(j) the value of the personal property sold with the real estate

(k) the year the contract was initiated if any installment sale

(l) any homestead exemptions

(m) the name, address, and telephone number of the person preparing the declaration

(n) whether the transfer is pursuant to compulsory sale

 

If you need assistance with a real estate transaction, local attorney Andrew Szocka provides thorough and speedy real estate transaction assistance in the Chicagoland area. To schedule a free initial consultation, visit the Law Office of Andrew Szocka, P.C. online or call the office at (815) 455 – 8430.