Allowing Pets in Apartments, Homes and Associations

      With the increased level of pet ownership, issues regarding “faux emotional support animals” (a situation where an owner/tenant is bending or breaking the rules to obtain a pet accommodation when pets are banned) and the need to attract more tenants and buyers, many apartments, landlords and condominium associations have started to adopt pet friendly rules.  If you are considering allowing pets as a landlord or association, you should consider adopting special rules and regulations to control the living and activity of any pet allowed in your property.

     The starting point should be the registration of any permitted pet.  This would include an application describing the pet, its weight, color, breed, sex, vaccination status, county registration and spay/neuter information.  Each owner should also be required to provide a current vaccination and rabies certificate from their local veterinarian.

     A set of rules should be provided to each owner with specific limitations and restrictions.  These could include a requirement for annual vaccination, a limitation on the number of pets (and no guest pets), a limitation on certain breeds; a weight limitation (many owners/associations have a twenty to twenty-five pound weight limit); a leash requirement; a specific place for pet defecation; a solid waste removal requirement and provisions to prevent breeding, noise/barking; restrictions on leaving pets on a balcony or outdoors; restrictions on leaving pets alone for long periods; and a removal policy for any violent or aggressive behavior against other owners and guests.  All Rules should be acknowledged that they have been read by a tenant/pet owner.

     A pet deposit is often a special condition of landlords that permit pets.  The deposit should be separate and apart from the security deposit.  The deposit can be either refundable or non-refundable.  Most deposits are in the $200 to $300 range.  For Associations, a common area deposit can be used to include damage caused by owners and their pets to common areas.

     All pet owners should be required to provide appropriate renter’s insurance which should provide coverage for both damage caused by the pet and for any personal injury caused by the pet, be it a simply excited dog knocking someone over or a vicious cat or dog that bites or scratches someone on the property.  Some basic renter policies exclude or limit animal coverage, especially as it relates to certain breeds, so this issue must be reviewed before allowing certain pets.

      For associations and apartment buildings that have had solid waste issues, it is now common to require DNA registration of all approved pets and to adopt a fine for failing to pick up after a pet goes on common areas.  As part of any approval of a pet, the animal’s cheek is swabbed and the dog’s DNA is registered by a company that provides a monitoring service.  If uncollected feces are found, the solid waste is collected and a small sample sent to the testing company.

     Once tested and compared to the DNA information on file, the testing company can determine if any registered dog is the responsible pet.  Once identified, the pet’s owner can then be fined for the violation plus the cost of the test.  The average cost for a service like this is about $50 per pet at the registration phase and $75-150 to test the feces to determine a match.  Combining DNA testing, fines for violations and Poop Bag Stations can eliminate most issues relating to uncollected waste.

     Proper planning, deposits and rules can go a long way to eliminate most issues relating to allowing pets.  This will expand the pool of buyers/tenants and prevent common problems from hidden pets, faux ESA animals or unregulated animals in places where pets are permitted but no procedures have been adopted.

Michael J Posner, Esq., is a partner in Ward Damon a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County.  They specialize in real estate and can assist landlords and associations in addressing animal issues.  They can be reached at 561.594.1452, or at mjposner@warddamon.com

Guest Blog: Protect Yourself from a Lawsuit by an Unlicensed Contractor

By Richard Lansing

          Every home owner in the country wants to get as much as they can for as little as possible. That is reasonable, but it can lead people down some risky paths. One of those paths, which is quite commonly utilized by first time buyers especially, is the hiring of an unlicensed contractor.

          Some needed home repairs and a simple web search leads a homeowner to get measurements from a gentleman who shows up at your door. He is dressed reasonably nice for a contractor (jeans and a polo), and all his construction equipment looks right. He takes measurements, provides a quote that is almost too good to be true (1/3rd less than the first contractor you called) and the next week he and his crew are ripping out your kitchen sink or replacing the master bathtub.

          What happens when Mr. Contractor gets injured? It might seem “fair” that he’d have to pay his own medical costs. Businesses should carry insurance, after all. Except that without a license, your contractor cannot apply for a business license. According to construction consultant Lyle Charles, “the reality is that home owners often end up carrying that burden when the contractor is uninsured. It is one of the dirty secrets of low-cost home renovations.”

          In order to become a licensed contractor, there are a few things a person must demonstrate to the state a number of items, and usually take a competency exam. Contractors must pass a contractor’s exam in order to acquire a contractor’s license. A contractor must also carry insurance when you register as an LLC, or other business entity. That insurance protects employees and the job site.  To protect the public, Florida actively pursues unlicensed contractors by performing sting operations in conjunction with local police.

          As you can imagine, all this licensing and exam work takes time and costs money. Contractors who charge more for their work have earned the right to do so through state licensure. They carry liability insurance that protects you, the homeowner, from the consequences of their on-the-job injuries.

          Before you hire that unlicensed contractor, stop and think about the potential hazards:

          Natural Disaster: If your home was recently damaged by a natural disaster, the unlicensed contractor may not be able to perform the work legally. That could limit your insurance settlement.

          Property Value: Someone unlicensed who performs major work, such as adding a room to your home, could reduce the property value because the addition will not have the proper permits or be built to the building code. Plus, homeowners are required to disclose unlicensed/unpermitted work when selling their home.

          Protection from Injury: Not just of the contractor, but the surrounding area. If the contractor drops a heavy tool on a car, for instance, whatever dent or scratch is left behind might end up costing you for the repair. The same goes for personal injury claims if that contractor hurts a neighbor. 

          Damages: If an unlicensed contractor fails to complete the work, does it in a poor manner or causes damage, the unlicensed contractor might disappear entirely, and often cannot be found if you need to sue.

          There is both good news and bad news. Before we continue, it’s best to speak directly with an attorney, as they will provide recommendations more directly related to local laws you must comply with regarding permits and association requirements for repairs. That said, there are some general guidelines you can keep in mind when you’re looking for a contractor and considering going with someone who is unlicensed.   

          You can file a lawsuit against an unlicensed contractor if there are damages to your property, or if he causes injury somehow (either to himself or someone else). Being unlicensed is, in some ways, actually a bigger risk than whatever risks come from the job itself. As a homeowner dissatisfied with a job, you can also stop payment to the contractor or refuse payment altogether. Most unlicensed contractors also do not write up agreements, so there is no contract that details their responsibility. Prices change, homeowners refuse payment, and accidents happen.

          Generally, if you try and sue an unlicensed contractor you will probably have to show the two of you attempted to work out a solution between yourselves. It should not cost you much more than a few thousand dollars in attorney’s fees to get some representation on your side if you need it for a default (if the contractor doesn’t show). You’ll have to wait a few years to collect, but once that default is renewed you can send the bill to collections and hope for your money to arrive.

          If you decide to file a lawsuit, consult an attorney familiar in construction law over someone who is general practice. That expertise will come in handy, as the intricacies of construction law require someone well versed.

          Going with an unlicensed contractor might sound great because you will save on the upfront costs, but it can cost you in the long run. There is simply too much risk with injury lawsuits, property damage and a lack of dispute resolution, to chance hiring a contractor who does not carry a license. 

Renting or Buying 2016

       The dream of home ownership is as American as hot dogs, baseball and apple pie.  At least that was the theory until the great recession that ruined home ownership for millions.  With the economy mostly recovered, mortgage interest rates at all-time lows and rents rising, is it now better, once again, to own or rent.

          Homeownership levels continue to fall with the level of ownership hitting a 50-year low last quarter.  Currently only 62.9% of households are owner-occupied.  Ownership levels are highest for seniors, and at an all-time low for millennials at 34.1%. The decline is due to several factors

          On strictly financial basis, using a five-year period of ownership and making some basic assumptions (your mileage may vary), renting versus owning is nearly a wash, with homeownership slightly less expensive:

                                                            Renting                            Owning

                                                 

Monthly Payment                                $1,350.00                        $   954.83         

Taxes/Insurance                                           20.00                             400.00

HOA Assessments                                        0.00                              100.00

Maintenance                                                 0.00                              250.00

Monthly Costs                                     $1,345.00                        $ 1,704.83

Down Payment                                                                            $50,000.00

Five Year Cost                                      $80,700.00                    $152,289.80

Less Interest on Down Payment (2%)   ($5,204.40)                    

Less Increase in Value (3%)                                                        $(39,818.00)

Less Principal Reduction/Equity                                                 $(69,105.00)

Interest Expense/Deduction                      $520.40                      $(7,636.80)

Plus Costs of Purchase/Sale                                                         $28,185.00

          Total Cost                                  $75,495.60                       $63,915.00

          This chart is based on a $250,000 home, a $50,000 down payment, an association payment of $1,200 a year, rent averaging $1,350 a month over five years, maintenance costs of $3,000 per year, a sales price of $278,750 after five years, plus the renter investing the $50,000 at an average of 2% and the homeowner’s home value increasing at a rate of 3% per year.  Given these factors, the savings over five years is approximately $12,000.  This includes costs of purchase of $5,000 and costs of sale (including a real estate commission of $23,185). 

                                                                                         

          Longevity: Determining whether to rent or own is dependent on several important factors.  First, how long do you plan to stay in your next home has to be determined, because one of the best benefits of home ownership is tied to longevity of ownership.  Our sample favors renting through year three, with each year thereafter supporting buying.

          One key factor tied to longevity is how mortgage loans are front loaded with mostly interest.  Fixed Rate Mortgages are amortized to provide a fixed monthly payment over the life of the loan.  Initially the payments are mostly interest, with only a small amount going to principal.  A typical $250,000 house with a $200,000 loan will only have principal reduced by $19,000 if sold within the first five years.  It takes nearly 20 years to reach a 50% reduction in the loan balance.

          Tax Deduction:  One benefit of homeownership is the ability to deduct mortgage interest paid on loans to acquire and improve the home. This can be worth thousands in tax savings during the early years of a mortgage.  However, many people do not have enough deductions to make itemizing their taxes worthwhile, and this benefit is lost if the homeowner cannot itemize their taxes.

          Maintenance:  One drawback of homeownership is the requirement of maintenance of the home from lawns, to painting, to repairs and replacements.  Renters mostly rely on the landlord to handle maintenance, repair and replacement costs.  Homeowners have to bear the full cost, which can be very expensive.  A new a/c system costs over $2,000, and a new roof can run from $7,500 to $30,000 depending on whether its shingle, cement or barrel tile roof system. 

          Down Payment:  The down payment is the largest bar to home ownership, especially for younger and first time buyers.  Typically, the down payment is twenty percent of the purchase price.  This is a large sum that may be difficult for many to accrue, and even the three percent down payment on an FHA loan may still act as a bar when coupled with closing costs that easily exceed $5,000.  Renters only usually need first last and security, which is far less than the full down payment, but can be equal to the FHA down payment.  Taking the twenty percent down payment and investing in an indexed fund instead of buying can often result in a substantial gain versus homeownership, which has seen both large value increases and decreases in recent years (the S&P has returned 78% over the last five years).

          Portability.  Renting is for a fixed term, customarily for one year.  Many leases provide a right to terminate early for a two-month rent penalty (an attempt to make this a Florida law did fail).  This ability to move quickly is often better for single and married couples without children.  Having to move for a career opportunity as a homeowner can mean carrying a mortgage and paying rent on two places until the first owned home is sold.

          Given the initial costs, down payment, the burden of maintenance, the loss of the ability to move quickly means that the decision to buy instead of rent can be difficult for many people, especially if they are likely to need to move in less than five years.  Committing to longer term ownership is when the decision becomes in favor of homeownership, ultimately saving money in the long run.

Michael J Posner, Esq., is a partner at Ward Damon, a mid-sized real estate and business oriented law firm serving all of South Florida, with offices throughout Palm Beach County.  Michael specializes in real estate law and business law, and can help sellers, buyers landlords and tenants with their real estate issues.  Michael can be reached at 561.594.1452 or by e-mail at mjposner@warddamon.com.

Condo/Coop Retrofitting Fire Sprinklers - The Lowrise Debate Rages

In 2010, the Florida legislature changed Florida Statute Section 718.112(2)(l) to amend the rules regarding the requirement for retrofitting of sprinklers in condominium (and cooperative buildings under 719.1055(5)(a)).  The change removed the following key provisions:

For purposes of this subsection, the term "high-rise building" means a building that is greater than 75 feet in height where the building height is measured from the lowest level of fire department access to the floor of the highest occupiable story. For purposes of this subsection, the term "common areas" means any enclosed hallway, corridor, lobby, stairwell, or entryway. In no event shall the local authority having jurisdiction require completion of retrofitting of common areas with a sprinkler system before the end of 2014.

          This change has sparked a controversy as to whether all condominiums are now required to either retrofit sprinklers or vote to waive retrofitting no later than December 31, 2016.  This change was intentional and by doing so the legislature specifically intended the law to apply to all condominiums, not just high-rises.   As this is state law, it trumps any local limitation or requirement which would limit or not require such installation for condominiums under seventy-five feet in height.        

The starting point for compliance is the Division of Florida Condominiums, Timeshares, and Mobile Homes, the state body that regulates condominiums.  In its written statement on the issue the Division has stated that:

Condominium and cooperative associations are required to report to the division certain information regarding the membership vote to waive retrofitting requirements for fire sprinkler systems and handrails and guardrails. If the association does not waive retrofitting requirements, it must report the per unit cost of retrofitting to the division

The Division makes no distinction between high rise and low rise condominiums.  As a result of the change in the law and the Division not ruling that the law does not apply to condominiums below seventy-five feet in height, it means that absent a change, all condominiums and coops must either vote to waive retrofitting or start the retrofit process by the end of the year and report their actions to the Division.  As late as early July, 2016 Travis Keels, deputy director of communications for the Florida Division of Condominiums stated, “Generally speaking, the fire sprinkler requirement applies to all residential condominiums.”

However, due to contradictory laws relating to low rise sprinklers, there are now many voices asserting claims that the law does not actually require retrofitting for low rise condos/coops.  The Florida State Fire Marshall issued a statement saying that: “The Florida Fire Prevention Code… requires only high-rise buildings that do not have exterior access from each dwelling unit to be protected throughout by an approved, supervised automatic sprinkler system.”  However, the Fire Marshall also recognized that their office “…cannot interpret the provisions of Chapter 718.112, Florida Statutes.”

Senator Jerry Ring, a sponsor of the 2010 legislation that changed the law, has also commented on the issue.  He stated, in a letter dated July 28, 2016, to the Director of the Division of Florida Condominiums:

It is regrettable that the Division’s “interpretation” of a 6 year old statutory amendment comes to light through a newspaper quotation a mere 5 months before the opt out deadline expires, and at a time of year when many communities have difficulty conducting business (let alone owner votes) due to seasonal absences. While I recognize that the comments made were undoubtedly in good faith, they are simply an incorrect interpretation of legislative intent. Due to the amount of concern that this newspaper quote has generated, especially in light of its timing, I am requesting that the Division issue a press release consistent with the intent of the Legislature.

          The problem is while the letter is well meaning, it is not a change in the law, merely one legislator’s interpretation of the intent of the law.  Therefore, we are recommending that all condominiums and coops start the process to waive retrofitting by either a member meeting or a written consent to action. 

The written consent allows for votes to be collected from local and absent owners by signing a written statement voting to waive retrofitting.  Interestingly, the Division allows even Associations that do not have express power to approve matters by written consent to use this process, “Voting by written consents or written agreements may be utilized by an association regardless of whether the bylaws or the declaration specifically permit voting by written consents or written agreements.”  In order to waive the costly installation, the vote must be made by the “affirmative vote of a majority of all voting interests in the affected condominium.”  Now is the time act, as sufficient votes to waive must be received no later than the end of the year.

Michael Posner, Esq., is a partner in Ward Damon a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County.  They specialize in real estate and can assist community associations in all legal matters including retrofitting votes. They can be reached at 561.594.1452, or at mjposner@warddamon.com

Eight Real Estate Mistakes

1.       Deeds without estate status: So you want to add dad, mom or a brother to your Florida property, so you get a Quit Claim Deed from an out of state lawyer, an office supply store or online, fill it out and mail in to be recorded. Three years later they die, and when you go to sell you discover that in order to clear their interest you will need to file an ancillary administration in Florida.  $3,000 and a few months later you close and get to share the proceeds with their heirs.  This can all be avoided by using the proper language to effectuate what your intent is on that deed.  If you want the property to go to everyone’s heirs, do nothing, but if you want to be sure that the property goes to the surviving grantees, simply add, “joint tenants with full rights of survivorship, and not as tenants in common” after the grantee’s name and upon their death, the title goes to the remaining grantee without probate.

2.       Grandma’s Condo: If you own a second home/condominium in Florida and are a resident of another state, you can avoid two probates by simply deeding your second Florida property to yourself for life with a remainder to your chosen heirs. Then, when you die, no probate is necessary.  You can even keep full control by adding Ladybird Powers to your Life Estate Deed.

3.       Applying for Homestead: Florida’s constitutional homestead is an automatic protection arising as soon as you take residency of your Florida home.  However, the statutory homestead tax break requires that you apply by March 1 of the year after you purchase.  Forgetting to apply will costs you about $500 each year, and you will lose a 3% cap on annual appraisal increases. If you closed last year and did not apply, you can still submit an application and ask for a late filing waiver.

4.       Home Improvements: Getting ready to sell your house but need some work done that requires a contractor?  If it is a short job, you should change the automatic one year life of that Notice of Commencement required for permitted jobs to the actual time needed to complete the work.  Otherwise, when you do sell you will have to hunt down that contractor and possibly some subcontractors to get release of liens, even though the job was done on one week and it has been eleven months since your house improvement was completed.

5.       Loan Payoff Surprise: Many people are surprised at closing when their mortgage payoffs are far higher than their last mortgage statement.  For example, if you borrowed $500,000 at 5% five years ago, and you are closing August 10, (and you were told not to make the August mortgage payment) and your August mortgage statement says you owe $448,866.09 in principal, your closing statement could say you owe almost $3,000 more.  That is because mortgages are paid in arrears, meaning that the July payment you made was for interest in June.  So at that August 10th closing they are collecting interest on the principal balance from July 1 to August 10, plus a week extra to cover mailing in the payment.

6.       Mortgage Insurance: Did you purchase your home with less than 20% down?  Then you probably pay mortgage insurance every month.  The insurance is supposed to stop once the loan amount equals 80% of your home’s appraised value.  However, it is the owner’s responsibility to request this relief.  If you think you have hit 80% mark, contact your lender, because each month you delay could easily costs $83 per month for each $100,000 you borrowed.

7.       Rubber Hoses: Go in your laundry room and look at the hoses connected to your washing machine.  If they are black rubber then (i) confirm you have flood insurance; and (ii) get in the car and go to Lowes or Home Depot and buy braided stainless steel hoses in the same length.  Installation is easy, turn of the water to the washing machine, remove old hoses and install new hoses. Burst rubber hoses are probably the number one cause of flood in homes.  You do have flood insurance too?  Many do not so take the time and do one of the easiest fixes possible to protect your home.

8.       Mortgage Interest: Do you know what interest rate you are paying on your home mortgage?  Many people close on a loan when they buy and then never refinance, throwing away thousands of dollars.  If you borrowed $300,000 ten years ago at 6% you are paying $1,798 a month.  If you refinanced all $300,000, that full amount at today’s rate of 3.75% your payment would drop to $1,389 and after closing costs you would have about $40,000 in your pocket.  The smartest move would be to refinance only what you owe for 15 years.  Your payment would still be lower by $300 a month and you would shave another five years on your existing loan.  

Michael J Posner, Esq., is a partner in Ward Damon a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County.  They specialize in real estate law and business law, and can with these and other real estate mistakes (except the plumbing tip!).  They can be reached at 561.594.1452 or by e-mail at mjposner@warddamon.com

Emotional Support Animals 2016 Update

     Emotional support animals have and continue to be a divisive issue in condominium communities, pitting the “no pet” contingent against those who desire to keep an animal to alleviate a disability.  The issue of fake service and emotional support animals has led to the Florida state legislature enacting a new law that criminalizes parties who falsely claim to have a service animal under the Americans with Disability Act (“ADA”): A person who knowingly and willfully misrepresents herself or himself, through conduct or verbal or written notice, as using a service animal and being qualified to use a service animal or as a trainer of a service animal commits a misdemeanor of the second degree, punishable as provided in s. 775.082 or s. 775.083…

Unlike service animals under the ADA, the residential community issue falls under a separate law established under the Florida and Federal Fair Housing Acts (the “Act”).  Federal lawsuits under the Fair Housing Act, arbitration claims with the Florida Department of Business and Professional Regulation and Administrative Complaints with the United States Housing and Urban Development continue to be filed, as communities struggle with addressing requests for a reasonable accommodation.

Two main issues continue to be raised in the cases being filed by owners and associations.  First, is the person, in fact disabled such that the disability impairs or limits a major life activity.  In many cases, the letters from doctors or mental health professionals fail to properly document or substantiate that a disability, in fact, exists.  Instead, they describe certain ailments of the person they are treating without stating that the ailment rises to a disability that does impair a major life activity.  The disability letter must be clear that a recognizable disability exists and that the specific disability significantly impairs a major life activity.  For example, a statement from the medical professional that contains language similar to the following may be sufficient to meet the initial burden of the Act, “Due to (describe the disability), he has certain limitations which substantially affect the following major life activity, to-wit: (Describe how such disability affects the patient).”

The second test is that the animal in question must, in some fashion, alleviate the symptoms of the disability and the person making the request has a need for the assistance.  The animal does not have to be specially trained depending on how the animal alleviates the disability.  Some Associations will not approve an ESA without proof of special training and this can lead to a violation of the Act by the Association.   The same disability letter should state what and how the animal alleviates the diagnosed symptoms, and the medical professional could include language such as, “In order to help alleviate these disabilities, and to enhance the patient’s ability to live independently and to fully use and enjoy the residential unit located within the condominium, I have prescribed an emotional support animal that will assist him in coping with his disability by the following assistance (describe how animal alleviates the disability).  Assuming both tests are actually met, the Association, under the Act, is required to make a reasonable accommodation.

Several recent cases have addressed elements of these issues, but as these are ongoing cases without final resolution, it is not clear the ultimate outcome.  In a truly tragic case between Alexander Peklun and the Tierra Del Mar Condominium, both sides moved for summary judgment in a reasonable accommodation case. The background of this case is what Plaintiff alleges led to the suicide of the disabled owner. In denying both motions, the United States District Court in December, 2015 entered an order that included several rules that may help clarify the obligations of owners and associations.  First, a reasonable accommodation is not a lifetime grant, and an association has a reasonable right to request follow-up information.  Second, not all ailments are “disabilities” that the Act was intended to protect.  However, the court found that sleep apnea, did interfere with a major life activity and rose to a level of a protected disability.  Third, the emotional support animal is not required to have task specific training (this issue is often confused, as was in the Peklun case, between a service animal, which is specially trained, and an emotional support animal).

In a Texas 2015 case (Chavez v. Aber), the United States District Court found that an employee of an owner can be found liable for violating the Act.  The employee defended on the grounds that only the landlord corporate owner can be liable for violating the Act.  The Court denied that motion, finding that if the employee assisted the owner in violating the Act by not making a reasonable accommodation (and taking affirmative action to threaten eviction, raise rents, etc.), then such employee can be personally liable.  This case could be ultimately extended to Association Board members who abuse and harass legitimate homeowners seeking a reasonable accommodation.

As we can see, the law regarding emotional support animals is both confusing and evolving.  If you are a disabled owner, it is best to provide good documentation so as to establish the required need for a reasonable accommodation.  If you are an Association, it is best to establish, in advance, reasonable rules regarding emotional support animal requests, and to avoid discrimination claims by failing to properly review and approve such requests.

Michael J Posner, Esq., is a partner in Ward Damon a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County.  They specialize in real estate and can assist associations and owners in addressing emotional support animal issues.  They can be reached at 561.594.1452, or at mjposner@warddamon.com

Reverse Mortgages - Pros and Cons

            In 1988, in an effort to keep older Americans in their homes, Congress passed the Reverse Mortgage bill, which authorized the Federal Housing Authority (FHA) and the United States Dept. of Housing and Urban Development to guarantee lenders who made home equity conversion mortgages.  These specialized loans are limited to individuals 62 years or older for loans secured by their primary residence, and for a loan amount that provides a sufficient equity cushion so that at maturity the loan may be repaid.  Reverse mortgages can be used on single family homes, condominiums and certain manufactured homes.

            Reverse mortgages do not require any payment of principal and interest as long as the borrower is alive or resides in the home as the primary residence.  Interest on the reverse mortgage (which can be fixed or adjustable) accrues until the loan is repaid.  The homeowner/borrower must still pay all taxes, insurance and maintenance on the residence. 

This waiver of payment is the main benefit of the program.  For example, a homeowner with a $250,000 mortgage paying interest at 5.5% with fifteen years left will be paying $1,419.47 each month in principal and interest. With a balance of $167,000 after fifteen years, and a home value of $400,000, a homeowner over 62 could obtain a reverse mortgage of $191,200, pay off the earlier loan, pay all closing costs (which are generally higher than most loans and one source of complaints about reverse mortgages) and have about $20,000 available to pay taxes and insurance (or a vacation).  After closing, the borrower will have the $1,419.47 in his or her pocket each month, an amount that may mean the difference between selling the home and keeping the home.

The funds from a reverse mortgage can be received in cash at closing, or available as a line of credit for future withdrawal.  The availability of a line of credit at closing requires that the borrower have sufficient equity for the new loan (in many cases, paying off the existing loan plus closing costs reduces or eliminates the amount available to borrow).  The proceeds from a reverse mortgage are not generally considered income and are not taxable, and will not affect social security or Medicaid benefits, but if the proceeds are held as liquid cash, that sum could disqualify a person from certain benefits and should be reviewed.

Loan repayment occurs when the homeowner dies, abandons the home or defaults under the terms and conditions of the loan (such as failure to pay taxes).  For death or abandonment, the homeowner or his/her family gets twelve months to sell the property to pay back the loan.  If the loan is not paid back, HUD may proceed to foreclose the loan, recover and sell the property to satisfy the debt.  Since interest is accruing without repayment, the value of the property may not be sufficient to pay-off the loan.  Unlike conventional mortgages (recourse loans), the borrower or the borrower’s estate is never liable for the loan or a deficiency due to the property being worth less than the loan balance (a non-recourse loan). 

Since their introduction, reverse mortgages have become popular; there are presently nearly 500,000 active loans. Originally a refinance only program, the law was revised in 2009 to allow these loans to be used to purchase a new home, so long as the borrower can pay the difference between the reverse mortgage loan amount and the purchase price of the new home.

There are several criticisms of the reverse mortgage program.  High upfront costs are an issue and are frequently not properly discussed with borrowers.  Interest rates are higher than conventional loans.  Pressure sales tactics (including late night TV ads) have encouraged seniors to take out reverse mortgages, spend the money on vacations and gifts, without consideration of the ability to pay and maintain the property going forward. 

Some elderly homeowners have been duped by the reverse mortgage/repair scam.  An inspector tells an elderly person that he or she need many thousands in repairs or the home will collapse.  Many cannot afford these “repairs,” but the scammer refers them to a home equity mortgage lender who arranges the reverse mortgage (even though the repairs are bogus or not necessary), taking huge fees from the unsuspecting owner desperate to fix the home.

Finally, some of the biggest critics are the children, who discover after their parents die that their house inheritance is worthless due to a reverse mortgage debt greater than the value of the home. Because of these issues, and the high default rate of nearly one in ten homes, HUD tightened lending requirements earlier this year to ensure that lenders carefully review borrowers’ financials to be sure they can continue to pay taxes and insurance required on the home.  In some cases, loans that used to be granted are now denied, and in other cases the amount loaned will include a required set-aside for payment of taxes and insurance, reducing the amount available to the homeowner.

A reverse mortgage can be a great tool for many homeowners, but it is a program that should be carefully reviewed to ensure that it fits an individual’s needs. Discussions with a CPA, your children and a HUD loan counselor are a must before taking out a reverse mortgage.

Michael J Posner, Esq., a partner in Ward Damon a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County.  He serves as the HUD Foreclosure Commissioner for the state of Florida.  They can be reached at 561.594.1452 or by e-mail at mjposner@warddamon.com