Thursday, June 14, 2018

Homesteads and Dual-use properties

The June 11, 2018 edition of Massachusetts Lawyers Weekly reports on a recent Bankruptcy Court decision that interprets the Massachusetts Homestead law (MGL c.188). The facts of the case were that the debtor owned a two family house, lived in one half of the house with his family, and rented the other half to tenants. The debtor also ran a landscaping business on the property.

A creditor moved for an evidentiary hearing to determine whether the property “was predominantly used” for residential or for something else. This “predominantly used” language came from an earlier Bankruptcy decision which held that if a property was not used predominantly as a person’s primary residence, then the Homestead did not apply.

The judge in this new case, In re Shove, reached a different conclusion. She ruled that as long as the property met the definition of a “home” as set out in chapter 188 and also served as the primary residence of the Homestead declarant, then the Homestead applied to the entire property regardless of how the rest of the property was used.

While I am happy with this pro-homeowner ruling, Bankruptcy Court rulings are of limited weight when it comes to interpreting Massachusetts law. Until the Appeals Court or SJC issues a decision on this issue, we won’t know how state courts will rule.

Thursday, June 07, 2018

A Few Observations on Local Real Estate

I recently posted the Lowell Real Estate Report and the Middlesex North Foreclosure Report on the Real Estate Reports page of the registry of deeds website. Based on these reports and on others I’ve prepared, I have a couple of observations about the local real estate market:
The number of sales from January through May 2018 is about the same as in Jan-May 2017, but prices seem to be up by 10% or more (based on our deeds excise tax collections and on median deed prices I've calculated). It's a good time to sell but not many people are selling, likely because they couldn't afford an upgrade to their current homes.

There are still a lot of foreclosures: Jan-May 2018 there were 106 versus 92 for the same period in 2017 (again, district-wide). The bulk of the mortgages being foreclosed originated during the real estate bubble (2003-2008). I don't know why after 10 years these mortgages are being foreclosed now. Have the people not been paying all along and the banks just failed to foreclose, or did the homeowner suddenly encounter some financial crisis like divorce, illness, job loss and lose the house to more recent causes? 

One thing is clear: almost all the bad mortgages were by national lenders. It's very rare to see a local bank doing a foreclosure. Their performance now and during the foreclosure crisis is a positive story that may not have gotten the attention it should have.

Also regarding foreclosures, the foreclosing lenders are increasingly willing to sell at auction to a third party whereas traditionally the lender was the purchaser at foreclosure. This suggests that auction bids are higher which makes sense given rising values. Quite a few of these third party foreclosure buyers are LLCs which are likely in the business of either (1) flipping properties or (2) owning a lot of rental properties. This has some long term implications if multifamily rental properties that were once owner-occupied increasingly come under the ownership of distant investors who might be less committed to the neighborhood and the community.

Wednesday, June 06, 2018

Electronic Acknowledgements

As more and more real estate transactions move from paper to digital, many wonder whether a notary public may electronically acknowledge a signature. I think the answer is YES, as I explain in this article which first appeared in the March 2018 edition of the Merrimack Valley Housing Report:

Until recently, the thought of a real estate closing that did not involve dozens of paper documents that contained cursive signatures made in ink seemed far-fetched. However, conversations with certain brokers, bankers and lawyers suggest that a tipping point for paperless real estate closings may soon be upon us.

Electronic signatures have been legal in Massachusetts since the adoption of the Uniform Electronic Transactions Act in 2004 (Massachusetts General Laws chapter 110G). This statute opened the door to electronic document recording in Massachusetts, a technology that now accounts for 55 percent of all documents recorded at the Middlesex North Registry of Deeds. However, almost all of those electronic recordings have consisted of scanned images of paper documents that were signed in ink with cursive signatures. Few have been true electronic signatures meaning some mark or symbol made directly on an electronic device by the person “signing” the document.

One reason for the limited use of electronic signatures on real estate documents is because of uncertainty over the legality of a notary electronically acknowledging a signature. The sticking point seems to be the requirement in Massachusetts General Laws chapter 222 (updated by Chapter 289 of the Acts of 2016) that a notary affix his notary stamp to the document when taking an acknowledgement. But a close reading of that statute does not necessarily require the stamp or the document to be tangible objects.

A notary who made the imprint of his notary stamp on a blank piece of paper and then photographed it, could then insert that digital image into an electronic document on which he was taking an acknowledgement. Presumably this would comply with the statutory requirement that a notary stamp be affixed to the document. In this case, both the stamp and the act of affixing it to a document would be electronic.

Electronic “workarounds” like this digital image of a notary stamp plus existing statutes and available technology make all-electronic transactions feasible today. Perhaps the hardest obstacle to overcome is the unfamiliarity people feel with a new way of doing things.

Whenever I raise the possibility of all-electronic transactions, the response typically is, “but that would increase the risk of fraud!” It’s true that all-electronic transactions are susceptible to fraud, but so is every other transaction, especially those on paper. Consider what happens when a document is recorded at the registry of deeds in the traditional manner. A person no one knows comes to the office with a piece of paper that purports to be legitimately signed and acknowledged, pays the recording fee in cash, waits for the document to be recorded, and then leaves with the original. Who prepared that document? Who signed it? Who acknowledged it? Who recorded it? We don’t know the answer to any of those questions. Neither are we bothered by the opportunity for fraud at every stage of that transaction.

The main reason for our nonchalance is that paper-based recording has been around for several centuries. Our familiarity with the process allows us to put the risk of fraud in the proper perspective. But all-electronic transactions are novel and unfamiliar to us, so it is natural for us to magnify the opportunity of fraud. Ironically, the technology needed for all-electronic transactions provides an audit trail that is unavailable with paper transaction, thereby making one who uses the technology to commit fraud easier to apprehend.

Another cause for confusion in adopting all-electronic transactions comes from complex procedures adopted in other states. Virginia, for instance, allows a notary public to take an acknowledgement by video. This permits a document to be acknowledged even though the person signing it and the notary acknowledging it are not in each other’s presence. While this has some real benefits – a service member deployed overseas, for instance, could easily execute a legal document – it is more than is required to perform an all-electronic transaction.

Nearly four hundred years ago, the colonial government of Massachusetts created the requirement that a document that conveys an interest in real estate must be acknowledged to be recorded. The purpose of this rule was to curtail fraud, either in the guise of a forged signature or of an actual signature that was later denied by its maker. That requirement and the reasons for it continue today. However, there is nothing to prevent the tools that are used to perform that task to change with advances in technology.

Monday, May 21, 2018

Deed statistics by town

Each month I compiles some statistics of recordings here at the Middlesex North Registry of Deeds. This helps us measure our volume of recordings but it also serves as an indicator of the state of the local real estate market. However, as with all quantitative analysis, unless you know exactly what is being measured, the numbers presented can be misleading.

For example, when I post something about total number of deeds recorded for the month, that almost always refers to all Recorded Land deeds and does not include Registered Land deeds. One reason for that is that registered land is a relatively small percentage of our recordings and, in most cases, are distributed evenly among the towns in the district (with the one exception being Billerica, which has a lot of registered land).

A second caveat on "number of deeds" involves the amount of consideration stated on the deed. A significant percentage of deeds recorded each month transfer property between related parties (as in a sole owner transferring to herself and her spouse; or a married couple transferring it from them as joint owners to them as trustees of a family trust). The consideration stated on these deeds is usually $1 so they can't be considered arms-length transactions.

Because I've been consistent in (1) not counting registered land deeds and (2) counting $1 deeds, the comparisons have been consistent and are able to reflect recording volume and real estate trends. Going forward, I won't change how existing reports are compiled.

However, I plan to add a new deed report into the statistical mix. This one will be done at the end of each month and will compare deed recordings for the entire year up until that point ("year to date") for the current year with the same period of the previous year. For each annual period I will show "all deeds" which will reflect Recorded and Registered Land without regard to consideration. For the same periods, I will also show the number of deeds with consideration greater than $60,000 and less than $1.2mil. These boundaries are meant to eliminate non-arms length transactions at the lower end, and properties of extraordinary value at the upper end. I will use that set of deeds and their values to calculate the median price of deeds recorded during the respective periods.

Perhaps it's best to illustrate for the period January through April for 2017 and 2018:

All deeds: 2017 = 265; 2018 = 297; up 12%
Deeds >$60K: 2017 = 140; 2018 = 167; up 19%
Median price: 2017 = $382,500; 2018 = $392,000; up 2%

All deeds: 2017 = 279; 2018 = 256; down 8%
Deeds >$60K: 2017 = 147; 2018 = 147; no change
Median price: 2017 = $335,000; 2018 = $350,000

All deeds: 2017 = 261; 2018 = 268; up 3%
Deeds >$60K: 2017 = 160; 2018 = 177; up 11%
Median price: 2017 = $250,000; 2018 = $322,000; up 29%

All deeds: 2017 = 638; 2018 = 620; down 3%
Deeds >$60K: 2017 = 412; 2018 = 399; down 3%
Median price: 2017 = $235,000; 2018 = $256,000; up 9%

All deeds: 2017 = 235; 2018 = 224; down 5%
Deeds >$60K: 2017 = 122; 2018 = 106; down 13%
Median price: 2017 = $357,500; 2018 = $385,500

All deeds: 2017 = 106; 2018 = 83; down 22%
Deeds >$60K: 2017 = 64; 2018 = 48; down 25%
Median price: 2017 = $275,000; 2018 = $337,000; up 23%

All deeds: 2017 = 142; 2018 = 174; up 23%
Deeds >$60K: 2017 = 79; 2018 = 92; up 16%
Median price: 2017 = $407,500; 2018 = $500,000

All deeds: 2017 = 166; 2018 = 198; up 19%
Deeds >$60K: 2017 = 83; 2018 = 85; up 2%
Median price: 2017 = $430,000; 2018 = $484,000; up 13%

Tuesday, May 08, 2018

Community Preservation Act funding increase

Here's an article I wrote for this month's Merrimack Valley Housing Report about potential changes to the Community Preservation Act. 

In the fall of 2000, the Massachusetts State Legislature adopted the Community Preservation Act (CPA) to provide a mechanism and funding source for cities and towns to preserve open space, provide affordable housing, preserve historic structures, and provide recreational space. To participate in the CPA, residents of a community must choose to impose on themselves a property tax surcharge of up to 3 percent. This decision is made by voters by referendum at a municipal election. If the CPA is adopted, the community creates a Community Preservation Committee that recommends projects to the board of selectmen or city council which have the ultimate authority over the expenditure of CPA funds.

When it was first implemented, the CPA proposed a dollar for dollar state match to any funds raised locally for CPA projects. The state’s matching fund, called the Community Preservation Trust Fund, obtains its money from a surcharge imposed on documents recorded at the registry of deeds.

Almost all registry of deeds recording fees include a $20 per document Community Preservation Act surcharge. When you record a deed, for example, the total amount you pay is $125. Of that, $100 is the actual recording fee, $20 is the CPA surcharge, and $5 is a registry of deeds technology surcharge. The exceptions are municipal lien certificates, which carry a $10 per document surcharge; and declarations of homestead, which have no CPA surcharge.

As with all funds collected, the registry of deeds transfers these fees to the Department of Revenue on a daily basis. The DOR is the administrator of the CPA Trust Fund.

One of the problems with depending on registry of deeds recording fees to fund the CPA (or anything else) is that the revenue stream is tied to the real estate market. When real estate is booming, a substantial amount of revenue is collected, but when the market slows, so does the money coming in. For example, in 2003 when the Middlesex North Registry of Deeds recorded 146,956 documents, $2.8 million was collected for the Community Preservation Act. But in 2014, only 53,584 documents were recorded. That yielded just $983,000 is CPA funds.

This decline in funding for the CPA Trust has coincided with an increase in the number of communities choosing to participate in the CPA. This increased demand for matching funds has caused the match to decline from 100 percent in the early days of the CPA to matches of less than 30 percent of the amount raised by the municipality today.

To address this issue, the Massachusetts State Legislature is now considering an increase in the CPA surcharge on registry recordings from $20 to $50 per document. Whether this change (or any other) is made should be known by the end of this legislative session in June.

As for the local impact of the Community Preservation Act, eight of the ten communities in the Middlesex North Registry of Deeds district have voted to participate in CPA since its inception. Carlisle, Chelmsford, Dracut, Tyngsborough and Westford all adopted it in 2001; Dunstable and Tewksbury in 2006; and Billerica in 2016. Only Wilmington and Lowell have failed to take advantage of it. This is especially unfortunate for Lowell since the surcharge on documents recorded at the registry of deeds for properties in Lowell since 2000 has generated $5.8 million in CPA matching funds, all of which has gone to other communities.

Wednesday, May 02, 2018

REBA Spring Conference Report

Yesterday I attended the 2018 Spring Conference of the Real Estate Bar Association of Massachusetts at the Four Points Sheraton in Norwood, Massachusetts. My Register of Deeds colleague Mary Olberding (Hampshire County) and I formed a two-person panel for a breakout session on the Massachusetts Deeds Indexing Standards.

Two of the topics that dominated our discussion were acknowledgements and addresses.

Here is what we said about acknowledgements:

The Deed Indexing Standards contain a list of documents that must be acknowledged before being recorded. If a document is not on that list, it does not need to be acknowledged to be recorded.
The minimum information needed to make an acknowledgement sufficient for recording is the signature of the notary; the printed name of the notary; the expiration date of the notary’s commission; and some language that reflects that the document has been acknowledged.
Most registries will reject a document that lacks the written name of the person whose acknowledgement has been taken in the acknowledgement clause.

Most registries do not require the notary stamp to be affixed in order to record a document. (But since the notary statute requires a notary to affix his stamp when taking an acknowledgement, the notary should comply with the statute and always use the stamp).  

On a document that has multiple grantors, it is sufficient if the signature of just one grantor has been acknowledged. However, on a declaration of homestead executed by two people, both signatures must be acknowledged for the document to be recorded.

For out-of-state and out-of-country acknowledgements, registries will defer to the person recording the document to determine the adequacy of the acknowledgement. Because the law of the place where the acknowledgement is taken controls the adequacy of the acknowledgement, registries will assume compliance with the appropriate law and record the document.

Regarding out-of-state or out-of country acknowledgements, these standards use the terms “notary public” and “justice of the peace” as generic references to any public official authorized to take an acknowledgement in that jurisdiction. For example, a document acknowledged in Connecticut by a “commissioner” could be recorded in Massachusetts.

Here is what we said about addresses:

A deed must contain two addresses: the mailing address of the grantee and the address of the property being conveyed by the deed. The grantee mailing address is so the municipal tax collector will know where to send the property tax bill. The property address is so the municipal assessor can identify the property to update ownership information in assessing records.

In many cases, a deed presented for recording fails to state that property address. When confronted with this omission, the customer presenting the document for recording will hurriedly write an address in the margin of the deed. The address so written is often wrong. However, this is the address entered by the registry of deeds in the searchable index. While those in the real estate law business understand that an incorrect address does not negate the property transfer, most homeowners think it does and will become very agitated when they discover the discrepancy. To avoid an expensive fix, please make an extra effort to ensure the correct property address is clearly stated on a new deed before it reaches the registry of deeds.

Remember that most liens are indexed only by the debtor’s name, not by any property address or town. Consequently, trying to narrow a search by limiting the results to a particular city or town will exclude things like attachments and federal tax liens that are indexed with a town code of “none.”

While searching by property address can be a useful starting point, it can also be unreliable. Most registries of deeds did not consistently enter property addresses in the index until the late 1990s. Also, the registry will index an address however it appears on the document presented for recording. While a post office address may be 3-5 Main Street, one-third of the documents recorded will say 3 Main Street; another third will say 5 Main Street; and the remainder will say 3-5 Main Street. Similarly, a street with a numeric name – like 3rd Avenue or Third Avenue – will be entered in the index in whatever way it appears in the document being recorded.