Author: Jacob Pugh

Why are Certified Funds required in a Real Estate transaction?

What are certified funds?  What are the differences between a “cashier’s check, bank money order, personal money order, cash, check, wired funds or ach?”  I’m buying real estate and my title company wants me to bring “cash or equivalent” or “certified funds.” Why? Why can’t I just write a personal check?  The money is there!  Does somebody stamp my hundred dollar bills as “certified?”  What bank is going to give me $200,000 in hundred dollar bills so that I can buy my house?  Do I need an armed guard?

Relax! The purpose of this blog post is meant to give a simple explanation of why “certified funds” are required in your real estate transaction and how to acquire and present them to the title company.

Certified funds are just that. They are certified to be good, guaranteed, valid, and non-revocable.  Here are the different types of certified funds:

  1. Cashier’s Check
  2. Bank money order
  3. Wire
  4. Cash

Simply put, once a cashier’s check or bank money order is issued by a bank, it cannot be recalled or cancelled by the bank.  The bank that wrote the cashier’s check or bank money order must by law, honor and pay the amount due in the document.  Therefore, it is the same as handing a person the equivalent amount of funds in cash.  Personal checks or personal money orders can be cancelled if it is determined that there is an issue with the check or the underlying funds.  Therefore, personal checks or personal money orders must “clear” the issuing bank before the payment is deemed absolute.  This could take as long as a week or more.

A wire is a method of transferring funds between two banks.  Once the wire has left the issuing bank and has been deposited in the receiving bank, the transaction is complete and final.  The funds cannot be returned without the approval of the recipient bank and underlying customer.

Cash is, well, cash. It is absolute funds, and value has is transferred immediately to the holder.  There is no issuing bank to recall the funds.  It is the absolute transfer of value when given from one person to another.  However, we highly recommend not paying for your house in cash. And so will your bank when you request $200,000 in cash to buy your house!

Certified funds are required because it assures that the funds are good and valid and present at the closing of the transaction.  A closing is set for a certain day and if, for example, a personal check is presented, the title company will have to wait at least a week before giving the seller their proceeds from the sale.  If the seller does not receive his proceeds for a week past the closing date, well, the parties have not really closed on the agreed upon date, right?  In order to ease this issue, your closing agent will require certified funds so that she may disburse proceeds to the seller, commissions to agents, filing fees, etc.  Certified funds give the closing agent the assurance that she is holding good funds and is clear to let money go to the various parties entitled.

When you are ready to complete your real estate closing, you will either pay for the real estate from your own money, borrow funds, or a combination of the two.  If you borrow the funds, most likely your banker will either give you a cashier’s check to deliver to the title company or simply wire the funds on your behalf.  If you are responsible for a portion of the funds, you will need to request a “cashiers check” or a “bank money order.”  Depending on your bank, either term may be used.

Buying or selling real estate is a major investment and can potentially cause you stress.  Our goal at Tallgrass Title is to answer your questions about certified funds or any other aspect of your transaction.  Its our job!

Importance of a Real Estate Agent in a Transaction

How do I negotiate a contract? What does “in escrow” mean? What is an appropriate “counter-offer?”  How much will my proceeds be from the sale of my house?  What the heck is title insurance and who sells it?  Which title insurance/closing company should we use?

An American’s home is his or her largest investment. The majority of us do not regularly purchase and sell real estate.  For this reason, the purchase or the sale of your house can be incredibly stressful.  Real estate agents or Realtors are real estate professionals that navigate through these tough questions daily.  Real estate agents are not just salespeople.  In fact, I would say that the majority of a real estate agent’s experience is in assisting a buyer or seller understand the transaction.  An agent will help you write a contract for purchase of real estate, advise on technical terms, and assist in making offers and counter-offers.  Additionally, an agent may help in coordinating financing for the purchase of real estate.  One must remember that a real estate agent has studied the profession and is licensed and works in the profession.  An average homeowner in the United States will usually own less than five homes in his or her lifetime.  This will most likely result in many years passing between sales and purchases.  It can be difficult to remember the details of a smooth transaction in these gaps.  Additionally, Americans are becoming more mobile across state lines and internationally.  A homeowner may understand how a real estate transaction takes place in Louisiana, but a Kansas transaction will have its own unique issues.
In addition to assisting homeowners in the art of negotiating and closing real estate transactions, real estate agents understand the market.  Understanding what the market will bear is invaluable in a real estate sale or purchase.  Real estate agents work in the field, they assist in sales constantly, and they know what property is worth.  As a Seller, you will be tasked with setting a list price for your home or real estate.  Your agent will know strategy for setting a listing price.  Additionally, as a Buyer, you will at some point make an offer on a house.  An agent will advise whether the price you would like to offer is appropriate or likely to result in a purchase.
Lastly, as title insurance professionals, we work with real estate agents on a daily basis.  They are incredibly valuable in the transaction process.  Real estate agents assist in securing signatures on various documents, coordinating closings and financing for their clients, and directing the disbursement of funds for various costs.   For these reasons, Tallgrass Title is a proud affiliate member of the Manhattan Association of Realtors which covers Riley, Pottawatomie, Wabaunsee, Marshall, Clay and Washington Counties.  Here at Tallgrass Title, we believe in the importance of real estate agents and encourage all buyers and sellers to work with a real estate agent in their transactions.

Basics of Oil and Gas Leases in Kansas

You have just received a commitment for title insurance and an exception appears:

“Oil and gas lease filed for record at book 300, page 242, on August 2, 1996.”

What is this? Why is it here? Do I need to do something about it? Are the “mineral rights intact?” “Will there be an oil well pump jack in my front yard?” The purpose of this post is to arm you with the basic knowledge to answer these questions and to take the confusion out of your transaction.

Oil and gas rights, also known as “mineral interests” are the right to the oil and gas potentially existing under the surface of real estate. A deed from one person to another automatically passes both the surface rights and the oil and gas rights to the new owners unless the deed specifically states otherwise.   If the oil and gas rights have been “severed” or are not “intact,” your commitment will clearly state this fact in the legal description and/or in the exceptions.  Simply put, one person can own the oil and gas rights below the surface and another can own the surface rights.  Both may be passed to different buyers by deed to the surface and deed to the mineral rights. Typically, in Kansas, surface rights and oil and gas rights are not severed.  Most commonly, oil and gas rights are “leased.”

An oil and gas lease is like a surface lease in that the owner gives the right to use real estate for a period of time in exchange for payment. Therefore, the owner is giving the right to another person (typically an oil and gas company) to explore and produce oil from the subsurface for a period of time.  Most oil and gas leases in Kansas range from five to ten years unless production or exploration is active.  If production or exploration is active, an oil and gas lease continues until such time as it is inactive for the term of the lease.  Interestingly, the vast majority of real estate subject to an oil and gas lease is never explored.  Companies purchase the lease and in the event oil and gas is found in the area, they can continue the exploration and production.

A title insurance company will list the oil and gas lease on a commitment to make the buyer aware of the fact that a lease exists on the real estate; that somebody potentially has the right to drill an oil well or place an oil well in your front yard. Quite often though, the lease period has expired and no oil has been produced.  If this is the case, and somebody familiar with the land will swear to this fact, the exception can be removed from the commitment.

Oil and gas rights can be a complicated subject for even the most seasoned buyer, seller, real estate agent or banker. If you have any questions about mineral rights in a transaction, Tallgrass Title has real estate attorneys that specialize in oil and gas law who are happy to discuss these questions with you.  It’s our job!

5 Highlights of Real Estate Contracts

The law of contracts (sometimes “agreements”) literally fills libraries and people devote their lives to learning and teaching its content. The issues can oftentimes be complex, confusing and daunting.  I cannot possibly begin to cover all nuances in a real estate contract.  However, I will provide a buyer and seller with five major points to consider in a contract to protect yourself.

  1. What is a real estate contract? A real estate contract is nothing more than an agreement about how the real estate will be sold by the Seller and purchased by the Buyer. It should contain all of the agreements between the parties. A typical consumer actually enters into a simple, unwritten contract each and every time a purchase is made no matter how small. However, we usually do not bring paperwork into donut purchases. Real estate on the other hand has significantly more value and can be far more complex. A written agreement allows for all of the details to be clear between the Seller and Buyer and in writing so as to prevent confusion and misunderstanding.
  2. Purchase price. Simply put: How much is the Buyer going to pay the Seller for the real estate to be purchased. Sounds simple enough but where will the money be delivered? Are the funds to be certified? (meaning the equivalent of cash?) Will there be an earnest money deposit? An earnest money deposit is a deposit towards the purchase of the real estate. It is most often made to the title insurance or closing company and paid towards the purchase at closing. However, if the Buyer fails to close for any reason that is not specifically allowed by the contract, the earnest money is forfeited to the Seller. Basically, it helps insure that the Buyer will carry through with the contract while at the same time giving the Seller some assurance that the Buyer is serious about the transaction.
  3. Closing date. When will the transaction take place? This is the day the Seller will deliver a deed and typically possession of the real estate and the day the Buyer will deliver money for the purchase. This date is often times about 30-45 days following the initial signing of the contract. The 30-45 day period allows the Buyer an opportunity to secure his financing. It also allows the title company an opportunity to prepare a title commitment and arrange a closing.
  4. Delivery of Deed and Possession. Just as it is stated; when will the deed be given to the Buyer and when will possession be granted?  Typically, the giving of the deed and possession happen on the date of closing.  Most Buyers prefer to have access to their home or real estate upon paying a significant amount of money.   That being said, unusual circumstances do arise and the parties to a contract oftentimes work out arrangements that protect both sides to an agreement.
  5. Proof of ownership. Most real estate contracts will contain how the Seller will prove to the Buyer that the Seller actually owns the real estate to be sold.  This is important because ownership of real estate is proven by several sources and methods.  Liens, easements, encumbrances, and ownership issues can impact the real estate to be purchased.  Most individuals are not equipped to determine whether these issues exist on real estate to be purchased.  Therefore, most contracts state that the Seller will deliver proof of ownership and the condition of the “title” prior to closing.  Most often this is through a “title insurance commitment.”  A commitment will show who owns the real estate and what liens, easements, encumbrances, etc. exist.  This document is usually prepared by a title insurance company on behalf of the Seller.  Additionally, the title insurance company will usually handle the closing of the transaction too.  This means that the title insurance company will collect a deed from the Seller and the money from the Buyer and pass them to each other.

As stated above, the process of entering into and fulfilling a contract can be complex and time consuming. I highly recommend that potential Buyers and Sellers employ a real estate professional such as a Realtor or attorney to assist in the process.

Using a Power of Attorney in Real Estate Transactions

In the current, fast-paced world, people often times find it difficult to be present at a closing. Perhaps a work or vacation schedule prevents a person from being present at a real estate transaction.  Military personnel are often times deployed overseas.  Often times folks are forced to relocate quickly and must sell their house from afar.  For these and many other reasons, a power of attorney may be the right tool for a closing.

Simply put, a power of attorney is a document that gives a person the authority to do certain acts on your behalf. This person is often referred to as the “power of attorney” or “agent.”  In a real estate transaction, this is commonly done with a “limited power of attorney.”  This allows the designated person the limited authority to sell or purchase real estate on behalf of a person.  The power of attorney document is signed by the person giving the authority prior to the real estate closing.  The designated individual provides the document to the title insurance or closing agent.  At the closing, the power of attorney simply signs for the absent person.

However, it is important to remember a couple of points to avoid delays or confusion at the closing:

  • Plan on having the power of attorney prepared well before closing. Often times the individual signing the document will be overseas. This will require finding a notary or equivalent at a consulate’s office. If in the United States, but simply unavailable, a notary will need to sign the initial power of attorney. Also, an original power of attorney will be needed for the closing.
  • Let your real estate agent, title insurance agent, closing agent or banker know as soon as possible that you are using a power of attorney to close. It is extremely important that these individuals know about the presence of the power of attorney in order to prepare the closing correctly. Failure to let these individuals know of that fact could delay closing.
  • If the power of attorney is being used to sell a principal residence or “homestead,” Kansas law dictates that specific language be added to the power of attorney. If the language is not present, the power of attorney may lack the proper authority to complete the closing.
  • Have a real estate professional assist you with the form. The power of attorney document and its requirements can often appear daunting and confusing. A real estate professional can assure that the document is completed correctly and prevent a delay in closing.
  • Decide who will be your power of attorney. Often times this is a stateside spouse, real estate agent or family member. It is important that this person be trustworthy. After all, the family home is most Americans’ largest investment. You do not want just anybody handling this transaction for you.

 

Tallgrass Title is also happy to assist in the preparation of the power of attorney to ease the closing process. Our office has seasoned real estate attorneys on staff that have prepared countless power of attorney documents for every type of real estate transaction.   Additionally, our attorneys are available to answer questions regarding the power of attorney.  With a little pre-planning, a seemingly daunting and confusing situation can be made easy.

Tax Consequences Resulting from the Sale of Your Principal Residence

It has often been said that there are two certainties in the world: death and taxes. However, with the sale of your principal residence, most of the time a seller can avoid paying tax on the proceeds received!  So, you have decided to sell your house and are concerned with paying income tax on the proceeds?  Are you about to attend your closing and this thought just popped into your head? Did you just deposit your proceeds check and now are scared the IRS will be coming for your bank account?

Simply put, the IRS requires individuals to pay capital gains tax on “gain” or money made in a transaction. This means that you will be taxed on the difference between what you paid for real estate and the sales price.  So, if you paid $100,000 for a house and sold it for $150,000 you have “gain” in the amount of $50,000.  Therefore, this $50,000 would be subject to tax.  However, the IRS has a law that states that if you sell your principal residence for a gain and you have had the house for at least two years, you can exclude up to $250,000 in gain from tax.  If you are married, the level is $500,000 in gain.  So, a couple selling their qualifying principal residence can take up to a half a million in profit without having to pay a single penny in tax!

With this advantageous tax rule, several people have attempted to use this rule for property that is not necessarily a principal residence. So, what is a principal residence?  Several tests are used to determine whether your house is a principal residence and subject to this tax free sale allowance.  Some of the factors used are: Where are you registered to vote?  Where do you receive your mail? What school district do your kids attend? What address is on your driver’s license? What address is on your state and federal income tax returns?  How often do you stay the night at the house?  The list is not inclusive but are definite factors looked at by the IRS.

Additionally, one must reside in the house as a principal residence for at least two years out of the previous five years in order to qualify for the exclusion. However, if the sale was because of a few reasons, you may still be able to qualify for at least a portion of the exclusion.  Some of the special exceptions include: work related move, health related move, divorce or unforeseeable events.  These exceptions each have their own rules that are too extensive to discuss here.  Therefore it is best to consult with your tax preparer or a qualified tax professional.

As you can see, this exclusion is a powerful tool for homeowners!

Real Estate Tax Proration in Real Estate Closings

A common question that arises during the closing process is how a real estate tax proration works in Kansas. Every county in Kansas, including Pottawatomie, Wabaunsee and Riley Counties, has a tax levied against real estate.  It is based upon the value of the property owned by an individual.  There are also different tax rates for residential, commercial and agricultural real estate.  Taxes are due for each year a person owns real estate and are charged against the owner of the real estate at the time the tax becomes due.  In Kansas, real estate taxes are not due until the month of December of the year of the accrued tax.  Additionally, the actual amount of tax is also not known until shortly before the tax is owed. So, basically, that year’s taxes are always paid at the end of the year in December.  To add further confusion, an owner of real estate may pay all the tax owed for that year in December or can pay one-half of the tax in December and pay the second half in May of the next year.

So, if you close a real estate transaction on any day besides January 1, the Seller will have occupied the real estate for a portion of the tax year and the Buyer will occupy for a portion of the tax year.  Therefore, to be fair, the Seller pays for the portion of the taxes that accrued while he occupied the real estate and the Buyer for his portion.  However, the actual tax amount is not known until around December, right?  If a transaction closes in July, how do we charge each side its amount?  As real estate taxes are based on value and value typically does not fluctuate wildly year to year, we estimate the amount of the taxes for that year based upon the previous year’s real estate taxes owed.  If your closing takes place when taxes are known, we will use the actual real estate tax figures from the county for that year.

Lastly, real estate taxes for that year cannot be paid until they come due in December.  Therefore, the Seller pays the Buyer the Seller’s portion of the taxes at the closing table.  The Buyer is then responsible for all of the taxes when they come due.  To simplify the process even further, we usually just show this as a credit at the closing table.  Meaning, we reduce the purchase price to be paid to the Seller by the Buyer by the amount of the real estate taxes that are the responsibility of the Seller.

Real estate taxes in Kansas can be quite confusing.  Therefore, if you have additional questions about real estate taxes in your closing, simply call our office for further assistance.  That’s why we are here!