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“Are Foreclosed Properties Always a Good Deal?”

アメリカ 弁護士 法律事務所 法律  ForeclosedHouse.jpgHome foreclosures are a hot topic these days. But what many of the reports on the increasing number of foreclosures seem to neglect to mention is what happens to properties after foreclosure. Since foreclosed properties are often sold at reduced prices buying a foreclosed property may be worth considering. However, there are some pitfalls to be aware of before you sign on the dotted line.

A foreclosed property is one that is owned by the lending institution or government agency that backed a now-defaulted loan. For one reason or another, the owner failed to make payments on the loan and the lender foreclosed on the loan and took possession of the property. The lender now has the title to the property and can sell it to someone else. Mortgages on all types of properties, including single-family homes and condominiums, can be foreclosed.

Finding foreclosed property may be easier than you think. Some institutions advertise their foreclosed properties; others deal strictly through real estate agents. Real estate agents usually have a current list of the foreclosed homes in their area. There are also Web sites that can help you find foreclosed properties on your own. These include www.1stforeclosure.com and www.foreclosurefreesearch.com, as well as government Web sites, such as www.hud.gov/homes/homesforsale.cfm.

The Federal Housing Administration usually sells its foreclosed properties through an auction announced in newspaper classifieds. On the day of the auction, potential buyers submit bids accompanied by a certified check for a percentage of the bid price. However, before you put in an offer, make sure you have done your homework and, if possible, consulted with an experienced attorney or real estate agent. You should put as much, if not more, consideration into the purchase of a foreclosed property as you would for a traditional real estate purchase.

Buying a foreclosed property can be risky if you are not familiar with the procedures involved. Safeguards that are present in a traditional sale, such as the presence of a lender and a title insurance company (both of whom will share your interest in making sure the title is clear and the value sufficient), may not be involved in a foreclosure sale. The condition of the foreclosed property can be an additional drawback. Sometimes the first owner who was unable to keep up on payments was also unable to maintain the home properly. Nevertheless, a foreclosed piece of real estate just may be the right purchase for you, assuming you are aware of the pitfalls and are fully prepared to meet them.

(Spring 2008) Photo: © Pondshots | Dreamstime.com

"Moving Season"

Moving SeasonMore than 40 million Americans change residences each year, and a large number of those moves take place in the summer months. If you are preparing to move, it is important to know your rights and responsibilities when hiring a moving company.

Most moving companies are legitimate, reputable businesses, but there are a growing number of complaints against interstate movers who hold their clients’ possessions hostage on their truck, demanding far higher sums than their agreed- upon estimate. There are several key characteristics to look for that will help you avoid running into rogue movers:

  • The movers should offer or agree to an onsite inspection. Do not trust estimates done sight-unseen that seem too good to be true. They probably are.
  • The company’s Web site should feature a local address and information about their registration and insurance.
  • On moving day, you should see a company-owned or marked fleet truck, not a rental.

For interstate moves, the Federal Motor Carrier Safety Administration (FMCSA) requires the company to have a U.S. DOT number. You can double check this registration at www.protectyourmove.gov. For moves within a state, regulations vary. Check with your local consumer affairs agency for more information.

Once you have selected your mover and you feel confident that they are a reputable company, you should understand what their liability is with your belongings. All movers must provide basic liability of $0.60 per pound per article. This protection is provided at no extra cost to you. However, with it, the moving company is liable by weight rather than value. For instance, under this no-cost liability, if the mover loses or destroys a ten-pound object valued at $1,000, they are still only liable for $0.60 multiplied by ten pounds, or $6.00.

You also have the option of Full-Value Protection (FVP), a comprehensive protection plan. Under FVP, if any article is lost, damaged, or destroyed, the mover must repair it, replace it, or pay you the current market value of that item. You will automatically receive this level of protection if you do not waive it in writing. Be warned, your moving company will charge you for this protection, and the cost is a percentage of the total value you place on your shipment. The more value you assign to your property, the more it will cost to secure FVP.

As a third option, some movers may also offer separate liability insurance through a third-party insurance company. If you choose to purchase this extra liability insurance through your mover, the mover is required to issue a policy or other written record of it at the time of purchase. Without such documentation, the mover is liable for any loss or damage caused by its negligence.

There are some actions that will limit or reduce the mover’s normal liability. These actions include the inclusion of perishable, dangerous, or hazardous materials without your mover’s knowledge and the failure to notify the mover in writing of articles valued at more than $100 per pound (for instance, jewelry, silverware, china, furs, computer software, etc). Additionally, many movers will refuse to accept liability for damages caused to articles they did not pack. As a result, you may want to consider allowing the movers to pack your more valuable items to assure they will be covered.

Some homeowners’ and/or renters’ insurance policies cover damage or loss sustained during moves. Check the details of your policy before making a decision about liability insurance or FVP for your move. To protect yourself in an unforeseen dispute, be sure to receive a bill of lading from your mover. The bill of lading is the contract between you and the mover. Legally, the mover must prepare one for every shipment it transports. The moving company representatives who load your belongings onto the truck should give you a copy before or at the time of the loading. Read the bill of lading before you accept it. Do not sign it until you fully understand and accept what it says, and take care to have it available until your shipment is delivered, paid for, and any claims are settled.

When arriving at your new home, your mover will expect you to sign a receipt for your shipment. This receipt should indicate that you have received the materials. It may not contain any language releasing the company or its agents from liability. If any such language is present, strike it out before signing.

If your move results in loss or damage to any of your property, you have the right to file a claim to recover money. File the claim as soon as possible. If your claim is not settled to your satisfaction, you may use arbitration to settle it. Every mover must participate in an arbitration program, and movers are required to provide information about their arbitration program prior to moving day. If you cannot settle a claim, and arbitration fails, or you choose not to go to arbitration, you may file a civil action. Your lawyer can help you determine if this would be an appropriate course of action.

(Summer 2007)

"Premarital Agreements"

Premarital AgreementsWeddings have always been about family and ceremony and celebration. To keep it that way, many couples are taking steps to clarify their money matters before their big day.
Sometimes one (or both) partners who want to get married also want to avoid the risk of losing assets, income, or a family business in the event of a divorce. Others, who may be marrying for a second or third time, might wish to make sure that most of their assets or personal belongings will be passed on to the children or grand-children of their prior marriages rather than to their new spouse.

The law has developed a legal instrument to address these concerns—the premarital agreement. Also known as a prenuptial or antenuptial agreement, premarital agreements are usually in the news only when a celebrity has or (as in the case of ex-Beatle Paul McCartney) fails to have one. But premarital agreements aren’t just for the rich and famous. They are for anyone who would like to clarify his or her expectations and avoid uncertainties about how a divorce court might divide their property or decide spousal support if their new marriage fails.

In signing a premarital agreement, a spouse agrees to have his or her property rights and support obligations determined by the agreement rather than by the usual rules of law that a court otherwise would apply upon a divorce or death. The agreement can give the spouse more or less than state law would otherwise provide. In most states, courts divide property as the court considers fair, and the result is less predictable: the split could be fifty-fifty or something else. If one spouse dies, courts normally follow the instructions of that person’s will, but in most states the surviving spouse is entitled to one-third to one-half of the estate regardless of what the deceased spouse’s will says.

If the husband and wife have signed a valid premarital agreement, that agreement will supercede the usual laws for dividing property and income upon divorce or death. In many cases, the less wealthy spouse will receive less under the premarital agreement than he or she would receive under the usual laws of divorce or wills.

In general, the premarital agreement must be in writing and signed by the parties. In most states, the parties must fully and clearly disclose in writing their income and assets to each other. This way the parties will know more about what they might be giving up. In some states, it may be possible to waive a full disclosure of income and assets, but the waiver should be done knowingly, and it is still best if each party has a general idea of the other’s net worth.

Many states do not set a specific time at which a premarital agreement must be signed. Generally, however, it is better to negotiate and sign the agreement well before the wedding to show that each person has considered it thoroughly and signed it voluntarily. If the wealthier person shows the agreement to the prospective spouse only one day before the wedding, a court may later find that agreement invalid because of duress. While a last-minute premarital agreement is not automatically invalid, timing may be a significant factor in determining whether the agreement is valid.

Of course, the premarital agreement must not be the result of fraud or duress. An agreement is likely to be invalid on the basis of fraud if one person (particularly the wealthier one) deliberately misstates his or her financial condition. For example, if a man hides assets from his future wife so that she will agree to a low level of support in case of divorce, a court probably would declare the agreement invalid. Similarly, if one person exerts excessive emotional pressure on the other to sign the agreement, a court might declare the agreement to be invalid because of duress.

A lawyer can help you make sure that the agreement is drafted properly and that both parties are making informed decisions. The lawyer for the wealthier party usually prepares the initial draft of the agreement, but the less wealthy party should also ask his or her own lawyer to review the agreement. Although you do not need to have a lawyer in order to have a valid agreement, the agreement is more likely to be enforceable if each person’s interests are represented and significant back-and-forth negotiations have taken place. The agreement is more likely to be challenged if one of the parties does not have an independently chosen lawyer.

In addition to ensuring that a premarital agreement is legally valid and appropriate to your goals, your attorney can also help you assess whether other instruments such as a trust might help you carry out your wishes before your wedding day.

(Spring 2007)

“Rental Cars”

Rental CarsSpring break puts many families in mind of a vacation, and rental cars are often a part of that happy picture. Still, it pays to remember that the contract the rental company asks you to sign at the counter is a legal contract. Make sure that you read and understand the terms. The contract should clearly list the base rate for the rental car, any extra fees, and the length of the rental period.

Are you guaranteed a car if you have confirmed reservations? Not necessarily.
First, you must have a valid driver’s license. In several states, major car rental companies have electronic links to government computers where they can quickly obtain driver records (motor vehicle reports) when someone wants to rent a car. They may refuse a rental contract if the applicant has too many violations on his or her record. Some major rental and leasing companies also require that customers have a major credit card and be at least 18 years old; some consider only credit card holders aged 25 or older. The company might waive the age requirement if you have an account number in your name through a motor club or other association or if you have a rental account through your business.

You also should be aware that discounts are available through so many bodies- professional organizations, unions, frequent-flier clubs, etc.-that many people seldom pay the full price for their rental cars. When you pick up your car, it may be possible to negotiate for an upgrade to a better car.

But what the rental agency can give, it also can take away by charging for “extras.” Additional fees might include drop-off fees that will apply if you pick up and return the car in different locations. There may also be fuel charges, extra mileage fees, and fees for renting equipment such as child safety seats or ski racks.

The company is almost certain to offer you the Collision Damage Waiver (CDW) option. If you agree to an extra charge, the rental company will cover damage to your rental car. However, that coverage usually does not include personal injuries or personal property damage. Before accepting this option, make sure your own automobile, medical, and homeowner’s insurance policies would not already protect you in an accident involving a rented car. (Hint: If those policies don’t protect you, talk to your insurance broker because this is standard coverage, although your own policy’s deductible may be higher than that offered by the
CDW.) Coverage outside the United States is not standard, but your credit card nevertheless may offer insurance that does apply outside the country. Finally, check with your credit card company to see if using your card to rent a car comes with any insurance benefits and find out what they are.

When you accept your rental car, carefully check it for damage and note any damage on the rental agreement before you drive off the lot. And, enjoy your vacation!

(Spring 2007)

"Arbitration Clauses in Contracts"

Arbitration Clauses in ContractsAn arbitration clause is a section of a contract requiring disputes to be resolved through arbitration. If you have agreed to the terms of a credit card, insurance policy, or bank loan, you have probably agreed to an arbitration clause. Often the arbitration clause is included in the fine print of an agreement.

Unfortunately, arbitration is not always in the interests of consumers. Consumer rights groups claim that mandatory arbitration circumvents the protections of the legal system, such as the ability to file class-action lawsuits. Moreover, consumers rarely voluntarily agree to arbitration, but do so in ignorance, when they sign lengthy contracts with mandatory arbitration clauses buried in legalese.

If you are involved in a dispute and are facing mandatory arbitration, talk to your lawyer about how best to proceed.

(Summer 2006)

"Contracts for Beginners"

Contracts for BeginnersWhether you’re buying a car, renovating your home, or leasing property for your small business, you can be sure you’ll need a contract. Contracts are essential in all of these situations and more for two very good reasons. First, you need to set out the details of the agreement you’ve reached with the other party. A contract tells everyone what the agreement is―and that includes you, the person you’re making the contract with, and third parties, including lawyers and courts. Second, you need a contract to state what happens when things go wrong, or if circumstances change. Ultimately―and this is the way lawyers approach contracts―if you wind up in court, the contract tells the court what you and the other party agreed to, and the court will hold you to that agreement.

What Goes in a Contract?

Contracts can be very long, dense documents. They look like this for a reason: contracts should capture every piece of relevant information about the transaction.

For example, imagine a contract dealing with home renovation. The contract would obviously specify the work to be done (for example, turn that little bathroom next to the hall closet into a big bathroom with new plumbing.) It would also specify the amount to be paid, and the completion date. But in addition, a good contract would deal with warranties―that is, guarantees that the work will be done in a workmanlike manner. It might deal with change orders―that is, what happens if you make changes during the construction process. It should deal with insurance, and certify that your contractor has workers’ compensation insurance. It should allocate responsibility for arranging permits and inspections. And it should include language about who is to pay attorneys’ fees and litigation costs in the event of a dispute. With all these clauses (and many others), a contract for a fairly simple home renovation project might run to ten pages or more.

Remember that the purpose of the contract is to define exactly what the agreement is, and to protect yourself if things go sour. The more vagueness there is in the contract, the less understanding there is between you and the other party, and the greater the likelihood that the agreement will fall apart. The best contracts are concise, precise, and cover every eventuality.

Negotiating a Contract

There is no such thing as a “standard contract.” Every contract is subject to negotiation, and any contract can be changed, annotated, or rewritten. If a person flat out refuses to negotiate on a contract, you may want to seriously consider walking away from the deal.

Bear in mind that if the other party has drafted the contract, or uses a pre-printed form that is “standard” in this kind of transaction, the contract he or she slides across the table has not been written with your best interests in mind. There’s nothing dishonest or even shady about that. Contracts are about protection and leverage, and the person who writes the contract is going to give himself all the protection the law allows. Work with your lawyer to go through the contract and identify the terms you will agree to, and the terms that you want to negotiate.

When you are changing a contract as a result of negotiation, you can simply cross out language that you don’t agree on, and annotate terms that you wish to change. You can add a rider of additional terms. Make sure both parties initial and date any changes.

Oral Contracts

An oral contract is any contract that is not in writing. For example, if a person sells you a second hand car, you agree on a cost, and you shake on it, you have created an oral contract.

An oral contract is a bad idea, period. Don’t do it. Get the contract in writing. And if you have a written contract, don’t make any additional agreements orally.

Here’s why. First of all, there’s the law. Some states still rigidly enforce the Statute of Frauds, an old common law rule that any agreement having anything to do with real property (land) must be in writing. If it’s not in writing, the courts will not even bother to decide who’s right; there simply is no valid contract.

The second legal issue involves the parol evidence rule, which says (roughly) that the written agreement signed by the parties is the entire agreement. If you have a written contract, but you agree to a change orally and problems arise, you run into the parol evidence rule. Any oral agreements you and the other party have reached will not be considered as part of the contract. If you agree on anything that’s not covered in the contract, add it to the written contract.

The third issue is a matter of evidence. With a written contract, the proof of the terms of the agreement is right there, on paper. With an oral contract, the proof is what you remember about the agreement versus what the other party remembers about the agreement. Even honest people can have different ideas of what terms were agreed to.

The fourth issue is a practical one. Think about how many issues are covered in a contract for the simple home renovation used as an example above. It is very unlikely that someone making an oral contract will be able to cover all of these issues in sufficient detail.

Signing the Contract

What should you do when the negotiations are over, a written contract is drawn up, and the person you’re negotiating with asks you to sign on the dotted line? First, you should read the contract. Make sure that everything you agreed to orally is included in the contract. Query anything you don’t understand. And, if a substantial amount of money is involved, it’s a good idea to run the contract past your lawyer.

(Fall 2005)

"Correcting Credit Card Billing Mistakes"

Correcting Credit Card Billing MistakesOver the holiday period and during the sales, you will probably use your credit cards to make dozens of purchases. You also might return items and have amounts refunded to your credit card, and purchase items online. In an age of identity theft, it is more important that ever to keep track of your purchases and returns and to pay attention to your account statements ensuring that no mistakes have been made. The good news is that a federal law, the Fair Credit Billing Act, gives you valuable rights if there are billing errors on your credit card or department store accounts. Your lawyer can give you more information about the act and advice on the steps to take if you notice major billing mistakes on your credit card statements.

What are Billing Errors?

The Fair Credit Billing Act requires credit grantors to correct billing errors promptly. The act defines billing errors as

  • unauthorized charges; these include charges made by someone not authorized to use your card, and automatic charges you authorized for a service or subscription that you have since cancelled;
  • charges that are not properly identified on your monthly statement or that are for amounts different from the actual purchase price; or
  • charges for something that you refused to accept on delivery because it was unsatisfactory or that the supplier did not deliver according to your agreement.

Billing errors may also include

  • errors in arithmetic or multiple charges for a single transaction;

  • failure to reflect a payment that you made or other credit to your account, such as a return; or

  • failure to mail a billing statement to your current address (if the credit grantor received notice of that address at least twenty days before the end of the billing period).

Keeping Track of Your Bills

Of course, you’re unlikely to notice any billing errors if you do not check your credit card statements against a record of your purchases. Your statement usually gives only the date of purchases, the price, and the store from which you bought each item. Credit card statements can be difficult to decipher when the statement only includes a merchant’s corporate name (such as “ABC, Inc.”) rather than the store name (such as “Candy’s Groceries”). It’s a good idea to check your statement against sales receipts. If you keep sales receipts, you may also return an item in the event that it is defective, damaged, or the wrong size or color.

Reporting Billing Errors

If you notice any billing errors, you should write or telephone the card issuer promptly. As a practical matter, most consumers would prefer to call the card issuer’s 800 number for billing questions, and most disputes can be settled in this way. (You can find the correct 800 number on your billing statement.)

However, the Fair Credit Billing Act only protects written―not telephone―inquiries, so making a written inquiry will better preserve your legal rights. Do not include written inquiries about billing errors with your payment. Instead, you should check the billing statement for the correct address for where to send billing questions. The letter should contain your name, address, and account number. State that you believe your bill contains an error, specify the charge at issue and explain why you believe it is wrong, and include the date and suspected amount of the error. Include copies of any sales receipts or other documentation that may be relevant. It’s also a good idea to send your letter by certified mail requesting a return receipt, so that you have proof that you sent the letter to the correct address.

Either a written or telephone inquiry must be made within sixty-days of the statement date. The sixty day time limit is very important; if you fail to observe it, you may forfeit your rights under the Fair Credit Billing Act. After you have notified a creditor of a billing error, the law requires the creditor to acknowledge your letter within thirty days (unless the credit grantor can fix the billing error in less time). The credit card issuer must resolve the dispute within two billing cycles (but not more than ninety days) after receiving your letter.

Following the Rules

If the credit grantor does not follow each of the time limits and other requirements in the Fair Credit Billing Act, then it cannot collect the disputed amount or related finance charges, even if the disputed bill turns out to be correct and the amount is thus money you truly owe. For this reason, it’s important to keep track of the dates on which you sent correspondence to the creditor, and the dates on which you received replies.

If the Bill Is Incorrect

If the creditor determines that your bill was in fact incorrect, then you obviously do not have to pay the contested amount. In addition, the Fair Credit Billing Act provides that you do not have to pay finance charges or late fees related to the contested amount.

If the Bill Is Correct

If the credit grantor finds that the disputed bill is correct and you do not want to take the matter further, then you must pay the bill and any related finance charges or late fees. You may ask for copies of relevant documents. If you fail to remit payment, then the credit grantor may take action to collect the amount and may report you to credit bureaus as overdue for the amount in question.

If you still disagree with the credit grantor’s finding, you should notify the grantor of your views in writing within ten days. If you refuse to pay the disputed amount, then the creditor may begin collection procedures and may report you to a credit bureau. However, in its report to the credit bureau, the credit grantor must state that you do not believe you owe the money. Remember, if a creditor reports negative information about you to a credit bureau, it can affect your credit score and make it more difficult for you to get credit in future.

If you are unable to resolve the dispute to your satisfaction, you may want to consult a lawyer.

Complaints and Litigation

The Federal Trade Commission enforces the Fair Credit Billing Act for most creditors. To file a complaint or to get free information on consumer issues, you can use the complaint form at www.ftc.gov.

It is also possible to sue a creditor who violates the Fair Credit Billing Act. Courts have the ability to award twice the amount of any finance charges between $100 and $1000 (i.e., a maximum of $2000) and may also award damages in some cases. Your lawyer can give you more information about pursuing litigation under the act.

Effect on Your Credit Rating

A credit grantor may not threaten your credit rating because you failed to pay a disputed amount, a related finance charge, or other charges while you’re trying to resolve a billing dispute. Once you have taken the steps described above by writing down the details of the billing dispute and sending them to the credit grantor, the law prohibits the credit grantor from reporting the account as delinquent because you have not paid the disputed amount or related charges. Until the credit grantor answers your complaint, the law forbids it from taking any action to collect the amount in dispute. You must, however, continue to pay any undisputed amounts.

In addition, the Equal Credit Opportunity Act prohibits creditors from discriminating against people who have exercised their rights under the Fair Credit Billing Act when they are applying for credit. Simply put, you cannot be denied credit simply you’ve disputed a bill. If you think a mistake has been made, you have nothing to lose by making an enquiry.

(Winter 2005-2006)

"Renovating Your Home"

Renovating Your HomeWinter is the time when many people begin planning a home renovation project. Renovation can be a great way to make your home a more enjoyable place to live while adding to the value of what is probably your most valuable financial asset.

This article, the first in a series, will look at some first steps in beginning a home renovation project. What factors should go into your decision to renovate? And if you decide to go ahead with a project, how should you go about setting a budget and paying for the work?

Should You Renovate?

The first factor to consider is your enjoyment of your home. Only you know how much a renovated kitchen will add to your enjoyment of your home, and how long you plan to stay in your home and enjoy the renovation. The second factor to consider is return on investment. A word of caution: the value of your home depends on many factors. The location of your home and its overall condition will have the greatest effect on its value, but renovation will play its part. Renovated kitchens and new bathrooms generate the most value, usually adding 90 percent or more of the renovation’s cost to the value of your home. A new deck, a renovated bathroom, or a new family room will typically add 75 percent to 85 percent of the renovation cost, while you should recoup about 70 percent of the cost of a renovated home office.

Paying for Your Project

If you decide to go ahead with your renovation project, you need to decide how much you can afford. Remember that your budget should include at least 20 percent more than your expected project costs to cover changes and additional expenses that you haven’t anticipated.

Depending on the size of your project, you may be able to pay for it out of your personal savings or by borrowing against personal assets such as a retirement fund, life insurance policy, or investment portfolio. But if the project is significant, it is more likely that you will need to seek some form of financing to pay for all or part of the project’s cost.

There are many different types of loans available―which one is right for you will depend on your circumstances. Some of the most common loans include:

Home equity loans

These loans let you borrow against the equity you have accumulated in your home, typically up to 75 percent or 80 percent of the equity value. You can easily calculate the amount of equity you have in your home by subtracting the outstanding balance on your mortgage from the home’s fair market value. Because a home equity loan is secured by your home, just as a mortgage is, you can write off the interest you pay on your income tax return. Interest rates on home equity loans are typically slightly higher than rates on a standard thirty-year mortgage. Closing costs can be high, however, and if you default on a home equity loan, you could lose your home.

Home equity line of credit.

This is an open-ended, adjustable-rate line of credit with your home as collateral. You can use the line of credit as you need it, up to a limit of between 75 percent and 80 percent of the equity value in your home. Home equity lines of credit usually carry a variable interest rate based on the current prime rate or another index. The interest rate is generally about 1.5 percent higher than a first mortgage, but is not charged until you spend some of the money in the line of credit. Interest paid on the money you borrow is tax deductible. The danger with a line of credit is that it’s very easy to go over budget.

Second mortgages.

A second mortgage is just like your first mortgage, but it’s next in line for repayment if you can’t pay your debts and the lender forecloses on your home. It’s a fixed-rate, fixed-term loan based on the equity in your house that is paid back in equal monthly installments. A typical second mortgage is a five- to twenty-year loan for 75 percent to 80 percent of the home’s equity value. Interest rates are slightly higher than for a standard thirty-year loan. Once again, you’ll face closing costs and you may even need to buy title insurance and pay processing fees. The interest is tax-deductible.

Cash-out refinancing.

If interest rates today are lower by two percent or more than when you first bought your house, refinancing your mortgage can be a smart move. This allows you to use the equity in your home to take out a new loan to pay off your existing mortgage and then use the remaining funds for your renovation project. A typical refinance involves an adjustable or fixed-rate 15- to 40-year loan for 75 percent to 80 percent of the home’s appraised value. Depending on the balance of the original mortgage, the remaining cash from the refinancing can be used at the homeowner’s discretion. Some lenders will refinance up to 95 percent of the home’s appraised value, though interest rates will be higher. Closing costs may include appraisal and points. The interest is tax deductible.

Under no circumstances should you feel pressured to sign loan documents or feel confused about what you are being asked to sign. A reputable lender will be patient and straight with you. Take your time in deciding which method of financing is best for you. Be sure that you understand all of the terms of the loan. Remember, if you have second thoughts about signing for a loan, the federal Truth in Lending Act gives you three business days after signing to cancel a contract. If you have any questions or concerns, talk to an attorney before you sign.

(Winter 2005-2006)

"Home Renovation: Contractors and Contracts"

Home Renovation: Contractors and ContractsYou’ve decided that a renovation project will add good value to your home, you’ve settled on a budget, and you’ve decided how to finance your project. Now comes the most important decision: who will do the work?

This article, the second in a series on home renovation, discusses how to select a contractor and reach agreement on a contract. What information should you have before you make your decision? And once you’ve decided on a contractor, what are the basics of a good agreement that will protect your interests?

Selecting a Contractor

There are many ways to identify possible contractors for your project. You might contact the contractor who worked on a project in your neighborhood that you admire, or respond to an advertisement in your local newspaper. But before you commit to any contractor, you should take the following steps to ensure that you’ve selected the right person for your project.

Get Three Bids

Take the time to get three bids on your project. You do not want to feel that you are being overcharged once the project has begun. Before you seek your bids, prepare a detailed plan of the work you want done. Give the same information to each of the contractors whom you ask to prepare bids so you can make a valid comparison.

If the prices diverge substantially, first look at differences between the core work and the finish work. Core work includes the work on floors, walls, ceilings, and everything that goes behind them. The cost for this work should be about the same from contractor to contractor. Finish work includes work on moldings, trim, tile, and cabinetry. The cost of materials and workmanship on these items can vary significantly. If differences in the cost of finish work don’t account for the overall cost difference, find out why one bid seems unusually high or low. Make sure all the contractors have the same understanding of the job.

Find Out as Much as You Can

A reputable contractor should be able to provide you with several references to former clients. Take the time to call these references and ask if you can see the work the contractor did for them. Find out what it was like working with the contractor.

Also talk to individuals who work in the home renovation community―such as electricians, plumbers, or interior designers―or to local realtors. What do they know about the contractor you are considering for your project?

Finally, double check your contractor’s credentials. Contact your state’s licensing board to confirm that the contractor is licensed and bonded.

Make Sure Your Contractor Carries Insurance and Offers a Warranty

Be sure your contractor has both workers’ compensation and general liability insurance and ask to see his or her current certificates of insurance. Workers’ compensation insurance provides coverage to the contractor and the contractor’s employees in the event of job-related injuries. General liability insurance covers negligence that results in injury to the person or property of someone other than the contractor and his or her employees. If your contractor doesn’t carry the proper insurance, anyone injured at your home during the renovation project is likely to sue you as well.

Ask whether your contractor provides a warranty on his or her work and make sure that it is mentioned in the contract. Some contractors may also offer an extended warranty for an additional fee.

Your Contract with the Contractor

Your project is likely to cost tens―maybe hundreds―of thousands of dollars. It is essential to protect your investment by a written contract that spells out the terms of your agreement with your contractor. At this stage, spending a few hundred dollars to have a lawyer help you review and negotiate a contract will be a smart investment.

You will likely begin negotiations with your contractor presenting a “standard” contract for the work. Treat this as a starting point―all contracts can be negotiated, changed, or rewritten. Your lawyer can assist you in negotiating clauses specific to your project. All contracts should address some essential issues.

Mechanic’s Liens

Mechanic’s liens can be filed against your property by anyone providing services, labor, or materials for work performed on your property. If a lien is filed against your property, you won’t be able to borrow money against your property or sell the property without paying the lien. If a lien remains unpaid, in many states a lienholder can force you to sell your property to satisfy the lien.

To avoid this situation, your contract should provide that the contractor’s and any subcontractor’s lien rights on completed work are waived as you make periodic payments. The contract should provide that at the end of the project you must receive full waivers of lien rights from everyone involved in the project before you make final payment.

Warranties and Insurance

As discussed earlier, make sure the contract provides warranties for the work and materials used in your project. The contract should also include a waiver of subrogation clause, which provides that the contractor cannot sue you for reimbursement of damages if the contractor is found liable for injuring someone. The contract should also provide that the contractor will indemnify (reimburse) you if you are found liable for any injuries occurring during the renovation.

Cost and Payments

Your contract must state how much the project will cost, and be clear about the work to be performed. The contract should break down the cost of labor and materials for different categories of the work (for example, plumbing, carpentry, and electrical work). Don’t accept a contract that provides only for an hourly rate or a cost-plus basis, which means that the contractor gets paid his or her costs plus a percentage set by the contractor as profit. In both hourly rate and cost-plus situations, the contractor will have little incentive to hold down costs.

f you have not yet made final decisions on certain finish or fixture details, make sure the contract provides for a means of determining their costs. Your contractor will also want provisions for unanticipated problems that arise during the project. Make sure that the contract spells out what problems might arise and what the solution and anticipated cost for correcting those problems would be.

Payments under the contract should be spread out over the course of the project. Payments are typically timed to coincide with certain milestones (for example, demolition, framing, appliance delivery, etc.). Make sure that the final payment is not due until all the work is completed and you have received lien waivers from all the necessary parties.

Change Orders

You are almost certain to change your mind about something after your project begins. These changes almost always increase the cost of your project. Your contract should provide that all change orders must be in writing, describe the work to be completed and its cost, and be approved by you in writing before the work can begin.

Start and Completion Dates

The contract should provide for set start and completion dates for the project. If there is a financial penalty if these dates are not met, the contractor will have an extra incentive to set reasonable dates that give you a clear sense of how long the project might last.

Responsibility for Permits and Inspections

The contractor should have responsibility for obtaining the necessary building permits for the project, which virtually all renovation projects will require. Do not consider any renovation without the proper permits. If you do so, the city could require you to tear down any work that is not up to code.

Attorneys’ Fees and Arbitration

The contract should provide that the prevailing party in any lawsuit is entitled to attorneys’ fees and court costs from the losing party. Also request a clause providing for arbitration in the event of a dispute, which is usually faster and less expensive than a lawsuit, and make sure you have a right to have a lawyer represent you in arbitration.

(Spring 2006)

"Home Renovation: Completing the Project"

Home Renovation: Completing the ProjectYou’ve carefully planned and budgeted your home improvement project and have engaged your contractor. Now come the hard parts―living through the mess and making sure that your project is completed according to the terms of your contract.

This article, the third and final in a series on home renovation, discusses some of the problems that can arise as your project moves to completion. It looks at some of the most common pitfalls in home renovation and then considers how you can resolve your dispute if your project goes wrong.

Common Pitfalls in Home Renovation

Few projects stay exactly on time or on budget, but no project should become a nightmare. Here are some common problems that you should be aware of as work begins.

Failure to Start

Your contract should specify an exact start date for the project; such a stipulation makes it more likely that work will start on time. However, situations can still arise that delay the start date: bad weather, for example, or delays in supplies of materials. Whatever the reason for a failure to start your project on time, you should expect your contractor to notify you of the reason for the delay.

If your project does not begin on time and you haven’t heard from your contractor, contact him immediately. If your contract has specified an exact start date, you should insist that the project start right away. If an exact start date was not specified, establish a definite date in the future by which you expect work to begin.

If your contractor continues to fail to respond, consider talking to your lawyer. He or she will be able to help you determine whether your contractor’s failure to respond constitutes a breach of contract and can draft a letter to the contractor spelling out what remedies you will expect in the event of a breach.

Delays and Failure to Complete

Your contractor’s responsibility is to do his best to keep the job moving forward and to apprise you of any foreseeable problems or delays. You should also be diligent in keeping the lines of communication open with your contractor. Do not hesitate to call if you are concerned about the progress your contractor is making. Remember that in construction, as in most businesses, the squeaky wheel gets the most attention.

If delays stretch into weeks or months, you may be facing a failure to complete. Failure to complete can be far worse than failure to start. You may be living in a torn-up home with no sign as to when the project will end. Your contract should provide for a completion date as well as a start date and also provide for penalties if the project is not completed in a timely manner.

If it seems clear that your contractor has abandoned the job, see a lawyer and begin the process of forcing the contractor off the job. Your lawyer will be able to help protect you against the possibility of mechanic’s liens being filed against your property by subcontractors and suppliers.

Shoddy Workmanship

Your contractor’s work must meet certain standards, most of which are established by states and municipalities in building codes. A local building inspector will ensure that your project is in compliance with these standards.

As the homeowner, you should be alert to signs of shoddy workmanship that do not amount to a code violation. The signs of shoddy workmanship will probably be apparent: corners that do not meet, for example, or appliances that do not quite fit in their spaces. When you see signs of such workmanship, talk to your contractor immediately and request that the problem be fixed.

Your contract should provide you with the right to an independent inspection over the course of the project. If your contractor won’t take responsibility for shoddy workmanship, insist on taking advantage of this right. Ask the inspector to provide a report detailing the problem, its cause, how it can be fixed, and the likely cost of repairs.

If your contractor still refuses to fix a problem after receiving an independent inspector’s report, you’ll probably have to prepare for the possibility of going to court. Talk to a lawyer right away so that you will know what sort of evidence you should gather and how you should proceed with your contractor.

Resolving Your Disputes

The best way to resolve disputes that arise during a home renovation project is to maintain a good relationship with your contractor and stay on top of your project. Ask questions as they come to mind and work with the contractor to negotiate solutions to the problems as they happen.

If problems escalate and you face an unresponsive contractor, you may need to take more serious steps to resolve your dispute. If you believe you are facing a breach of contract, let the contractor know in a phone call or, even better, in a face-to-face conversation. Keep notes of your conversation. If this doesn’t produce a satisfactory response, you will want to talk to a lawyer. A simple letter may be all that is required―it will give the contractor notice that you are prepared to take whatever steps are necessary to resolve the problem.

The terms of your contract and a conversation with your lawyer will help you decide if further steps need to be taken. Your contract may allow, or require, alternative dispute resolution in the event of a dispute. This may take the form of arbitration or mediation (discussed in the cover story). If alternative dispute resolution is not an option, you may be able to resolve the matter in small-claims court, depending on the estimated cost of resolving the problem. Or you may need to pursue a lawsuit against the contractor. Your lawyer will be able to help you decide which means of dispute resolution is best for you.

In any case, you will be seeking either specific performance of the contract, which forces the contractor to do the agreed-upon work, or damages that will cover the cost of repairing the problem.

(Summer 2006)

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