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In Hearne v. Statesville Lodge filed May 15, 200l, the North Carolina Court of Appeals reaffirmed the doctrine known as “Buyer Beware”. In this case, purchasers brought suit for misrepresentation against the seller and real estate broker after purchasers learned that the septic system could not handle the purchaser’s increased volume due to purchaser’s commercial use of the property. The seller and the listing agent knew the purchaser intended to open a restaurant on the premises and allegedly told the purchaser that the septic system was adequate for that purpose. Relying on that information, the purchaser failed to make any independent investigation concerning the septic system and purchased the property. After closing, purchasers could not obtain a permit from the health department to open a restaurant because the septic system was inadequate.

In holding for the seller and the listing agent, the Court of Appeals held that where the seller and listing agent did nothing to trick the purchaser, did nothing reasonably calculated to induce purchaser to forego an investigation of the property, and where the purchaser had a full opportunity to inspect the property and determine its suitability, the purchaser could not reasonably rely upon a statement made by the seller and the listing agent. The Court of Appeals recited a number of North Carolina cases which have held that the purchaser’s right to rely on representations made by the seller or the seller’s agent is inseparably connected with the duty of the purchaser to use diligence with respect of representations made to him. In other words, the courts require purchasers to take reasonable steps to protect their own interest and will not allow purchasers to rely on general statements made by sellers or real estate agents. To do otherwise, according to the court, would merely encourage negligence and inattention on the part of purchasers.

The court in Hearn v. Statesville Lodge has enforced the classic “Buyer Beware” doctrine. Under this doctrine, purchasers are not allowed to rely upon “general” statements made by sellers. Without a doubt, this case will be cited often in the future in defense of sellers and real estate agents.

Can real estate be purchased and sold based on a handshake? The answer is “no”. North Carolina, along with all other states, has a statute which derives from a English law adopted in 1677 requiring that all contracts for the sale of real estate must be in writing. These statutes, known as “Statute of Frauds”, are written to discourage mistake, misunderstanding, fraud, and other causes of disputes and lawsuits in the purchase and sale of real estate. Therefore, if an important element in a contract is missing (such as the property description or a signature), the contract is void because it violates the Statute of Frauds.

No special form is required in order to satisfy the Statute of Frauds so long as the document contains the essential elements necessary for a contract. These elements include the name of the buyer and seller, a description of the property, and the signature of the party to be charged with the contract.

Next to the signature on a contract, perhaps the most important element needed to create a valid contract is the “description” paragraph. How much legal description is needed in the contract? Generally, if the description of the real estate identifies a particular tract of land as distinguished from all other land, it is adequate and evidence can be admitted at trial to fit the description on the contract to the particular piece of land. Phrases such as “see deed” are insufficient unless the exact book and page number of the deed is stated in the contract. Suppose the contract describes the land as five acres on Highway 49 but the seller owns a 10 acre tract of land on Hwy 49. This contract would be invalid under the Statute of Frauds because the parties have not described “in writing” the 5 acres of land being sold. Our courts have held that a street address is actually ambiguous but will be sufficient so long as there is evidence beyond the street address which can be used to clear up the ambiguity and identify the land with particularity. A little extra time in describing the real estate to be sold may prevent a dispute and lawsuit based on the Statute of Frauds.

Is earnest money necessary for the validity of a real estate contract? The answer is “no”. Earnest money has never been a legal requirement. Mutual promises are sufficient. In other words, a promise by the seller “to sell” and a promise by the buyer “to purchase” the real estate is enough to create the contract.

While it does not take much to create a binding contract to sell real estate, it does require the “basics” and, more importantly as a result of the old 1677 English law carried forward into state law, it requires that the agreement be reduced to writing.

Every year millions of Americans enter into a variety of debt consolidations. As the popularity of debt consolidation has increased, so has the number of dangerous pitfalls in these debt consolidation programs.  Chapter 13 Bankruptcies are a type of debt consolidation allowing you to reorganize your finances by consolidating your debts into one monthly payment. Chapter 13, however, should not be confused with traditional debt consolidation programs.  Chapter 13 has the power of the Federal Bankruptcy Court behind it, and provides many advantages for people seeking debt relief.

-Brian P. Hayes

1. Accuracy of the information on the listing agreement and the seller disclosure form is important. Inaccurate information on the seller disclosure is a common source of misrepresentation lawsuits filed against sellers.
2. The terms and wording of the sales contract are crucial. You are not selling a car or a refrigerator. This is one of the most important documents many people will sign in their lifetime. Get it right the first time.
3. If there is a breach of contract by either party, the earnest money deposit is not the only thing that will be at stake. In North Carolina breach of contract damages can be more than just the deposit money so the seller does not have to be satisfied with just the earnest money deposit.
4. Who is the buyer? The important thing is to sell the house. If the buyer walks away and breaches the contract, the seller is left with only a lawsuit. Check out the buyer before the contract is signed. A contract is only as good as the person who signs it.
5. The seller should know his limitations and not try to be a “know it all”. Sellers should rely on the experts. Real estate agents, attorneys, inspectors, surveyors, and mortgage lenders are a few of the experts the seller should rely on when selling real estate.

-James E. Scarbrough, Association Attorney

1. North Carolina is a “buyer beware” state. That means the buyer is on his own and must check out the condition of the property.
2. State licensed home inspectors should be used to determine the condition of the home. Even if the buyer is a “handyman”, leave the building inspection to an expert.
3. The earnest money deposit is not the only thing the seller will get if the buyer breaches. It is a common misconception that the buyer can refuse to close and will only “lose the deposit money”. The seller can sue for breach of contract damages totaling much more than the earnest money deposit.
4. Choosing the lender is important. It makes good sense to use local lenders, banks, and mortgage brokers. You can always go to their office and get results. Selecting a lender on the internet can be a mistake if the lender does not have a local office.
5. Communication is the key. Communication with the lender and the closing attorney’s office is crucial. Check out the attorney’s office and make sure there is a good staff of real estate paralegals to assist you.

HINT: Use local professionals to help you purchase a home. Local realtors, home inspectors, attorneys, and mortgage lenders will make for a smooth transaction.

-James E. Scarbrough, Association Attorney

This is the third section of our look at living through foreclosure. In this segment we will consider the use of a Chapter 13 Bankruptcy filing to stop foreclosure.

While many readers may realize that bankruptcy laws changed in October, 2005, what they may not realize is the negligible effect of the law changes on most debtors. Using a Chapter 13 filing to stop a foreclosure can have several beneficial aspects. First, a Chapter 13 filing immediately terminates the advancement of the foreclosure proceeding. Under §362 of the Bankruptcy Code an “automatic stay” is imposed which prohibits the lender (and almost all other creditors) from attempting to collect on debts. By stopping the foreclosure early in the process, a Chapter 13 can save the home, and perhaps decrease the foreclosure costs (attorney fees, etc.) incurred by the bank and then passed on to the borrower. Unlike a forbearance agreement, a Chapter 13 filing can protect the home without the cooperation of the lender. Finally, repaying the arrearage on the mortgage in a Chapter 13 will normally give the homeowner between 3 to 5 years. This breaks the arrearage in the smaller pieces, as opposed to the larger lump sums often required in reaffirmation agreements.

While the Chapter 13 filing will impact on one’s credit, the effect may be no worse than the negative credit reporting related to the late payments and foreclosure filing. Additionally, while the Chapter 13 filing remains on the credit report for 7 years, judgments and other litigation can remain in excess of 10 years. Since most people facing foreclosure have defaulted on other debts (credit cards and car payments) as well, the Chapter 13 can be a “one stop” solution to give people a fresh start.

Retaining one’s home after the initiation of the foreclosure is certainly possible-depending on the homeowners financial situation. If you or someone you know is threatened by a foreclosure, our office may be able to help. We are a federally designated Debt Relief Agency under the United States Bankruptcy Laws. We assist people with finding solutions to their debt problems, including, where appropriate, assisting them with the filing of petitions for relief under the United States Bankruptcy Code. If you believe you may need to consider a Bankruptcy, please call to set an appointment. Our initial consultation is free, and in many cases our fees can be paid through the Chapter 13 plan.

-Brian P. Hayes

This is the second edition of our look at living through foreclosure. In this segment we will consider negotiating with the homeowner’s lender as a means to stopping a foreclosure. Lenders are in the “lending business,” and seldom wish to venture into acquiring real estate (that is, completing foreclosures) if avoidable. Occasionally a “forbearance agreement” will be offered which will allow the arrearage on the mortgage and foreclosure costs to be re-paid to the lender. After completion of the forebearance agreement terms, normal monthly payments can resume.

The problem with forebearance agreements is that they typically will require repayment of the deficiency amounts and costs over a few weeks, or at most a few or several months. Obviously, if the borrower had the money to pay then, they wouldn’t be behind in the first place. If the forebearance agreement fails, the homeowner is often only a few weeks or months “better off,” and usually a few thousand dollars “poorer.” In a couple of situations we are aware of the lender never dismissed the foreclosure proceedings, so when the homeowner defaulted on the forebearance agreement the ensuing sale required only 20 days notice. In other cases, homeowners have used IRA or 401k funds, which resulted in both a heavy tax burden and depleted assets the homeowner could have protected.

Despite the possible pit-falls, forbearance agreements are certainly one possible solution. Negotiating forbearance agreements can be complicated, and is not a process borrowers should undertake ill advisedly. If you or someone you know is threatened by a foreclosure, our office may be able to help. We are a federally designated Debt Relief Agency under the United States Bankruptcy Laws. We assist people with finding solutions to their debt problems, including, where appropriate, assisting them with the filing of petitions for relief under the United States Bankruptcy Code. If you believe you may need to consider a Bankruptcy, please call to set an appointment. Our initial consultation is free, and in many cases our fees can be paid through the Chapter 13 plan.

-Brian P. Hayes

Foreclosure rates are reaching an all time high. That is what the statisticians, and even the local newspapers, have recently been telling us. What options does a homeowner have after a foreclosure is begun? We will look at some of this issue over the next few weeks. Before turning to consider possible solutions, let us consider the problems caused by foreclosures.

Many homeowners assume that, after missing one or a few payments, all they need to do is catch up on the missed payments. Almost all mortgages contain what is known as an “acceleration clause.” What this means is that, once a loan is in default, usually by the homeowner missing a payment by 30 days or more, not just the missed payment is due, but the entire remaining balance of the mortgage. Unless the lender agrees to forego this “acceleration” of the principal balance, avoiding foreclosure could require that the mortgage balance be paid in full. In addition to the problem of acceleration, many fail to realize the danger posed by the foreclosure related expenses which accrue after the start of the foreclosure. These include the banks court fees and other expense, along with its attorney fees. Even assuming no extra attorney fees have been incurred, the trustee’s fee (which goes to the attorney) in a foreclosure is typically five percent (5%) of the loan balance. On a $100,000 mortgage, these fees could easily equal or exceed $6,000.00 for the foreclosure-even before it is completed. Even if the lender agrees to defer the acceleration, it will expect these costs to be repaid along with the arrearage. Even if paid, the record of the foreclosure will appear on one’s credit report for years to come.

Retaining one’s home after the initiation of the foreclosure is certainly possible-depending on the homeowners financial situation. If you or someone you know is threatened by a foreclosure, our office may be able to help. We are a federally designated Debt Relief Agency under the United States Bankruptcy Laws. We assist people with finding solutions to their debt problems, including, where appropriate, assisting them with the filing of petitions for relief under the United States Bankruptcy Code. If you believe you may need to consider a Bankruptcy, please call to set an appointment. Our initial consultation is free, and in many cases our fees can be paid through the Chapter 13 plan.

-Brian P. Hayes