New laws make remote electronic notarization secure and accessible.

From home searches to purchase contracts and loan applications, many aspects of a modern real estate transaction are now conducted electronically and online. But until recently, the actual closing has remained a stubbornly paper process in an increasingly digital world. Over the past several years, with the rapid expansion of remote online notarization, fully online digital closings have arrived.

Online closings can turn the most cumbersome part of a real estate transaction into a client-friendly online meeting that clients can complete from anywhere. They also dramatically reduce post-closing processing times, speeding up final fund transfers and commission payments.

While online closings will soon be a key part of every practitioner’s toolkit, they’re not yet available in every state, and most underwriters require use of approved online notarization platforms. Here’s an overview of how they work:

What are the major steps in a remote online closing? Documents are prepared by the title company and uploaded to an online remote notarization platform. Buyers and sellers can log on and review the documents and discuss any questions with their agent and others. When ready, signers return to the platform and connect with an online notary. Agents and others can connect in, too. Signers electronically sign and the notary electronically notarizes each document as required. As a security measure, each completed document is then “tamper sealed.”

To deter identity fraud, each signer’s identity is validated to a much higher standard than in a traditional paper-based notarization, using -database-driven tools such as knowledge-based authentication and software-based analysis of the client’s photo ID. In addition, the audio-video session is recorded. Encrypted data records of the transaction are maintained for the periods specified in law or applicable contracts.

The key feature of remote notarization is that while the notary must be commissioned and physically located in a state that authorizes its notaries to use online tools, the property and signer can be in another state.

Where are online closings available?

Virginia, Florida, Texas, Ohio, Michigan, Minnesota, Arizona, and Utah, among other states, have enacted laws authorizing their remote notarization, and legislation has been introduced in about 15 other states. But in the real estate context, two other factors can affect whether you can use remote notarization to close your transaction: title insurance underwriter guidelines and e-recording rules in the county where the property is located. Online real estate closings currently can be completed in more than 35 states, with the list expanding regularly. Check with one of the leading national remote notarization platforms, including notarize.com(link is external) (where I work), to see if your state is on the list and to ensure that your online notarization platform has been approved by your underwriter.

What about cost?

Online closings require a computer or mobile device with a camera and an internet connection. The per-transaction cost is about the same as a mobile notary: roughly $75 to $150 or so depending on the complexity of the transaction.

When will I still use paper notarization?

Traditional notarization isn’t disappearing yet. A client may prefer paper or may not have access to internet service. Or the property may be in a county that doesn’t yet accept electronic records for recording purposes. Even in those cases, you can benefit from partially online closings, called “hybrid” closings, where many key documents are reviewed and signed by the client online, while a subset of documents is ink-signed in front of a traditional notary.

©National Association of REALTORS®
Reprinted with permission

What you should know about working with clients who choose this unusual avenue to homeownership.

A small but growing share of home buyers is forging an alternative path to homeownership that is ripe for potential legal consequences: purchasing a property with friends. With affordability near an all-time low, it’s easy to see why some consumers, unattached to family or a partner, would consider such an arrangement prudent. However, these transactions likely will introduce legal issues you wouldn’t typically have to address with clients who are married or buying with family members.

You may not be seeing the trend of friends purchasing homes together in your neck of the woods just yet. There’s a likelihood, though, that you will soon. Only 2% of buyers in 2018 described themselves as “other,” meaning they could be in an unmarried romantic relationship or an alternative family relationship, says Jessica Lautz, vice president of demographics and behavioral insights at the National Association of REALTORS®. “Marriage rates in the United States have dropped while, at the same time, home prices have increased, so buyers are finding unique ways to enter homeownership,” Lautz says. One result of this trend, she adds, is the share of unmarried couples purchasing homes with roommates is increasing.

While the process of buying a home with friends is similar to purchasing with a partner or alone, there are specific aspects of this type of sale on which you, as the real estate professional, should be able to offer guidance. “The most important thing is for the friends to be on the same page on legal issues and to have everything in writing,” says NAR Senior Counsel and Director of Legal Affairs Chloe Hecht.

The major issues that could have legal implications include:

• How will the down payment be split?
• In whose name will the mortgage be?
• How will the title be held?
• Will the ownership stake be equally split?
• How will decisions be made about repairs and improvements?
• How can one of the owners exit the partnership?
• What happens if one of the owners passes away?

“It’s also important to understand how your state’s laws could impact the partnership,” says Hecht, who recommends consulting with a real estate attorney to ensure the buyers have a comprehensive agreement about the joint purchase.

The piece of the puzzle that may cause the biggest legal concerns is the plan for transferring ownership in the event one friend wants to exit the partnership. ”The parties may want to consider allowing the person who is staying a right of first refusal to purchase the other person’s interest in the property they jointly own,” Hecht says. “Related issues to consider are how the parties will determine a fair market value for the house and what happens if the person staying can’t afford to purchase the other’s interest in the house.”

Beyond legalities, the decision-making process also may be trickier between friends than partners or family members, says Stacey Schalk, associate broker at Berkshire Hathaway HomeServices in Northglenn, Colo. Couples, for example, usually have a firmer understanding of what they want in a home, while friends may need more time to come to an agreement, she adds.

In cases of friends purchasing together, Schalk recommends sitting down with the buyers to firmly establish what’s important to them in a home, including which spaces they’re willing to share, such as the kitchen, family room, and outdoor area. Friends may also need help figuring out how to equitably cover utility bills, maintenance costs, and expenses for common home goods. Shalk says that while it’s exciting to consider living with your best friends, practitioners need to look beyond their clients’ initial enthusiasm about such an arrangement to figure out what the friends really require in their spaces.

Some real estate professionals have been on the consumer side of a transaction with friends and struggled with the process. Daniele Kurzweil, a sales associate with Compass in New York, says she was a silent partner when she bought a single-family home that was converted into a two-family home with two of her friends in 2011. Kurzweil says she was confident she was making a solid investment but left specific decisions, such as the location and finishes of the home, up to her friends. Kurzweil contributed to the process by helping her friends understand the types of renovations they should undertake versus a major project. “I trusted that my friends would make the right decisions. Had I tried to get involved, it would have been a distraction, and nothing would have gotten done,” Kurzweil says, describing the transaction as having “too many cooks in the kitchen.”

Kurzweil and her friends didn’t draw up legal documents describing their ownership stake in the property, though they have since formed an LLC and are figuring out how to clear legal hurdles as they go. Kurzweil says she wouldn’t advocate a property purchase with a friend before asking yourself a few questions:

• Would you trust your friends to do the right thing, with or without a legal document? (Spoiler: You should always have a legal document in place when purchasing with friends.)
• If, for some reason, you were unable to make a decision regarding a problem with the property, would you trust your friends’ judgment?

“If your answer to either of these questions is no, then making it legal with a contract won’t change things,” Kurzweil says.

None of this is to say that buying a home with friends is necessarily a bad idea. But the possible legal and personal ramifications cannot be understated, says Jake Lizarraga, a writer for REITS.org(link is external), a website dedicated to helping people understand real estate investment. ”For those who don’t qualify for a mortgage on their own, it’s a great idea,” he says. “For those who wish to keep a friendship, not so great.” Lizarraga likens buying a home with friends to going into business with friends: The individuals must agree on a vision moving forward for the arrangement to work. However, it’s likely with friends that, eventually, they’ll have different visions—which can sour the relationship quickly. Then again, it’s always possible that a home purchase with friends can lead to a lifelong partnership.

©National Association of REALTORS®
Reprinted with permission

2019 law and ethics in review: What you, our readers, buzzed about the most this year.

Perhaps the most important aspect of your business is learning how to protect yourself legally in the event a transaction or client relationship goes awry. Articles about misunderstandings regarding your freedom to communicate with appraisers, how to handle a bad home inspection, and crossing the line on social media are among those that readers ranked highest this year.

Dos and Don’ts of Appraiser Communication
The takeaway: Qualified and competent appraisers welcome any information that helps them do their job. Real estate professionals should feel empowered to supply relevant materials, including the terms of the sale, applicable comparable sales, and any evidence of notable renovations done to a home that might affect its value.

Prepare for Common Legal Pitfalls in Real Estate
The takeaway: There are many seemingly mundane issues during a home sale that carry potentially serious legal consequences practitioners may misunderstand. Beyond fair housing, transactional items that can be wrought with unforeseen opportunities for trouble include disclosures, contracts, escrow management, and lawful property marketing.

3 Reasons Home Inspections Kill Deals
The takeaway: There are no classes in college or high school to teach people how houses work or where risk lies in a residential building. Even professional real estate agents have little or no training to help them understand how to look at houses and identify issues; most of these skills are learned on the job through the school of hard knocks.

Social Media Posts That Get You in Trouble
The takeaway: It’s often misunderstood how the Code of Ethics extends to how you conduct yourself online. What you wouldn’t say or do in front of someone, you also shouldn’t do on social media and other online platforms. In general, any guideline for offline behavior applies to online as well.

How the 20% Business Income Deduction Applies to You
The takeaway: Almost any self-employed person or owner of a pass-through business (such as an S corporation, limited liability company, or partnership) with eligible income, which the National Association of REALTORS® made sure includes commissions from real estate sales, can take 20 percent off the top after business expenses are taken out.

©National Association of REALTORS®
Reprinted with permission

An implicit antidiscrimination ban is now spelled out by a new standard of practice in the Code of Ethics.

As REALTORS®, we pledge to live by the Code of Ethics outlined by the National Association of REALTORS®. NAR commemorated the 50-year anniversary of the Fair Housing Act in 2018, and fair housing has been enshrined in the REALTOR® Code since 1974—at the time mirroring the federally protected classes. In the years since, REALTORS® have moved ahead of these federal protections, adding sexual orientation and gender identity as protected classes in 2010 and 2013, respectively.

But not all of us give these issues the attention we should. Over my decades-long career in real estate, I have never seen a fair housing violation with my own eyes. I’m a white male and have learned that if you don’t look like me, selling real estate can be a very different experience. I’ve invested significant time and energy over the last three years engaging REALTORS® of color as I sought to improve inclusion within Illinois REALTORS®, where I served as president in 2018. Once I immersed myself in groups of people who don’t look or sound like me, it was devastatingly apparent that members of color, those who are non-native speakers of English, and LGBTQ members of our REALTOR® family regularly experience discrimination. (See Commentary about a broker’s response to a hate-based attack.)

While Article 10 of NAR’s Code of Ethics directly addresses fair housing policies, discrimination in our industry can manifest itself in the form of a lack of cooperation. Article 3 has long mandated that “REALTORS® shall cooperate with other brokers except when cooperation is not in the client’s best interest.” That provision has always implicitly forbidden refusal to cooperate with other brokers based on other brokers’ membership in any protected class. But ongoing experience makes clear that brokers—even unintentionally—may shun cooperation with a broker whose non-native spoken English is difficult to understand or whose color leads to an automatic presumption that their client isn’t qualified.

With these scenarios and many others in mind, NAR’s Board of Directors recently approved a new standard of practice to Article 3, effective Jan. 1, 2020: REALTORS® may not refuse to cooperate on the basis of a broker’s race, color, religion, sex, handicap, familial status, national origin, sexual orientation, or gender identity.

That which was previously implicitly prohibited is now explicitly prohibited. The revision dispenses with any subtlety on that issue and trumpets loudly that discrimination in our REALTOR® family will not be tolerated and will subject offenders to swift and serious sanctions. After the recent reports of discrimination in Long Island, N.Y., the local board initiated investigations to determine whether members violated their duty to provide equal professional services consistent with Article 10. This is our Code in action.

We are REALTORS®. We welcome and embrace equal housing opportunity. We welcome and embrace cooperation with even our fiercest competitors whenever it works to our clients’ benefit. Because that’s who we R.

A New Timeline for Ethics Training

The NAR Board of Directors has approved an extension of the Code of Ethics training requirement from every two years to every three years. The deadline for the current training cycle has moved from Dec. 31, 2020, to Dec. 31, 2021. A presidential advisory group, appointed to review the requirement, recommended the change to give local associations adequate time between cycles to administer the program.

©National Association of REALTORS®
Reprinted with permission

Failure to warn clients about wire fraud scams could mean financial loss for your clients—and legal trouble for you.

Benjamin and Joyce Fox were eager to move to a home near family and settle into retirement. In 2017, after a three-month house hunt, they found a three-bedroom townhouse in Lafayette, N.J.

The townhouse was a foreclosure, owned by JPMorgan Chase. The Foxes agreed to pay cash for the $91,500 listing. They withdrew the money from a home equity line of credit on their current house. On Aug. 29, 2017, Joyce received wire transfer instructions via her Yahoo email account. An email from her real estate attorney had told her to expect such instructions. She wired the $91,500.

On closing day, Sept. 1, 2017, the couple’s homebuying dream turned into a nightmare. The closing representative scrutinized the wire transfer receipt: “That’s not our bank, and that’s not our account number.”

The Foxes had fallen victim to an elaborate wire fraud scam that has become all too familiar to anyone who works in real estate sales—a scam that involves infiltrating email accounts and sending fraudulent wire transfer instructions. In this case, the scammers had sent fictitious emails to the Foxes, impersonating both their real estate attorney and real estate agent, for weeks leading up to closing.

Today, more than two years later, the couple is still paying the $91,500 for a home they’ve never owned. They’ve filed suit, seeking to hold their attorney, agent, and others accountable for not warning them of the dangers of such scams.

Could You Be Held Liable?

Real estate mortgage closing scams are one of the top five wire fraud schemes, according to the FBI’s Internet Crime Complaint Center, accounting for $150 million in losses in 2018 alone.

As cyberfraud scams grow more sophisticated, real estate pros are finding themselves more at the center of such lawsuits. In one case from 2018 (Bain v. Platinum Realty LLC), a Kansas court found a real estate agent and her brokerage liable after fraudulent wire instructions that the agent allegedly forwarded to the buyer resulted in the buyer losing $196,622. The agent denied sending the email. A jury found the agent and her brokerage 85% liable and ordered them to pay the buyer $167,129 in lost funds. A federal court upheld the verdict.

Protect Yourself—and Your Clients

The Foxes accused their agent of using an unencrypted, personal email account to send contracts that the couple argues put their personal information at risk. Upon further investigation of what went wrong, the Foxes had received all incoming and outgoing messages from Joyce Fox’s Yahoo account leading up to the wire transfer. The actual transfer instructions from their attorney’s office came in just seven minutes prior to the fraudulent instructions; the scammer had taken control of Joyce Fox’s account, deleted the attorney’s message, and replaced it with fake instructions. The fake message was sent from an email address that omitted just one “l” from the attorney’s email address.

“The best practice to prevent liability is to not let your clients become a victim in the first place, and that means educating them up front—and often—and especially as money is exchanging hands,” says Lesley Muchow, deputy general counsel at the National Association of REALTORS®.

NAR is working with the FBI and other real estate industry groups to help warn consumers and arm real estate professionals with tools to educate consumers about the dangers of wire fraud scams. There are videos, pamphlets, and checklists for brokerages to use, urging agents to:

• Have face-to-face conversations with clients to clearly explain the risks. Urge them to always call and verify all wiring instructions they receive by calling a known person through a trusted phone number, not the phone number provided in the email with the wire instructions. Calling a number in the email could result in connecting directly with the scammer, who will confirm the false wire instructions. “A real estate professional has the opportunity to sit down, look the client in the eye, and say, ‘This is a problem,’ ” says Bruce Phillips, chief information security officer at West, a technology subsidiary of Willston Financial Group. There’s a customizable brochure(link is external) available from NAR that agents can use to guide these conversations.
• Add a disclosure form as a risk management tool for your brokerage. Several state associations and brokerages have developed a wire fraud disclosure form that real estate pros can use to warn clients about cybercrime risks. Access sample forms at nar.realtor.
• Consider insurance to reduce your liability. Visit nar.realtor to access a report about cyber insurance
• Adopt greater security precautions to safeguard your transactions. NAR has developed a cybersecurity checklist, available to download at nar.realtor.

It includes tips such as:

• Use encrypted email, a transaction management platform, and a document-sharing program when sharing sensitive information.
• Use two-factor authentication.
• Avoid using unsecured Wi-Fi connections when conducting business.
• Use complex passwords.
• Keep software, firewalls, and operating systems up-to-date with the latest patches.
• Urge clients to confirm all instructions in person or over the phone with a trusted representative and never simply follow emailed instructions.

©National Association of REALTORS®
Reprinted with permission

Know how escrow funds are handled if a deal falls through.

In an ideal world, every transaction closes without a hitch. However, it’s important to prepare for those times when the sale does not close. In those cases, we are left with the question of how to deal with funds held in escrow.

Closing procedures vary by state. You need to be familiar with the process, whether you do business in an escrow or non-escrow state. The majority of states are non-escrow; in those states, the parties typically sign a purchase agreement and schedule a closing date. On closing day, the parties exchange all necessary documents and funds. In escrow states, like California and Arizona, the parties sign a purchase agreement (or escrow instructions), along with all pertinent documents; these documents are held in escrow until the date of closing.

Despite the differences, there are general principles involving default that apply nearly everywhere.

First, it’s important to confirm that your contract for the sale and purchase contains provisions regarding the duties of an escrow agent, if applicable. When the parties cannot come to an agreement as to the release of escrow, and they make conflicting demands for the funds, the escrow agent will generally not be able to release the funds to either party. An escrow agent (or broker) shouldn’t release funds unless both parties sign a release.

However, if you’re working with a seller who wants to make a claim on the escrow funds, promptly notify the escrow agent or broker to avoid inadvertent disbursement. It’s important that you communicate with your broker, the escrow agent, and the closing agent to let them know your objection to the release of an escrow deposit. Make sure you carefully follow the notice requirements of your contract.

When the parties cannot come to an agreement as to the release of escrow, and they make conflicting demands for the funds, the escrow agent will generally not be able to release the funds to either party. An escrow agent (or broker) shouldn’t release funds unless both parties sign a release.

Depending on your location, your contract may require that the parties attend mediation or arbitration before proceeding to litigation to determine entitlement to the escrow deposit. The actual remedy may vary if the escrow is being held by a broker, by a title company, or by an attorney. Assuming your contract doesn’t have a provision for mediation or arbitration—or that both steps have been completed—the escrow agent would typically file a lawsuit, known as an interpleader action, in order to be removed from the dispute. Funds are thereby deposited in the registry of a court. The amount of time that an escrow agent may be willing to wait to initiate a lawsuit will vary depending on each agent’s policies. It’s common practice for an escrow agent to hold the funds if the parties are making progress toward a resolution.

Occasionally, the deal may be disrupted at a point where the escrow agent is already holding the down payment and funds from the lender. Lenders normally require that a closing agent return the loan proceeds if the transaction doesn’t close. Likewise, the down payment tendered by the buyers is generally returned and not subject to the procedures and terms outlined in the purchase agreement for escrow funds.

When filing an interpleader action, an escrow agent is typically reimbursed from the funds in escrow for any attorney’s fees and costs incurred in the filing. This will inevitably diminish the amount of funds available to be distributed between the parties. That’s why purchase contracts—and common sense—dictate that buyers and sellers should try to come to an amicable settlement to avoid the cost and other challenges of litigation.

©National Association of REALTORS®
Reprinted with permission