What Seller’s & Their Realtors Need To Know.
When selling real estate in Rhode Island, Seller’s and their realtors should be aware of any/all issues that pertain to the property being sold, have knowledge of the law that applies to the transaction and be aware of the items and tasks needed to close the transaction.
Failure to be adequately prepared may cause a delay in the closing or worst, lose a buyer. Below is a checklist of items for particular situations that sellers and their realtors should use when preparing a property for sale.
Seller’s Need an Attorney Too!
I am surprised at how many closings I do where the seller comes unrepresented. A real estate closing is a complex legal transaction with many legal documents for the seller to sign. A Rhode Island real estate attorney representing the seller needs to review all of the legal documents, advise and instruct the seller what to sign and what not to sign, prepare the legal documents that the seller is obligated to produce for closing, explain the process to the seller and address any issues that may arise including title issues. A Rhode Island real estate lawyer for the seller will review the HUD-1 settlement statement or closing disclosure and make sure all pro-rations and charges are correct and will attend the closing with the Seller. Many sellers think they are saving money by not having and attorney. However, the reality is that they are being charged by the closing attorney to prepare the documents on their behalf.
Check the Title before listing the property!
Prior to listing a property for sale the Listing Agent should at a minimum go to city/town hall and obtain the current owner deed to ensure that all owners are accounted for and names are spelt correctly for when it comes time to prepare the purchase contract.
The Listing Agent would be well advised to look further into the title to account for all liens that currently exist on the property.
In the alternative, the Realtor or the seller should buy a Rhode Island Current Owner Title Search to ensure that title is properly vested with the current owners and that all liens and encumbrances are accounted for. If any discrepancies exist they can be dealt with right away as opposed to delaying a closing to deal with them. Some title issues can take a considerable amount of time to clear. A current owner title search in Rhode Island should only cost between $100 and $150. Any title issues that exist on title prior to the current owner will also have to be addressed and will be discovered by the buyer's attorney. However, most title issues prior to the current owner will be covered under the current owner's title insurance policy which will assist in resolving any prior owner title problems quickly.
You may be asking what could be on title that the current owner does not know about. Obviously first and foremost is the deed into the current owner. Surprising issues are often found in the deed into the current owner. Whether it be signing authority, improper legal description, or improper drafting. If there have been transfers of ownership with the current owner in adding someone to title or taking someone off title. Each deed must be examined. Also when drafting the listing agreement, purchase contract and real estate closing documents, all current owners on title must be listed and must sign off on the documents.
Another common current owner title issue is missing discharges. It is common for the current owner to have refinanced their current mortgage and in some cases multiple times. When you do a refinance the prior mortgage is suppose to be discharged once the bank receives the payoff. Many times this does not happen. The discharge must be track, obtained and recorded to clear title.
Other title issues of concern include execution liens, mechanic liens, notices of violations, city/town liens, tax sales, etc...
Properties held in an Estate (Owner(s) are deceased):
Under Rhode Island Law, if a person who dies in the State of Rhode Island owned property at the time of his/her death, there is an automatic lien that is placed on the property(s) in favor of the State of Rhode Island. Not many people are aware of this. Again, it is an automatic lien by statute.
In order to get this lien discharged, the representative for the estate must file a Rhode Island Estate Tax Return along with the proper discharge forms to the Division of Taxation. If a tax is due, pay the tax. If there is no tax due, the estate tax return still must be filed. The Division of Taxation will issue a discharge of the automatic Inheritance Tax Lien and record same in the town/city where the property is located. It is important to file this paperwork as soon as possible as it could take several weeks to get the tax return reviewed and approved and for the discharge to issue.
Most real estate closing attorneys in Rhode Island will not close until they have the recorded discharge in hand as the lien is a cloud on title. If the attorney allows the closing to proceed, they will require proof that there is no tax due and that the proper forms have at least been filed and will hold the seller’s proceeds in escrow until the ITL release is recorded and received.
A common error on behalf of sellers and their realtors is that they believe since the will of the deceased person states that the Executor has the power to sell real estate that they can simply move forward and list the property and sell same. This is incorrect. Until a probate case is opened and the will is admitted and validated in probate and the Executor appointed by the Probate Court, the executor has no power to sell the property. Once the probate is open and the executor assigned, then the Executor can move forward with selling the property without further probate court approval as long as the will gives this specific power to the Executor. If the will is silent on the power of the Executor to sell property then probate court approval will be needed in order for the Executor to sell.
Properties being sold by Non-Residents:
Under Rhode Island law, if an owner/seller of property located in Rhode Island is not a resident of the State of Rhode Island, then there is a non-resident withholding tax due from the seller at the time of sale/closing. The tax is 6% of the net proceeds for individuals and 7% for corporations. The law puts the burden of accounting for and collecting this tax on the Buyer. If a seller provides the buyer with an affidavit stating that they are residents of Rhode Island then the buyer can rely on this affidavit and there is no tax due. Furthermore it is advisable to include the address of the seller in the grantng clause of the deed as further evidence of residency.
If a seller is not a resident of Rhode Island and thus cannot provide the affidavit, the buyer (through the closing attorney) must collect and remit the required tax to the Division of Taxation following closing. There is an automatic lien on the property in favor of the State of Rhode Island until the tax and proper forms are filed. Once the tax is paid and the forms filed, the State will issue a discharge to the Buyer for the Buyer to record in the City/Town where the property is located.
There is an option for non-resident sellers to make an election to be taxed on gain rather than on the net proceeds. There may be no gain or the gain may be much less than the net proceeds and thus there could be no tax due or the tax due could be substantially reduced. If the seller wants to make this election the proper forms must be completed and filed with the Division of Taxation prior to the closing. Once the Division of Taxation reviews and approves the filing they will issue the seller a certificate which must be provided to the buyer and closing attorney.
Properties Held in the Name of a Business/Corporation:
In addition to the additional documentation require of a business entity seller, the biggest concern is that the business entity is active and in good standing with the State of Rhode Island. The following documents and information will be needed from a business/corporate seller prior to the closing: 1. Letter of Good Standing from the State of Incorporation/Organization. 2. Letter of Good Standing from the Division of Taxation. 3. Articles of Organization. 4. Corporate Authority/Minutes or LLC Resolutions. 5. If LLC, documentation on how the LLC is taxed.
Properties Held in a Trust:
A copy of the Trust Agreement will need to be provided to and reviewed by the closing attorney. One of the biggest issues with a Trust seller has to do with the residency requirements. As stated above, Rhode Island charges a non-resident seller a 6% withholding tax. When dealing with a trust it is not the residency of the trust that matters, but the residency of each and every beneficiary of the trust. In order to avoid the non-resident issue noted above all beneficiaries must be Rhode Island residents. If one or more are not, then the RI non-resident paperwork must be completed and filed and a discharge obtained.
Finally, a Memo of Trust must be prepared and recorded along with certain pages of the Trust document.
Property is a Condominium
A condominium resale certificate must be requested and obtained from the condominium association well in advance of the closing. Most condo associations charge a fee for the resale certificate ranging from $50 - $300 on average. The original must be brought to closing.
Standard Items Needed for All Closings:
1. Smoke Certificate – R.I. law requires that all properties being sold be inspected by the local fire marshal for properly installed and operational smoke and carbon monoxide detectors and obtain a passing certificate prior to closing. The original smoke certificate needs to be provided to the closing attorney.
2. Final Water Reading – a final water meter reading should be obtained approximately 5 – 7 days prior to the closing date and provided to the closing attorney
3. Oil Certificate – If oil remains in the tank and the seller wants reimbursement for same from the buyer at closing, the seller should obtain a certificate from an oil company stating the number of gallons remaining in the tank and the current per gallon price.
Tomassi Law Associates, LLC works with Sellers to provide effective and efficient seller representation from start to finish in a real estate transaction. We make sure that all of the above is accounted for and will prepare all of the required legal documents for the closing on the seller’s behalf. We also will review the Purchase Contract prior to signing and will attend the closing with the Seller.
If you are thinking about selling or are already in the process of selling - call Attorney Jared Tomassi today at 401-941-LAW1 (5291) or email at email@example.com.