Order Up!

One of the many interesting things we do at the Florida Real Estate Commission (FREC) is decide escrow disputes from all over the state, and render escrow disbursement orders (EDOs) telling the parties how to distribute the funds. Many of these controversies arise from the execution and interpretation of the FAR/BAR contract’s tricky financing contingency.

The new FAR/BAR contract forms effective April, 2017 contain a variety of revisions, including an overhaul of the financing contingency.   Among other things, the old provision attempted to provide sellers with some certainty they wouldn’t be tripped up at the last minute by a buyer’s late-breaking credit denial.

Unfortunately, many buyers’ agents did not pay attention to the built-in timelines, and how those jibed with the deadlines they established for the commitment date, closing, etc. As a result, we often saw cases where these agents unwittingly gave an untimely notice of cancellation that resulted in the buyer’s funds being due and owing to the seller.

A source of general confusion was what happened on the financing commitment deadline – which was nothing. Under the old form, the commitment deadline was merely a stepping off point for other possibilities (i.e., cancellation by either party, provided the same happened prior to 7-days before the closing date, etc.).

The new contingency takes a more definitive approach, and makes it clear that if a buyer cannot obtain a “Loan Approval” within the “Loan Approval Period,” then they have to give written notice within the Loan Approval Period if they want to terminate the contract and get their money back. If timely notice of cancellation is not given, then the contingency is waived. It is a hard and fast deadline, with no exceptions as could be the case in the outgoing contract form. Period, end of story.

The seller likewise still has their cancellation option, this time within three days after the expiration of the Loan Approval Period if they’ve not received notice from the buyer that (i) they received their Loan Approval, or if they have not (ii) tendered a notice of cancellation or (iii) a waiver of the financing contingency. For the queasy seller who has little faith in their buyer’s ability to close, this is a nice, albeit quick, bit of built-in flexibility.

What this contract re-draft did not do is remove the carve-out for a buyer’s last-minute, no consequence cancellation if the property doesn’t appraise, or if “Property related conditions of the Loan Approval have not been met…” From the listing agent’s perspective, this remains a detail to manage and potentially mitigate depending on how far in the future the closing date is, and how it lines up with the Loan Approval Period deadline.

The savvy Realtor will utilize an appraisal contingency rider to manage timing of the issue, or perhaps even strike the carve-out language so it is clear the appraisal is not an excuse upon which the buyer can rely for termination of the contract beyond the deadline for the Loan Approval.

How to manage the property-related conditions exception is less clear, since the buyer is still not required to divulge a copy of their loan commitment (but rather just provide notice of its receipt). In one recent case, a credit denial a day or two before closing based on a lack of reserves held by the condominium association resulted in the FREC voting to return the buyer’s deposit. While to most this was an obvious outcome, it does nothing to provide a seller, who may have already packed up and moved, with any peace of mind.

Faced with this reality, a listing agent may attempt to strike the property-related conditions language of the contingency. Should the buyer refuse, the agent’s remaining choice is to keep abreast of the Loan Approval process, and try to discern any conditions of particular concern. The agent may also request a copy of the Buyer’s Loan Approval, although there’s no guaranty it will be divulged. The end goal is to keep the seller as informed as possible about what, if any, potential pitfalls may exist in the period between Loan Approval and closing.

As I have said so many times before, contract forms are a Realtor’s stock and trade. If an agent has not made it a point to learn and thoroughly understand each these documents, then one cannot help but question their overall commitment to professional practice.

Knowledge of a contract’s inner-workings breeds nothing but a better intuition about how to deal with the practical situations the agent will encounter every day out in the field. This most recent form overhaul presents Realtors with yet another opportunity to become even more familiar with what this paperwork says and means.

As always, we wish you safe travels along on the road to closing, and please do not hesitate to reach out should you have questions regarding this, or any other, subject with which we might be able to assist.

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This information in this site is not intended to establish an attorney-client relationship, and if anything herein could be construed as legal guidance or advice, I strongly encourage you to consult with your own attorney before relying upon any such information.

 All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

dunlapmoran.com

 

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Shoot First, Ask Questions Later

Some say the road to hell is paved with good intentions.

Like in the case of the well-meaning Realtor who gets their client committed to a home purchase, without the client first having figured out what to do with their lease that doesn’t expire until after closing.

When eventually confronted with the question of why the landlord is unenthusiastic about letting the client out of the lease early, and demanding payment of the rent through the conclusion of the lease, an uninformed Realtor just shrugs and offers platitudes like these:

“Florida law allows for an automatic termination of the lease once you buy a new home.”

 “The standard lease provides for early termination if you buy a new home.”

 “That’s unfair, the landlord can’t do that.”

No one ever said life is fair, especially since there is no such thing as a “standard lease,” and Florida law says absolutely nothing about what happens when a tenant purchases a new home.

Suddenly, the Realtor finds their client in a costly quagmire. What to do?

Put in the most basic terms, a lease – written or oral – is an agreement to pay for the use of someone’s real estate for a specified period of time. Florida’s landlord-tenant act (Florida Statutes ss. 83.40-83.683) governs residential tenancies when there is no written agreement. Other than some basic requirements as to how to deal with advance rents and deposits, and certain basic maintenance duties required of a landlord, what two contracting parties agree to between themselves is entirely up to them.

For this reason, each lease is as unique as the people agreeing to it. From the fill-in-the-blank version you purchase at Office Depot, to the FAR-BAR template, to a lawyer-prepared agreement, each says what it says in its own way, and there is no mandate in the Florida Statutes as to what that agreement must contain.

Put another way, each lease is fact-specific, so you can never assume that what one says or does will be the same for another.

From the savvy Realtor’s perspective, while the client’s existing lease is not really their concern, the Realtor will undoubtedly be the first person the client calls when the landlord refuses to let them out of the lease early, and they’ll likely demand to know how their Realtor could commit them to a purchase knowing they still had a lease.

As is the case with any healthy relationship, a little bit of communication can be a good thing. Should you find yourself in this situation, a good starting point would be to take the following steps:

  • Encourage the client to get their situation figured out in a way that makes it comfortable for them to proceed with their planned purchase.
  • Remind them to read their agreement and understand whether or not they have a termination option, and if they do, how is it exercised, and what will it cost.
  • If they do not understand their lease, they should call their landlord, or better yet, seek the advice of a real estate attorney to gain a better understanding of their options before they approach the landlord and/or the purchase offer you’re working on for them.
  • Once they understand their options, they should pursue some sort of written resolution of the lease – either on their own, or with their real estate attorney’s assistance.

Meanwhile, document the action you’ve recommended so there is no question later about what advice you gave. It can be as simple as: “since you wish to purchase a home while you’re still obligated under a lease, we discussed that you’re going to take the following action to deal with your lease…. And, once you have this figured out, you will let me know when and how you wish to proceed with a purchase offer.”

Short, sweet, to the point, making it clear it is the client’s responsibility to deal with their lease, and under no circumstances are you promoting them making a large purchase commitment without first understanding their existing rental obligation and its financial impact.

Further, this is not a suggestion that you insinuate yourself into the lease termination discussion or process. Your goal is simply to make sure your client recognizes their existing obligation, and takes some action to address the situation so they don’t wake up weeks down the road with a major purchase obligation layered on top of a potentially significant lease obligation.

As always, never hesitate to consult with an experienced real estate attorney if you have questions about your role in helping clients with an unresolved lease commitment, or likewise if your clients need assistance achieving a resolution of their lease in order to move forward on their new home purchase.

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This information in this site is not intended to establish an attorney-client relationship, and if anything herein could be construed as legal guidance or advice, I strongly encourage you to consult with your own attorney before relying upon any such information.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

dunlapmoran.com

 

 

The Day The Wall Came Crashing Down

GetMedia[1]A client was awaiting closing on the sale of her historic home when one day, lo and behold, the rustic old wall along a perimeter of the property came crashing down.

Ay yi yi.

Just one more headache in the protracted process of selling a home with a long and storied history, but one with the kind of deferred maintenance that caused the owner’s (shrewd) Realtor to demand an As-Is Residential Contract for Sale and Purchase for all offers received.

According to that form: “Except for ordinary wear and tear and Casualty Loss, Seller shall maintain the Property, including, but not limited, lawn, shrubbery and pool, in the condition existing as of Effective Date (“AS IS Maintenance Requirement”).”

So what to do in a case like this where the wall was in an obvious state of disrepair at the outset, but just couldn’t hold itself together long enough for the closing to occur?

Put another way, given the contract’s AS IS Maintenance Requirement, how do you bring something like this back to its same decrepit state as of the Effective Date, or quantify the expense for doing so?  By extension, does it then become the seller’s obligation to provide a new replacement for what fell apart in the interim, the cost of which can be substantial?

In this case, no contractor who visited the property was able (or willing) to give an estimate for anything other than a proper repair and replacement.  What ended up transpiring was a negotiated credit that covered a portion of the estimated repair cost.  What first took place was quite a bit of conversation about the blurry nature of the parties’ respective rights and obligations under the contract, and what anyone was legally required to do.

From a technical perspective, the contract probably cannot reasonably be expected to give explicit guidance on this subject matter.  What this does, though, is land everyone smack dab in one of those gray areas that lawyers love (we make a good living in that space), and Realtors detest (“Just tell me what to do so we can get this closed!”).

What, then, is the smart listing agent to do when preparing to present a property with known (or anticipated) structural challenges?  Here are a few thoughts to get you started:

  1. Take a good long look around for readily observable issues, such as active leaks, foundation cracks, shaky fences and walls, etc.  The things any regular person might be reasonably expected to notice.
  2. Ask the seller to be thorough and candid in filling out their disclosure, and include any known and/or observable issues about which they have concern.
  3. Require all offers to be submitted using the As-Is Residential Contract for Sale and Purchase.
  4. Consider specifically addressing trouble spots in the contract, i.e., “Perimeter wall is specifically excepted from Seller’s AS-IS Maintenance Requirement and will be conveyed to Buyer in its as-is condition at the time of Closing, regardless of whether the condition has changed beyond the extent of ordinary wear and tear.”

This is not to suggest that the agent is taking the place of the home inspector, or the seller’s disclosure is meant to take the place of the buyer’s thorough review of the property.  Where the agent wants to end up – to the extent this can be achieved through clear and concise contract drafting – is in a bright line situation where one and all agree that items of concern that could deteriorate substantially between the Effective Date and Closing are not something for which the seller is financially responsible (think active roof leak…).

As always, you are encouraged to seek the advice of an experienced real estate attorney should you run across issues such as these and need a helping hand when the time comes to respond to an offer.  Bright lines are best established when there is time to think through the situation, rather than when deadlines are looming and pieces of history come crashing down around you.

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This information in this site is not intended to establish an attorney-client relationship, and if anything herein could be construed as legal guidance or advice, I strongly encourage you to consult with your own attorney before relying upon any such information.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

dunlapmoran.com

Life On The Other Side

IMG_6124Being an allied professional in the real estate industry means spending your days guiding clients through the pitfalls and travails of the process with an observer’s cool detachment and level head, all in the name of helping them realize their goals and achieve their dreams.

Always Be Closing.

Then comes the day you find yourself on the other side of the table.  You become the consumer of someone else’s professional services.   Short of a sugar-laced, mid-afternoon double espresso, what better jolt to the system than being on the receiving end of lackluster service?

“Good morning Mr. Luzier, this is your wake-up call.”

For me it started innocently enough.  A quick email to a previously-utilized mortgage resource led to a phone application and a rapid approval for a refinance at a favorable rate.  Then, the real work began – providing account statements, insurance information, expense verification, tax returns, blood type – and so on and so forth.  Over, and over, and OVER again.

For One Hundred and Sixty. Nine. Days.

Yes, you read that correctly: 169 days.  My own refinance was taking so long that my office colleagues kept track by counting down for everyone to see – along the lines of the way the world waited with unfailing anticipation during the Iranian hostage crisis – i.e. “Day 145 – need updated bank statements AGAIN.”  Meanwhile, I convinced myself the repeated delays, unanswered questions, and glacial pace were no different than the treatment I often see my own clients endure at the hands of their mortgage lenders.

“This is the nature of the beast.”  “It doesn’t matter who you are or what you have – everyone gets treated the same way.” “Getting a mortgage these days is a marathon, not a sprint.”

These are all words I’ve said to others (in earnest) to assuage their feelings of having been chewed up and spit out by the mortgage process.  They are the same words I told myself to divert my attention from the cycle of disinterest demonstrated by those who had agreed to help me achieve my goal of completing a garden-variety refinance.

Thankfully, somewhere around Day 155 I had a moment of clarity, and on a hunch picked up the phone to reach out to a mortgage originator many of my clients hold in unusually high esteem – someone whose low-key demeanor and ability to answer people’s concerns in a methodical and intelligent way made me hope that perhaps even my simple project could one day reach its intended conclusion.

The difference was like night and day.

The approach from the new lender was simple and logical.  They took a quick look at my credit history in the context of the requested loan, then drilled down to assimilate the information necessary to provide their underwriter with a fully-defensible application package.  Since all was in order when application was made, the approval occurred promptly, and the list of pre-closing conditions to satisfy was reasonably short.

Barely 30 days will have elapsed from the first contact with the originator to the closing of the new loan.  Granted, all of the information requested of me was close at hand thanks to my prior experience, so I was able to short-circuit much of the document assemblage challenges that hog-tie so many in their effort to move their mortgage request from application to closing.

Meanwhile, I’ve received regular status updates throughout, enjoyed prompt responses to my inquiries, and was repeatedly impressed with the interactive nature of the conversation with my lender who expressed genuine concern about me, my financial goals, and what would work best for me and my family with this particular transaction.

Out of the morass came the simple affirmation that just because many have a dismal experience in a particular business sector, doesn’t mean this is the new normal.

As with most things, the right people on the job can make all the difference – because they are veterans who know the ropes and stay on top of the process –  because they want to do a good job for you and earn your repeat business –  because they care.

Life is all about choices, and the moral of this story is to choose wisely when it comes time to suggest to whom your clients should turn to satisfy their mortgage lending needs.

Realtors and novices alike know the mortgage approval process is not what it used to be thanks to drastic changes in regulatory oversight in the wake of the Great Recession.  So why waste your time with those who are not totally invested in or easily capable of delivering a 5-star experience under the new rules and regulations, when there are professionals out there who understand the challenges, and know how to negotiate the process so you come out the other end happy and satisfied?

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This information in this site is not intended to establish an attorney-client relationship, and if anything herein could be construed as legal guidance or advice, I strongly encourage you to consult with your own attorney before relying upon any such information.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

dunlapmoran.com

Believing Miss Mildred (a true parable of shade trees, neighborly trust, and a bottomless cup of coffee)

Miss Mildred

Once upon a time, a young fresh family bought a fine old home in a fine old subdivision dotted with a veritable forest of fine old shade trees and lakes, not to mention neighbors of a similarly fine old stature.

One day, the young fresh family brought home a frisky new puppy. Nothing would do but to fence in their fine old back yard to protect their new faithful friend. Daddy James, a real estate professional, went next-door to see Miss Mildred, their fine old neighbor who had lived in the fine old neighborhood for nearly too many years to count.

Miss Mildred, aside from knowing her way around the kitchen, was a fountain of knowledge on all things important to their fine old neighborhood, including who owned what, and what went where.

In this case, the question was whether the fine old oak tree between their two properties was on the young fresh family’s side of the line, or Miss Mildred’s?  It seems that James, the real estate professional, had not procured a survey when the young fresh family purchased their fine old home.

Over an endless cup of coffee and a scrumptious piece of homemade cake, Miss Mildred opined as to how the fine old oak tree was on her side of the dividing line. Unwilling to question such an acknowledged neighborhood authority, James, the real estate professional, reckoned that their new fence should be placed on the young fresh family’s side of the tree.

Nary a word was ever spoken again on the subject until the young fresh family expanded, and the time came to move to a larger, finer new home.  Much to everyone’s surprise, the buyer’s survey revealed that the young fresh family’s fence had been installed a couple of feet inside of their actual property line!

When questioned by the buyer’s Realtor, then the closing attorney, James, the real estate professional, happily recounted the story of coffee and conversation with Miss Mildred, and insisted her assessment of the boundary line location was correct. His devotion to his future former neighbor was so staunch, in fact, that James stated emphatically and with increasing ire that the buyer’s survey was incorrect, and that was that.

With emotions at a fever pitch, the buyer’s attorney ordered his own survey of the questionable property line to check the work of the prior surveyor. Lo and behold, the lines matched to a tee.

Finally seeing the writing on the wall, James, the real estate professional, agreed that perhaps the buyer’s request to relocate the fence was reasonable, and hat in hand he trekked over to Miss Mildred’s house one last time to deliver the news. An eminently practical woman, not to mention a frugal one, Miss Mildred politely agreed that two surveyors could not possibly be wrong, and in fact perhaps it was her memory that had gotten a little fuzzy after all these years. Work soon commenced to relocate the fence, and the closing happened without further ado.

The moral of the story is that fine old neighbors can be a treasure trove of community knowledge, not to mention hospitality.  Unless, however, they are licensed surveyors, their insights on the precise location of boundary lines and other technical matters best be regarded as anecdotal, and leave the measurements and legal opinions up to the professionals.

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This information in this site is not intended to establish an attorney-client relationship, and if anything herein could be construed as legal guidance or advice, I strongly encourage you to consult with your own attorney before relying upon any such information.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

dunlapmoran.com

Would You Like Fries With That?

Castle frontWe’ve all been there: that crucial moment of decision when faced with an option that can add cost (Leather upholstery? Carpeted floor mats? V-8 engine?), and even calories (French fries? An extra scoop of ice cream? Bearnaise sauce?).

Thanks to the US government’s consumer protection regulations, buyers who finance their homes using mortgages are now advised that owners title insurance coverage is “optional.”  Buyers who read their closing disclosures closely are keying into this description, and beginning to wonder whether they actually need such coverage, especially since it is spelled out as an extra cost item.

The short answer to this query is YES, but know that I am biased; our firm issues the title insurance policy.

The purpose of title insurance is to eliminate risks and prevent losses caused by defects in title arising out of events that have happened in the past.  To achieve this, title insurers perform an extensive search of the public records to determine whether there are any adverse claims to the subject real estate. Those claims are either eliminated prior to the issuance of a title policy or their existence is excepted from coverage.

Mortgage companies require a lender’s policy of title insurance for their benefit in connection with closing, therefore the description of the owner’s coverage as “optional.”  The lender’s policy doesn’t do a thing for the homeowner.  It only insures that the mortgage is a first lien.

The lender, of course, would be concerned IF the buyer lost title to the property, but only WHEN that occurred. The lender would be concerned IF they found out there is a judgment or municipal lien ahead of their mortgage in lien priority, but only WHEN the mortgage is in foreclosure.

Put another way, the lender gets concerned once the tragedy has already happened. An owner is concerned before it gets that far.

Since the title policy is an indemnity contract for losses, the mortgage company must suffer a loss before they actually have a claim under the lender’s title policy. Therefore, they must proceed to foreclosure, sell the property and obtain less than the debt due on the loan. By that time the owner has been ejected from the property.  And, without an owner’s policy, a buyer is not covered and must pay someone else’s debt.

Given these risks, why is owner’s title coverage  now being considered “optional,” and why do lender’s title insurance policies all of a sudden seem so expensive?

Under Federal rules, the lender is required to lump a majority of the title insurance cost into the lender’s required coverage.  This is basically opposite of what Florida law provides, i.e., the bulk of the cost of the title insurance is associated with the owner’s policy, and the cost of the lender’s coverage is an incremental addition.

So, while the substance of what title insurance coverage is hasn’t changed, the disclosure rules relating to its costs have, leading to confusion and concern by consumers feeling like they’re being upsold for something they don’t necessarily need.

In such a case, the old adage of “penny wise and pound foolish” certainly applies, and an informed consumer should not feel guilty about incurring the incremental cost of the so-called “optional” owner’s title insurance, especially if he or she considers the protection of their substantial real estate investment a #1 priority.

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This information in this site is not intended to establish an attorney-client relationship, and if anything herein could be construed as legal guidance or advice, I strongly encourage you to consult with your own attorney before relying upon any such information.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

dunlapmoran.com

FIRPTA and the First Day Effect

Island bayouThe days of our lives are scattered with those first times we always remember – a new school, a new job, a new year, a new romance – those milestones that come and go, and in the lead-up can be the impetus for a new way of doing things, different from how we approached or looked at life before.

Thanks to an impending rule change by the Internal Revenue Service (IRS), on February 17, 2016 the rate of income tax withholding in connection with the disposition of a U.S. real property interest to which a foreign person is subject increases to fifteen percent (15%) of the amount realized by the Seller on the transfer, from the present ten percent (10%) level.

Under the rules of the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), it is the buyer of real property who is required to withhold the percentage due on the transfer, and remit the withheld amount to the IRS (I) unless an exemption applies, or (ii) the seller has obtained a Withholding Certificate from the IRS authorizing a reduced amount of withholding.

According to noted international tax specialist Renea Glendinning, CPA, “If the buyer fails to withhold the proper amount, they can be held liable for the withholding.  The buyer’s closing agent generally acts on the buyer’s behalf to assist with meeting any withholding obligations.”

Up to now, most buyers were nonchalant about the withholding obligation, and happy to accommodate foreign sellers when it came to allowing them to await receipt of a Withholding Certificate, rather than forcing remittance of the withheld funds at the time of closing.

With the withholding rates going up (and the potential liability getting larger), the rush to the new era seems to have bred a newfound lack of willingness to accommodate foreign sellers in their acquisition of a Withholding Certificate. In the run-up to the rate change, buyers have begun to exercise their rights under a formerly obscure FAR/BAR contract provision to force the remittance at the time of closing, which states in part:

“If prior to Closing Seller has submitted a completed application to the IRS for a Withholding Certificate and has provided to Buyer the [required] notice…but no Withholding Certificate has been received as of Closing, Buyer shall, at Closing, withhold [15%] of the amount realized by Seller on the transfer and, at Buyer’s option, either (a) timely remit the withheld funds to the IRS or (b) place the funds in escrow, at Seller’s expense, with an escrow agent selected by Buyer and pursuant to terms negotiated by the parties, to be subsequently disbursed in accordance with the Withholding Certificate issued by the IRS or remitted directly to the IRS if the Seller’s application is rejected or upon terms set forth in the escrow agreement.”

From a listing agent’s perspective, an unyielding buyer isn’t necessarily a problem or cause for concern, especially from a timing perspective.   A foreign seller does not have to wait until the following calendar year to file their final tax return and obtain any refund due.  Instead, they can make what is referred to as an application for early refund, which is essentially the same application as the one for the reduced withholding.

The difference in this case is the withholding has to have been remitted to the IRS, and the application must include with it copies of the Form 8288-A to document that the withholding has been paid (therefore the reason it cannot be sent until after closing occurs).  The processing is basically the same as with the application for reduced withholding, but when the Withholding Certificate is issued, the refund is obtained from the IRS, rather than from the closing agent for the sale transaction.  Between not being able to send the application in before closing, and having to get the refund from the IRS, it is likely that only an extra month or two has been added to the time the refund is received.

From a selling agent’s perspective, the issue is more nuanced, and the response to the foreign seller wishing to apply for reduced withholding and escrow funds at closing (rather than remit them to the IRS), can depend in large part on how well the buyer is educated on the subject as the contract is first being written.

Especially given the FAR/BAR form’s statement that “[d]ue to the complexity and potential risks of FIRPTA, Buyer and Seller should seek legal and tax advice regarding compliance,” there is never a better time to get an experienced real estate attorney involved than at the beginning of the transaction to advise on the meaning and implications of the buyer’s withholding obligations and options, and help you forge a consensus for the parties as they move forward to closing.

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This information in this site is not intended to establish an attorney-client relationship, and if anything herein could be construed as legal guidance or advice, I strongly encourage you to consult with your own attorney before relying upon any such information.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

dunlapmoran.com

** Publisher’s note: This post was composed with the valuable assistance of Renea Glendinning, CPA (Kerkering Barberio).