In its never-ending fight against money laundering, the federal government is imposing new requirements on certain real estate transfers that could have a significant impact on your clients. You can help smooth their transactions, though, with a few simple steps at the outset.
To start out with, here’s a quick overview of what the anti-money laundering (AML) rule says. First of all, it applies to transfers that meet three requirements:
- The property must be residential real estate. This includes condos, co-ops, small apartment buildings (4 or fewer units), and some mixed-use properties.
- Someone other than an individual must take title. This could mean a trust, a land trust, an LLC, a corporation, or some other entity.
- The is no mortgage from a bank. This means the rule applies to cash deals, hard money loans, family loans, and even transfers where no money is changing hands.
If the rule applies, FinCEN requires the collection and reporting of significant personal information from both the buyer and the seller in the transaction. This information may include names of the parties or their owners/managers/trustees, as well as dates of birth, social security numbers, and photo IDs. Note that if information is required, neither a buyer nor a seller can hide behind an entity. FinCEN requires the information from the people behind the entity.
Here are a few ways you can make the process as smooth as possible for your client:
- Make sure you put the correct name(s) on the contract. If you represent the buyer, talk to them at the very beginning of the process, even before showing properties, about whether they want to buy in their own name(s) or put the property in a trust or LLC or other entity. If they’re not sure, we’d be happy to provide some initial advice. If you represent the seller, even before you sign the listing agreement, check with us to see exactly who’s on title to the property and how they should be listed on the listing agreement and the contract. A title search will need to be done anyways—this just lets us get a head start. Having the right names on the contract lets us determine quickly if the AML rules do apply.
- Be sure to include your client’s phone number and email on the contract. If the AML rules apply, the title company will need to reach out to your client to collect the required info. We expect most of them will do so by email, and many of them will require two-step verification using a cell phone. If they have to search for this contact info, it will just delay the process.
- Unless it’s a cash deal, list the lender’s information on the contract, even if it’s a hard money or family loan. One of the title company’s first steps in determining if the AML rules apply is to reach out to the lender to determine if the financing meets the rules’ requirements.
- If you’re selling a multi-unit building, let us know right upfront when you send us the contract how many units there are, so we can get the ball rolling on either certifying that the AML rules don’t apply or on working on compliance if they do apply.
- Even if you don’t think the AML rules will apply to your transaction, don’t skip any of this information. As much as we’d like to have everything right at the outset, things change in real estate transactions. Think about how many times you’ve had a client change their mind late in the game about taking the property in their own name vs in a trust or LLC. Sometimes these changes can bring the AML rules into play and having to scramble to find the necessary information can cause real delays in the process.
- If you hear any rumblings from your buyer that they might want to make changes in financing or in who takes title, follow up with them and us right away, so we can minimize the delays that might be caused by such changes.
- Educate your clients. For investor buyers, make sure they know that these rules exist, and that they’re nationwide. Changing title companies or counties or states won’t let them avoid them. For owner-occupant buyers, if there’s any hint of non-standard financing or mention of a trust, give them a heads-up that title will need a lot of info from them. You don’t want them caught by surprise. For sellers, just make sure they know that these rules exist and that whether they apply or not is beyond their control, since it depends entirely on the buyer’s identity and financing. You don’t need to make a big deal of it, but the fewer surprises for your client the better.
These AML rules will certainly be a big change in the real estate industry, but we can work together to minimize their impact on your clients. Don’t hesitate to reach out to us if you have questions.