- Buying Furnished Property: Take Care in Contract
Selling Personal Property With Real Estate
By: Raymond J. Bowie, Esq.
Here’s one of those great conundrums in life: When real estate is sold, more than real estate is often sold.
In the sale of any parcel of real property other than vacant land, a number of items other than the real estate are typically conveyed by the seller to the buyer. The land, buildings and things physically attached to buildings are considered “real property” – but anything else is not real estate. It’s “personal property.”
In the English common law from which our laws derive, “real property” came to be legally defined as the land, any buildings or structures permanently built on the land, and certain other items called “fixtures”. A fixture is virtually anything which is physically attached to the structure in such a way that removing it would cause some damage to the structure. Everything else, by exclusion, is defined as “personal property”, that is, things not physically attached to real property.
Other than vacant land, few real property transactions involve only the real estate. In residential sales, it is customary for most free-standing appliances, carpeting and window treatments in the property to convey to the buyer, even though they are generally personal property items. Sometimes, specific pieces of furniture are also included in the sale. And particularly in places like Naples, it is not uncommon for a residence to convey “turn-key furnished,” which means complete with everything needed for someone to move in and commence living there, from linens and towels to kitchen utensils.
As a general rule in real estate transactions, for a lease or a sales contract to convey anything other than just the real property (i.e. the land, the structures and the attached fixtures), the agreement must specifically include, by name or description, any accompanying personal property items. In the absence of such specific provisions, personal property items do not convey to the tenant or buyer.
Helpfully, most standard form residential sales contracts and leases contain pre-printed provisions for common appliances (stove, refrigerator, dishwasher, clothes washer and dryer), existing wall-to-wall carpeting and window treatments to convey with the real property. However, if the parties agree that any other personal property items are to be leased or sold with the real estate, any such additional items must be specifically listed in the lease or sales contract.
Unfortunately, parties to a contract will sometimes take the easy recourse of simply stating that the property is sold or leased “turn-key furnished” or that “all existing furniture is to convey.” But such clauses may, in the event of a dispute, prove too vague to be specifically enforced against the seller or lessor. If it comes down to the buyer’s interpretation versus the seller’s as to any specific personal property item, the burden of proof will likely be on the buyer – and it will be impossible for the buyer to meet.
Hence, when real property is being sold or leased “turn-key”, or otherwise with extensive personal property included, prudent practice is to compile a detailed written inventory of the personal property and attach it to the sales contract or lease with the following reference in the agreement: “Including the personal property items set forth in the attached Inventory.” Each party should also sign off on the inventory list as well.
Occasionally, parties will agree to document the personal property inventory with a series of photographs or by videotaping the contents, in lieu of compiling a written list. If the inventory is to be depicted by such graphic means, it is advisable to depict the items in logical fashion room by room, starting with a panoramic of each room than focusing a close-up on each major item in the room sufficient to capture the details of its manufacture, model, appearance and condition. The photographs or videotape should also be “time stamped” and otherwise identified as the inventory relating to the specific contract or lease to which it pertains. If the inventory is done by videotape, narration should be added if possible linking the tape to the agreement and enhancing description of particular items if warranted. Copies of the graphic inventory should be made for and kept by both parties.
If no inventory of such personal property is available at the time of leasing or sale, the parties should add a clause making the lease or contract contingent upon the seller or landlord compiling such an inventory list and the buyer or tenant approving of the list within a designated time frame.
The above rules regarding how personal property should be treated in realty transactions may seem common sense enough. Unfortunately, lurking just below the surface are certain pitfalls which seem to defy common sense. In the arcane realms of sales taxation, mortgage underwriting and title insurance, buyer and seller can get tripped up if personal property is improperly treated in a real estate sales contract.
Fortunately, most real estate sales contracts contain a provision that the sales price stated in the contract is allocated exclusively to the value of the real property, which protects against many pitfalls. However, traps may be sprung upon unsuspecting parties when extensive personal property accompanies the sale of the realty and the parties make the mistake of attaching a separate price or value to the personal property.
For instance, while the sale of real estate is not subject to Florida sales tax, sales tax will in some cases be due upon the value of personal property items that convey with the real estate. The general rule is that where the transfer of personal property is incidental to the sale of real estate or a business, it is not subject to sales tax. State law also provides an exemption from sales tax for sellers who sell personal property on an “occasional or isolated” basis, without using the services of a broker or consignor. However, a problem may arise when the real estate sale is brokered through a real estate broker and the parties state in the contract a value or price for the personal property separate from the real property’s sales price. In brokered transactions, this would require that Florida sales tax, collectable and payable by the seller, be assessed on any specific separate value stated for the personal property.
If sales tax is owed, the seller must collect it, apply for a sales tax certificate number, and file a sales tax return – a lot of paperwork for selling what may be just a few pieces of furniture. Fortunately, the Department of Revenue will not go beyond what is actually stated in the sales contract. Hence, the seller or his broker can freely advertise the value of the personal property in marketing the real estate prior to writing up a sales contract. And after the sale, the buyer and seller can each allocate their cost bases between the realty and personal property for their own tax purposes.
Another potential problem may arise when property is sold extensively furnished and the buyer seeks mortgage financing based upon the contract sales price. Lenders will not allow the value of personal property to be included in mortgage financing; only the value of the real estate. If the personal property is separately valued in a real estate sales contract, the mortgage lender’s appraiser or underwriter may deduct the personal property’s value from the contract sales price. The buyer’s maximum loan amount may then be calculated on the lower adjusted value of the real property alone, requiring what may be a higher down payment from the buyer at closing.
Thankfully, appraisers and lenders generally accept as part of the real estate’s value the common household appliances, carpeting and window treatments customarily included in standard residential sales contracts.
Yet another situation in which the parties may be called upon to separately value the personal property may occur at the real estate closing. Closing agents providing title insurance to the buyer are not supposed to base the amount of title insurance on anything other than the value of the real estate being conveyed, excluding the value of personal property. If personal property seems to comprise an extensive portion of the contract sales price, some cautious closing agents may ask the buyer and seller to agree upon separate personal property and real estate values, so that title insurance can be issued only on the latter. Unfortunately, this again runs the risk of triggering sales tax and mortgage underwriting pitfalls if the separate valuation comes to the attention of either the Florida Department of Revenue or the mortgage lender.
Generally, for the above reasons, it is preferable for the parties to a real estate sales contract to avoid stating any separate price for personal property in the sales contract. If the personal property is extensive and the parties are pressured by a mortgage lender or other circumstance to provide separate valuation, there are several alternatives.
The parties might enter into a contract addendum that clarifies that the personal property items were unwanted by the seller, left to the buyer solely for the convenience of the seller, and hence the parties attach no value to the personal property. Or if it is insisted that the parties attach some value to the personal property, the contract addendum can assign minimal “garage sale” values to each of the items. And if sales tax becomes a concern in transaction brokered by a real estate broker, the parties might enter two separate contracts – one for the real property and the second for the personal property. The personal property contract would set separate or perhaps nominal values for the personal property items, recite that the parties negotiated that contract between themselves without the services of the broker, and state that the parties’ performance of the personal property contract is to coincide with the closing of the real property contract.
Figuring out conundrums may be fun: Whenever real estate is sold, more than real estate is often sold. But in this case, we must also take care that the conundrum does not harbor any pitfalls.