Buyer ‘in a Mess’ Because They Had No Financing Contingency Clause

QUESTION: We are in the middle of a terrible mess and don’t know how to get out. When we started looking for homes, we told the realty agent our income and the amount of our cash down payment.

But she showed us homes priced higher than we knew we could afford. Then she persuaded us to make a purchase offer. It was accepted by the seller within an hour.

We should have known something was wrong when that happened because there was no negotiation, even though we offered $14,000 below the asking price.

But the big problem occurred because we can’t get a mortgage loan due to credit problems, a bankruptcy and unstable income.

We told the realty agent about these problems but she assured us she could get us a loan. That was a lie. Now we have our $5,000 earnest money deposit tied up, the seller refuses to refund our money and is threatening to sue us.

We talked to a lawyer but he says we have no grounds to back out because our purchase contract was not contingent upon obtaining a mortgage. What should we do?

ANSWER: A mortgage finance contingency clause should be in every home purchase contract.

For example, such a clause might read, “This purchase offer contingent upon buyer and property qualifying for a new 30-year first mortgage of at least $100,000 with a fixed interest rate not exceeding 10%, a monthly payment not over $877.57 and a loan fee not more than two points.”

If such a loan proves to be unavailable then you would have the choice of either accepting the best available loan or canceling the sale and having your earnest money deposit refunded.

The realty agent should not have encouraged you to make a purchase offer on a home that was beyond your means and without including a mortgage finance contingency clause.

But don’t give up yet. Ask the seller to help finance your purchase. Perhaps you can assume the existing mortgage on the home and the seller can carry back a second mortgage on terms you can afford.

I suggest you sit down with the seller, the realty agent and the agent’s broker to work out a mutually acceptable solution.

How to Locate the Foreclosure Properties

Q: I recently read a magazine article about a man who has earned a fortune buying foreclosure houses and fixing them up to profitably resell. Please tell me how I can find out when the foreclosure sales are held.

A: Even in the best communities, foreclosure sales occur. But most people don’t know about them. It takes work and diligence to track and successfully acquire these distress properties.

Start at your county office where notices of default are recorded. You may find these notices also are published either in a legal newspaper or in a privately published newsletter. Ask the county recorder, real estate attorneys and realty brokers for the best information source in your town.

There are three opportunities to buy these properties: from the defaulting owner before the foreclosure auction; at the foreclosure sale, and, if there were no bidders, after the auction from the foreclosing lender. You will soon learn the pros and cons of when to buy at the right time.

Don’t Let Home Buyer Move In Before Closing

Q: We signed a contract to sell our home. The buyers wanted a 60-day closing as they needed time to move from overseas. But the move came sooner than expected. Since our home is vacant, they want to move in now even though their mortgage won’t be ready for another month. Our realty agent advises against letting the buyers move in early. But I feel so sorry for them living in a motel. What should we do?

A: Listen to your real estate agent. If you let the buyers move in they will surely find real or imagined defects in your home. They may even refuse to close the sale until you repair the problems or reduce the sales price. Don’t give your buyers unnecessary leverage over you. Keep them waiting to move into your home until after the deed is recorded.

Motor Home Can Be Replacement Residence

Q: My husband and I are thinking of selling our home for around $200,000, using our $125,000 “over-55 rule” tax exemption, and buying a nice motor home so we can travel around the country.

Since our sale profit will be about $160,000, could we do this in a way that would let us avoid tax on our sale profit?

A: Yes. Any principal residence you own can qualify. Examples include condominiums, cooperative apartments, mobile homes, houseboats, motor homes and old-fashioned single-family houses.

To combine the “over-55 rule” $125,000 tax exemption with the roll-over residence replacement rule of IRC 1034, available to home sellers of any age, just subtract your $125,000 exemption from your principal residence’s $200,000 net sales price.

That would leave an approximate $75,000 “revised adjusted sales price,” in your case. If you buy a motor home costing at least $75,000 within 24 months before or after the sale, you can then defer the tax on the remainder of your sale profit.

Don’t Be Pushed to Close Home Purchase

Q: We contracted to buy a new home, which was to have been finished months ago. Due to various delays it still isn’t completed to our satisfaction. But the builder says if we don’t close our purchase within 30 days, he will sell the house to another buyer he says is waiting. (I don’t believe that.) What can we do to get the obvious defects corrected before we close our purchase?

A: Before you close the purchase you have maximum leverage over the builder. Don’t be pushed into closing the sale until the defects are corrected.

If necessary, retain an attorney to bring a specific performance lawsuit for delivery of the house as provided in the sales contract. To prevent the builder from selling the house to another buyer, your attorney also will record a lis pendens against the title. That means anyone who buys the house or makes a loan on the property does so subject to the outcome of your litigation. The practical result is to get the seller to be reasonable.

Lease-Option May Be Way to Sell House

Q: I am having difficulty selling my home. The realty agent says it is priced realistically, but the market for homes is slow in our town. I recall several months ago you said a lease-option is a good way to sell virtually any property. I am getting desperate because I am making mortgage payments on both my old and new houses. Please explain how a lease-option would work in my situation. Are there any disadvantages?

A: Lease-options are quite simple. Used properly, I have yet to see this technique fail. The tenant-buyer locks in the option purchase price and has a year or more to build up all or part of the down payment in the form of a rent credit. An advantage for you, the seller, is that you will have rent coming in to pay the mortgage, property taxes and other costs.

For example, let me tell you about a recent lease-option I entered into late last year. The rent is $1,500 per month, about $300 per month higher than the $1,200 market rent would be for the house. The tenant knows this fact. However, the resident gets a $500 per month rent credit and will have accrued a $6,000 credit toward the down payment in one year. In addition, the tenant’s non-refundable consideration for the option also applies toward the down payment when the option is exercised.

Lease-options usually attract top-quality tenants who treat the home as their own, even though they do not yet own it. I find the best way to find good prospective buyers is to run a classified newspaper ad under both “houses for rent” and “houses for sale.” I prefer a headline such as “Just $5,000 Moves You In,” followed by a description of the house.

Be Sure Seller Really Owns the Property

Q: A few weeks ago, I saw a “for sale by owner” newspaper classified ad for a home. The price seemed like a bargain. However, the seller seems rather strange. She says she has lived in the house many years, but when I ask her questions, such as the occupations of the neighbors, she doesn’t know the answers. Frankly, I question if she really owns the house. I have already given her a $5,000 earnest money deposit. How can I be sure I am not being swindled?

A: It is not unknown for dishonest people to try to sell property they don’t own. Giving your $5,000 directly to the seller was not a smart move.

To avoid making any more mistakes, since a realty agent is not involved in your transaction, please consult a real estate attorney, who will arrange for title insurance and closing the sale. The title insurer will provide ownership information as well details on current mortgages and other liens, so you will know the legal owner’s name.

Paint Is Most Profitable Home Improvement

Q: Due to a job transfer, next month we will be putting our home up for sale. We know it needs paint, inside and outside, but are reluctant to go through the hassle of painting. One painter estimated it will cost about $4,000 to completely paint the house. Frankly, we don’t have the money to spare because all our moving costs won’t be paid by my husband’s employer. If we let the buyer paint the house, do you think we need to give a $4,000 discount to make up for the need to paint?

A: You will be making a very, very big mistake if you don’t paint your home before putting it on the market. Paint is the most profitable home improvement you can make. Even if you must borrow the $4,000 from a loan shark, the paint will make your home sell faster and for more money than if you don’t paint it before the sale.

Most home buyers have little imagination about how nice your home can look after it is painted. If you get any purchase offers, they will be discounted by more than the $4,000 it will cost to paint your home. Spring is the perfect time to paint your home, so if you want the best price, get it into top condition before putting it up for sale.

Why Does Realty Board Not Give Answer?

Q: I am preparing to put my house on the market and want to interview three agents, as you often suggest. Since I don’t know any agents here, I called the local Board of Realtors to get the names of their three most successful sales agents. The nasty lady who answered the phone said that is confidential information.

Then I asked for the names of the three largest local brokerages and again she refused to give me this information. Why did this organization go out of their way to be uncooperative with me?

A: You were wise for wanting to interview the most successful agents in your community, but it was unfortunate the local board was so uncooperative.

Such information is not confidential, and there is no reason you should not have been given the names of the top agents. If you watch the newspaper, you will often find the top agents honored for their sales success, so there is no reason not to give that information to prospective home sellers.

1-Year Listing: Insist on Cancellation Clause

Q: I must sell a choice 10-acre parcel of land that is in a resort area overlooking a beautiful lake. However, there is only one real estate agent in the nearby town.

She insists on a one-year exclusive listing. Don’t you think that is too long? What should I do to get this land sold?

A: A one-year listing is far too long. Although land often takes much longer than houses to sell, with a one-year listing the agent would tie up your property and you would have no recourse if the agent does a poor job of marketing it.

One solution is to agree to the one-year listing, but insist on a written cancellation clause allowing you to cancel the listing at any time without cost, upon 30-day notice to the agent.

If the agent refuses to agree to such a clause, the agent lacks confidence in her ability to sell your land. Another alternative is to have the agent prepare the listing but cross out the 12-month term and replace it with a 3-month or 6-month term.

Empty House Reveals Defects to Buyers

Q: We have purchased a new house and will be putting our old home up for sale.

Do you think we should leave most of our furniture in our old home until it sells, or should we move everything out?

A: Empty houses are great for buyers because the defects are readily visible.

If you move your furniture out, you will probably have to paint the interior, possibly recarpet and make other improvements.

But if you keep most of your furniture in the home until it sells, prospective buyers can see how nice it looks and how their furniture will fit. Help them see how comfortable your home can look by leaving most of your furniture.

No Limit on Using Replacement Rule

Q: About six years ago, when we sold our home and bought our present home, we deferred the profit tax by using that roll-over residence replacement rule you often discuss. Now we are thinking of selling our current home and buying a large one. Can we use this tax break again or is it limited to only one use?

A: There is no limit to the number of times you can use the roll-over residence replacement rule of IRC 1034. However, it cannot be used more frequently than once every 24 months, unless the sale involves a job location change that qualifies for the moving cost tax deduction.