Specify Exact Mortgage Terms in Contract When Buying a House

QUESTION: About two weeks ago, we made our first offer to buy a home. The realtor wrote in the offer, “Contingent upon buyers obtaining the maximum mortgage available at current market terms.” Stupidly, my wife and I signed it. Within two hours, the seller accepted our offer with no haggling over price or terms. That worries me. The realtor checked with a few lenders in the area and says the best loan she can find is for 80% of the sales price at 10.25% fixed-interest rate with a 2 point loan fee.

But when we signed the offer, the realtor assured us we could get a 90% loan since we have excellent income and credit. However, the realtor now says getting a 90% mortgage is a hassle. We can’t afford a 20% down payment, the 10.25% interest rate is higher than we expected, and the seller refuses to carry back a second mortgage. Can we get our $5,000 deposit back?

ANSWER: Your realtor should not have written such a vague mortgage finance contingency clause into ur purchase offer. I’ve said here many times before that property buyers should always spell out the exact mortgage terms desired. If that loan proves to be unavailable, then the buyer can either accept the best mortgage obtainable or cancel the purchase.

The realtor should have written a finance contingency clause such as, “This purchase offer contingent upon buyer and property qualifying for a new fixed-interest-rate first mortgage of at least $100,000 with interest rate not exceeding 10%, a monthly payment not more than $877.57, and a loan fee not more than 1 point.”

If you sued the seller for specific performance of this purchase contract because of the seller’s breach of contract, due to the vague finance contingency clause, your lawyer would have a very difficult time proving a contract was formed. Conversely, if you back out of the sale and have to sue for refund of your $5,000 deposit, your argument would be that no contract was ever formed because the finance clause was too indefinite. Anything can happen in a trial court, but if you sue for your $5,000 deposit refund it looks like you have a good chance of winning. Please consult your attorney for details.

Don’t Add New Owner to Title of Home

Q: My elderly mother recently sold her expensive home. She will use that “over 55 rule” to shelter $125,000 of her profit from tax. But that leaves almost $65,000 of additional profit that will be taxed unless she buys another home. She wants to buy a house in both her name and my name as joint tenants even though only she would live in the house. Do you think this is a good idea?

A: No. To qualify for the “roll-over residence replacement rule” of IRC 1034 your mother must buy a replacement home costing at least as much as her old home’s revised adjusted sales price within 24 months before or after the sale. That means she can defer the tax on the remaining $65,000 profit by subtracting her $125,000 “over 55 rule” exemption from her old home’s net sales price and then buying a replacement home costing at least this amount.

However, if she adds you to the title, that complicates matters. It raises the issue of a possible gift to you. Also, to qualify for the residence replacement rule both residences must be owned in the same name. Please ask your tax adviser to explain further.

How to Find a Motivated Seller

Q: A very successful real estate investor friend told me the key to finding good deals is to buy from an anxious seller. She invests in single-family houses but can’t or won’t tell me how to find these sellers who will be flexible about selling for low down payments. Any suggestions will be appreciated.

A: Every time a real estate agent calls me about the possible purchase I ask, “Why is the seller selling?” A few nasty agents reply, “It’s none of your business,” but most tell me the seller’s motivation so I can make a purchase offer that meets the seller’s needs. If you keep searching for a home being sold by an anxious seller, you should then be able to buy at the best price and terms.

Older House Offers More Profit Potential

Q: About two years ago we bought a brand-new house in a new subdivision. We recently sold it due to a job transfer and were lucky to get out without a loss. The problem was the developer is continuing to develop the subdivision with fancy newer models, so we had to price our home less than his. But now we are considering whether to buy a new house or perhaps an older one in an established neighborhood. Do you think a new house or an older one offers the best profit potential?

A: Older homes offer the best profit potential. There are several reasons: most older homes are cheaper on a per square foot basis than new houses, old homes are in established neighborhoods where you know what you are buying, most old homes have close-in locations with established shopping, schools and transportation nearby. Older homes usually have larger rooms than new houses so older homes give more for your money, and you can create unique value in older homes by adding on, renovating and improving, whereas new homes have little potential for upgrading.

However, older homes sometimes have major drawbacks, such as the need for major repairs, functional obsolescence such as poor floor plans, and old-fashioned features that beg to be modernized. But when you make a purchase offer to buy an older home, be sure it contains a contingency for a professional inspection so you can back out if a professional inspector discovers the need for major repairs.

A One-Item Checklist for Owner-Sellers

Q: Do you have a checklist for home sellers who prefer to save the sales commission and sell without a real estate agent?

A: Yes. There is just one item on the do-it-yourself home sale checklist. It says “Interview at least three local real estate agents about listing your home for sale with them, analyze their comparative market analysis form and estimate of your home’s market value, ask lots of questions about each agent’s services, fees, references and anything else you want to know.

“Then check each agent’s references and decide if you are capable of selling your home alone without risking making a costly mistake.”

Most do-it-yourself home sellers wind up listing their homes with a real estate agent, so don’t waste time and money trying to sell your home without professional help.

Forcing Tenant With Lease to Move Not Easy

Q: In August, we bought a house which had a tenant living in it. She said she was moving by the end of September. But when October arrived the tenant showed no signs of moving out. When we confronted her, she showed us her lease that runs until next June.

However, when we were buying the house the realtor and the sellers assured us the tenant was moving out in September. We had hoped to move into our home by now. The tenant offered us rent but we refused it. What should we do to get the tenant out?

A: Forcing a tenant with a written lease to move out is virtually impossible. The reason is that a property purchaser buys the property subject to the rights of the tenants. The realtor should have obtained the tenant’s written agreement to move out at the end of September. If you try to evict the tenant, she will show her lease to the judge and you will have nothing to prove your right to an eviction.

However, the realtor and the seller may be liable to you for damages if they incorrectly told you the the tenant would move out by October. Please consult your attorney for more details.

Pay Minimum Down in Condo Purchase

Q: After looking at single-family houses, I realize I will be lucky to afford to buy a one-bedroom condo. A developer is offering 5% down payments on some new condos, but I can afford to pay up to about 20% down. This would reduce my monthly mortgage payment substantially. What do you recommend?

A: Before getting to your question, please allow me to beg you to reconsider buying a one-bedroom condo. The resale market for two-bedroom condos is much stronger, and I think the potential for a two-bedroom condo is much better. If there is any way you can afford to buy a two-bedroom unit, please think it over.

As for your question about the amount of down payment, make the minimum down payment and obtain the largest available mortgage. The primary reason is the 1987 Tax Act allows you to deduct the interest on an acquisition mortgage, but if you make a big down payment and later realize your mistake, it will be very costly or even impossible to refinance. If you can handle the larger monthly mortgage payments, go for the 5% down payment now.

Don’t Let Home Buyer Handle Sale Closing

Q: We are selling our home to an attorney and his wife. That was our first mistake. But this fellow is a real estate attorney who often handles property closing settlements. He wants to handle the closing of this sale. I am reluctant to let him do so, but our realty agent thinks it would be all right since he won’t charge for the settlement. What do you think of the idea?

A: You should insist the closing of your home sale be handled by a neutral third party such as, depending on local custom, an attorney, escrow firm, title insurance company, bank or S&L.; The buyer should deliver the down payment plus mortgage loan proceeds and you, the seller, deliver the deed and other necessary documents.

If the buyer handles the sale closing, there is a risk that everything might not be handled correctly. Although you might save a little money, I don’t think the risk is worthwhile.

When Back-Up Home Offer Can Backfire

Q: We were very fortunate that our home sold within a few weeks after we listed it for sale. However, our realty agent told us home sales often fall apart, so she suggested we leave the “For Sale” sign up and keep our listing in the multiple listing service.

While the first sale was pending, another agent brought in a second offer that was slightly higher than the first offer, which we had accepted. Our agent showed us how to accept the second offer contingent upon the first sale not being completed for any reason. When the scheduled closing date arrived for the first sale, the first buyers asked for a 10-day extension to arrange a better mortgage.

Against our agent’s advice, we refused to grant the extension. But the second buyers didn’t have their mortgage lined up, so they weren’t ready to close either. The day after we refused to extend the time for the first buyers, their lawyer sued us and recorded a lis pendens against the title. What should we do about this mess?

A: Consult a real estate attorney immediately. Although you had no obligation to give the first buyers 10 additional days to obtain a better loan and the second back-up buyers weren’t ready to close their purchase either, you got caught in the middle.