Make Sure Realty Agent Includes a Financing Contingency Clause

QUESTION: When are you going to expose the realtors? I thought they could be trusted. But my wife and I found out their so-called Code of Ethics is a joke. We made a $500 earnest money deposit to buy a house. The realtor assured us we should have no trouble getting a mortgage. After the seller accepted our offer, we learned mortgage interest rates had jumped. We couldn’t qualify for even an adjustable-rate mortgage.

When we asked for our $500 back, the realtor refused to refund it. I called the local Board of Realtors. The executive director said there was nothing she could do to help us get our $500 back. I asked about the Realtor’s Code of Ethics but she couldn’t find any violation, even though the agent assured us we could get the mortgage we needed.

Since the realtor was holding our money, we sued her in Small Claims Court and the judge ordered her to refund our $500. Even after we got our judgment, the realtor refused to pay us and we had to attach her bank account to get our money. Don’t you think this is unethical behavior?

ANSWER: Yes. The realtor should have included a mortgage finance contingency clause in your purchase offer. Such a clause might read “This offer contingent upon buyer and property qualifying for a new mortgage” with the specific terms acceptable to you spelled out.

On paper, the Realtor’s Code of Ethics looks great. But the enforcement is virtually nil. I have tried to learn how many realtors are annually kicked out of the National Assn. of Realtors and their state associations as well as the local Board of Realtors for violations of the Code of Ethics. But apparently no statistics are kept.

However, there is a very good reason. If the local Board of Realtors cancels a membership, the wayward agent could sue the realtors for damages. The defense costs can be tremendous. As a result, few realtors are tossed out. I think the realtors rely on the state real estate license officials to revoke licenses of their members whose conduct is less than admirable.

There’s Certain Risk in Buying a Home ‘As Is’

Q: About two years ago we bought our home. The two real estate agents seemed to gang up on us. It was our first home purchase. Now we realize the seller hid some defects from us. A friend, who is a building contractor, says the roof rafters are separating. I don’t quite understand what is happening, but there are cracks in the walls. However, our problem is we bought the house “as is.” The contractor showed us where the cracks were patched by the seller. The estimated cost of repair is at least $5,000. Do you think the seller is liable to us for concealing defects?

A: When a property buyer purchases “as is,” that means the buyer accepts the property in its present condition with no warranties or representations. In other words, the seller is not responsible for repairs.

However, the seller and real estate agent must disclose any known defects. That is the problem. If the seller and realty agent are liable to you for damages, then you must be able to prove they knew of the defects and failed to disclose them to you. Please consult your attorney for details.

Some Lenders Appear Anxious for Business

Q: I don’t know if this is true every place, but as a realty agent I have found in the last few months that mortgage lenders are extremely anxious for business. Several of the major lenders in our town are so eager for business their loan agents have suggested offering less than their posted rates and terms. Some of my buyers have taken advantage of these offerings and, to my surprise, got the loans they requested. I just thought I would pass along this information in case it might help your readers.

A: Thank you for sharing that valuable information. While I haven’t noticed lenders in my area willing to negotiate, I have had a rash of phone calls in the last few weeks from lenders begging me to refinance mortgages with them. However, the terms they offer are nothing special and they still want unnecessary documentation. Perhaps I’ll try your strategy of trying to negotiate better terms than the lender originally offers.

Home Is an Investment, Not Just a Residence

Q: Recently you said a home should be looked at both as a personal residence and as an investment. Please elaborate on how to look at a home as an investment.

A: If you were buying a common stock, you wouldn’t buy in a company with poor prospects for future earnings. Similarly, you shouldn’t buy a home that is unlikely to appreciate in market value.

Or, if you are investing in a bond, you expect the yield to be competitive with other investments. When buying a home, you can enhance the yield by making as small a cash down payment as possible, so if the house goes up in value your yield per dollar invested is maximized.

To enhance the probability that your home will increase in value, you should buy in a good neighborhood. Pay special attention to school quality, as it is usually worthwhile to pay extra for a home in your area’s best school district. No matter how terrific the bargain, stay away from neighborhoods with poor quality schools because good families won’t move there, thus holding down the value of homes in that area.

Must Home Seller Accept Full Price?

Q: Please don’t laugh at my question. Must a home seller accept a full price, no contingencies purchase offer? I ask because I made a full price offer on a house listed for sale at what I thought was a bargain price.

A: A home seller has no legal obligation to sell for the listing price to a buyer who offers the full price. However, the seller would be liable to the listing agent for the full sales commission.

Should Home Buyer Sell Former Residence?

Q: We have contracted to buy a new home under construction. It will be finished in a few months. Meanwhile, we are debating whether to sell or keep our old house. If we keep it as a rental, we can refinance its mortgage to give us the cash we need to buy the new house. However, if we sell it we won’t have to pay tax on our profit because we are buying a more expensive house. What do you advise?

A: You can never own too much real estate. I suggest you keep your old home as a rental property because it is presumably located near your new home so you can easily supervise its rental. Because it has probably appreciated nicely in market value and will continue to do so over the long run, owning two houses could be a very profitable decision.

How to Get Warranty on a New Home

Q: Some time ago you said there was a warranty available on new homes. I talked to the builder of the home we are buying and he said he never heard of such warranties. Where can I buy such a policy?

A: You can’t. New home warranty policies are sold only to home builders. They are not available to the general public.

But I worry about a home builder who is not aware of new home warranty policies. Perhaps your builder can’t qualify.

Only the best home builders offer 10-year home warranties from reliable companies such as the well-known Home Owners Warranty (HOW) Corp. of Washington, D.C.

Top-quality home builders purchase these policies for their buyers. If any home defects develop, the builder is responsible. But, if something happens to the builder, such as bankruptcy, HOW takes over and pays to repair any defects.

Should Home Be Seen as an Investment?

Q: My husband and I have until July to buy a home due to a job transfer. We have visited our new town twice and have thoroughly investigated the home market there. One older suburb has excellent schools, but the homes for sale there are not very up to date. We feel that suburb is about 10 years behind the times. However, a more progressive nearby suburb has nicer homes, but the school quality is not very good. But the homes in the older suburb have appreciated much better in market value. Which area do you think would be best for us?

A: View your home purchase not only as a place to live, but also as an investment. Although you may not be thrilled with the older homes in that suburb with the good schools, chances are a home there will appreciate much better than homes in the nearby suburb where the schools aren’t so good.

Woes of an Unhappy Do-It-Yourself Seller

Q: After reading that book “Sold by Owner” by Maurice Dubois you recommended, my wife and I decided to try selling our home without a real estate agent. The good news is we sold our home. But, the bad news is now we learned we grossly undervalued our home and, even after paying a real estate agent’s sales commission, we would have been far ahead to list the house with a realty agent.

However, we sold the house to a real estate broker who moved in as his personal residence. Since it now appears we sold about $25,000 below market value, don’t you think the realty broker owed us a duty to tell us we were selling too cheap?

A: No. Presuming the real estate broker was buying as a principal and was not receiving any sales commission to represent you, the agent owed you no duty to inform you of your sale below market value.

Real estate agents owe their buyers and sellers a fiduciary duty of honesty, full disclosure, loyalty, bravery and all that, but such a duty is not owed to a non-client. As you may recall, I did not recommend the “Sold by Owner” book but only commented on it, both pro and con.

Your situation is a classic example of why I do not recommend home owners sell without the services of a professional real estate agent.

Don’t Deed Property to Minor Children

Q: I am a 34-year-old widow. My husband died in an auto accident a few months ago. I have two children, ages 10 and 12. Because my health is frail, my sister suggests I add my children to the title to my house as joint tenants, so if anything happens to me, they automatically receive the full title. There is about $50,000 equity in the house. Do you think this is a good idea?

A: No, no, no. Please don’t deed any real estate to minor children. The reason is that in most states, children can receive property titles, but they cannot convey them. If you die, chances are the children would have to sell the house and move in with relatives. But, to sell real estate, minor children must be represented by a guardian. This involves expenses and delay because court approval is also required.

Please consult an attorney to prepare a valid will, which takes care of the children if anything happens to you. Also, ask about creating an inter vivos (living) trust, with you as the trustee and initial beneficiary. Then, if you die or become incapacitated, the alternative trustee takes over. If you die, your children can become the new beneficiaries, but the new trustee can easily deal with the property and sell it without court approval. An inter vivos trust is not only very simple, it also avoids probate costs. For this reason, most lawyers won’t recommend inter vivos trusts.

Old-Fashioned Cure for Seller’s Remorse

Q: Our offer bid to buy a home was accepted by the seller (after some haggling back and forth). That was about five weeks ago. We obtained our mortgage and were ready to close the sale last week when the seller announced to us and the realty agent that she had decided not to sell. She feels she is not getting enough for the house. But, I think, more importantly, she has not found a suitable place to move. Our problem is that we sold our old home, but can’t move into the house we thought we bought. The realty agent has tried to talk to the seller, but she has become irrational and won’t listen. What should we do?

A: The old-fashioned remedy for the home seller’s remorse disease is for the realty agent to go over the sale with the seller, emphasizing the advantages to her. Apparently, this already has been done.

That leaves you with the more practical remedy of hiring a real estate attorney to file a specific performance lawsuit and record a lis pendens against the property title, so nobody in their right mind would buy the house.

When you win the specific performance lawsuit, the court will order the seller to perform her side of the contract and deliver the deed to you as agreed. Because each property is unique, monetary damages would be insufficient to compensate for your loss.

Is a 90% Mortgage Dangerous for Buyer?

Q: Recently I saw you on TV where you said home buyers can obtain 90% and 95% home mortgages. That sounds very dangerous to me. If a home buyer only has 5% or 10% for a down payment, don’t you think such a small percentage is dangerous for the buyer and the lender?

A: No. Thousands of prospective home buyers have good income and good credit, so they can afford monthly payments to buy a home. However, they haven’t saved enough for a typical 20% down payment.

The problem is in many communities home prices rise faster than potential buyers can save. The solution is to get these people into a home as quickly as possible. The 90% and 95% PMI (private mortgage insurance) home loans available from more than 22,000 banks and S&Ls; solve the problem.

Once the buyers are living in their own home, most people will do everything possible to make the monthly mortgage payments, even if they are steep. For example, I know one young couple where both husband and wife work full-time jobs and on weekends they have part-time jobs. Without the incentive of home ownership, I doubt that they would work so hard.

How to Make Certain House Isn’t a ‘Lemon’

Q: My husband and I are searching for a home to buy. But you wouldn’t believe the deplorable condition of some of the homes we have seen at weekend open houses. We are afraid to make a purchase offer because we can’t thoroughly inspect the house in just an hour or so. How do home buyers make sure they are not buying a lemon?

A: The solution to your problem is to include a home inspection contingency clause in your written offer. Such a clause might read: “This purchase offer is contingent upon buyer obtaining a satisfactory professional home inspection report at buyer’s expense within five business days. If such report is not approved by buyer, this sale shall be canceled and buyer’s earnest money deposit promptly refunded in full.” Of course, you obtain such an inspection after your offer is accepted by the home seller.

Put All Conditions of Sale in Writing

Q: We thought we sold our home. The sales contract said the sale was to close within 30 days. But, the buyers couldn’t get a new mortgage, so we said they could have an additional 15 days to close the loan. However, they still weren’t ready to close, refused to return our phone calls or those of our real estate agent, and were very nasty to us.

After waiting a month beyond the scheduled closing date, we sold our home to a backup buyer who paid us all cash and closed the sale within a week. Now the first buyers are suing us, the real estate agents and the buyers. They say we told them to take their time about closing the purchase. But, the purchase contract says: “Time is of the essence.” I should add that in the last few months our house has appreciated in value because a large new shopping center will be built nearby. What should we do?

A: Consult a real estate attorney to answer the complaint. Your situation is a classic example of why everything, especially that time extension for the closing date, should have been in writing. The written time extension would have stated that the buyer was being given only an additional 15 days. Your giving them a month additional to close the sale was more than reasonable. Now it seems they are taking advantage of your good nature. After you win the case, you may want to consider suing their attorney for malicious prosecution, as this appears to be a groundless lawsuit.

Seller Wants Warranty Policy as Inducement

Q: Some time ago you mentioned a one-year home warranty policy. I plan to sell my home in a few months and think it might be a good idea to offer such a warranty as a sales inducement. Where can I buy such a warranty policy?

A: Virtually all realtors offer one-year home warranty policies from various companies. Your home buyer is protected for repairs to plumbing, wiring, heating and built-in appliances. Some policies offer extra-cost protection for air conditioning, roof, pool and other coverages. You also will find a few warranty companies even protect the home seller from the date the home is listed with the agent for sale.

As you know, I recommend interviewing at least three local realty agents before listing your home with the best one. Be sure to ask each agent for the details of the home warranty policies they offer.

Can Out-of-Towner Avoid Being Taken?

Q: I am being transferred and have to buy a home in my new city. But I am greatly worried because I don’t want to pay too much. How can I avoid being taken advantage of as an out-of-towner?

A: Don’t be in a hurry to buy a home. Before making a purchase offer, insist that the realty agent prepare a written “comparative market analysis” form showing recent sales prices of similar nearby homes as well as the asking prices of comparable neighborhood homes. This is the same form which was prepared for the seller when the listing price was determined.

But your best bet is to lease a home with an option to buy. Then you can try out a home, lock in the option purchase price, have all or part of your rent credited toward the down payment, and later decide if the home is right for you.