Offering a Second Mortgage Best Way to Get Top Dollar for Home
QUESTION: We are in the process of listing our home for sale. The realty agent suggests we consider carrying back a second mortgage of about $25,000. Then the buyer could assume our existing VA mortgage at its 8.5% interest rate. But since we will be moving about 1,500 miles away, don’t you think it would be too dangerous for us to take a second mortgage? What would we do if the buyer doesn’t make the payments and we have to foreclose?
ANSWER: I think your real estate agent made a great suggestion. By carrying back a second mortgage, you will make your home much easier to sell than if the buyer has to either come up with a big down payment or go out and get a new first mortgage. Offering easy financing is the best way to get top dollar for your home.
But when the buyer assumes your old VA mortgage, be sure you obtain a release of liability, just in case the buyer defaults. Without such a release, if the buyer defaults and the lender suffers any foreclosure loss, you could be liable for the deficiency loss.
As an alternative to carrying back a second mortgage, you might consider taking back a wraparound mortgage. Let me illustrate.
Suppose your home sells for $100,000 and it has a $50,000 existing VA first mortgage. Instead of taking back a $25,000 second mortgage, carry back a $75,000 wraparound all-inclusive mortgage at perhaps 9% interest or more. You will then be earning 9% on your $25,000 loan plus a 0.5% differential on the underlying $50,000 VA mortgage. The buyer will make one loan payment to you each month and you will use part of that money to keep up payments on the VA mortgage. That way, you will always know the payments are being made on the first mortgage.
If you should ever have to foreclose, just ask a local real estate attorney to handle the foreclosure for you. In the event there are no bidders at the foreclosure auction to pay off your loan, you would get the house back to sell for a second profit.
It should be noted that second-mortgage lenders should promptly begin foreclosure after their borrower misses just one payment. Read the next letter to find out why.
When a Real Estate Contract Is Assignable
Q: My husband and I signed a contract to buy a home. But about a week later, he learned he will be receiving an out-of-town job promotion. Now we don’t want to buy the house. However, we got a very good deal on it.
A friend is willing to take over our purchase contract, but the seller refuses to agree to assign our contract to the new buyer. I think she realizes she could have gotten more money for the house. What can we do to get out of this contract and assign it to our friend?
A: The general contract rule is any contract is assignable unless prohibited by its terms or it is a personal service contract, such as where the home seller agreed to carry back a mortgage for the buyer.
If the seller was to receive all cash for the home, then her objection to assignment of the contract would be hard to justify unless the contract terms prohibit assignment. Please consult your attorney for further details.
Protect 2nd Mortgage; File Foreclosure Papers
Q: About three years ago, we sold our home and carried back a $26,000-second mortgage for the buyers, who assumed our old first mortgage. Everything went well until about four months ago when we didn’t receive our monthly payment.
As we now live out of town, I called the buyers and learned the husband has left town and the couple will be getting a divorce. The wife still lives in the house with their three children. She can’t afford to support them and make the mortgage payments. The first-mortgage lender has begun foreclosure. What should we do to save our $26,000 second mortgage?
A: Consult a real estate attorney in the town where the home is located. You made a very bad mistake by not immediately filing foreclosure papers. Now the first-mortgage lender could hold a foreclosure sale and wipe out your second mortgage.
To prevent that from happening, you will need to pay the missing payments to reinstate the first mortgage. Then you can begin foreclosure on your second mortgage without fear the first-mortgage lender might wipe out your second loan.
Your situation shows why second-mortgage lenders should promptly begin foreclosure after their borrower misses just one payment. Being nice and waiting to foreclose, as you have discovered, can be costly for a second-mortgage lender.
Can a Buyer Force Delivery of Home?
Q: My wife and I listed our home for sale with a fine real estate agent. After about a month, she brought us a low purchase offer. We negotiated with the buyer and eventually reached an agreement. But the buyers keep coming back to reinspect the house and try to change the terms of the sale. We had our attorney review the final contract and he said we should not agree to any changes.
However, the buyers are proving to be so obnoxious and troublesome we want nothing to do with them. So we told them to either stick by the original contract or forget the sale and we would sue them for damages. We didn’t hear from the buyers for over a month and presumed the sale was off. Now they want to buy the house on the original terms. Can they force us to sell?
A: Yes. A buyer can sue a defaulting seller for specific performance of the sales contract. After filing the lawsuit, a buyer can also record a lis pendens against the title of the property.
If you really want to sell your home, I suggest you prepare to sell on the original contract terms. Resisting the buyer who apparently really wants to buy your home could prove to be a costly experience. Ask your attorney to explain further.
Rules on Deferring Tax on Home Sales
Q: My CPA and my attorney are giving me conflicting advice. I’ll trust you to decide who is right. Last April I bought a new home. I now realize it was stupid to buy a new home before selling the old one, but I fell in love with the house. To arrange the down payment, I had to beg my banker to make me a “bridge loan” on my old house, which finally sold in October.
My CPA says I cannot defer the tax on my profitable home sale because I bought my replacement home before selling my old principal residence. But my lawyer tells me I can defer the tax. Oh, one more fact. I bought my old home in May, 1987, when I deferred the tax on the sale of my former home sold in April, 1987. My CPA says this is what disqualifies me. Since I have a large profit, who is right?
A: When all else fails, read the law. Internal Revenue Code 1034 is the roll-over residence replacement rule, available to home sellers of any age. Incidentally, even if you are age 55 or older, the $125,000 home sale tax exemption does not apply because you did not live in your old home at least three of the five years before its sale.
At the risk of boring you, the residence replacement rule says, “If property used by the taxpayer as his principal residence is sold by him, and, within a period beginning two years before the date of such sale and ending two years after such date, property is purchased and used by the taxpayer as his principal residence, gain from such a sale shall be recognized only to the extend that the taxpayer’s adjusted sales price of the old residence exceeds the taxpayer’s cost of purchasing the new residence.”
Another section of this law bars the use of this tax break within two years before the date of sale of the old residence. However, you sold your home in October, 1989 and your previous use of this tax law was more than two years before, in May, 1987, so it appears you qualify for tax deferral. Your attorney is correct. Your CPA is wrong.
What Happens to Tax Deferral Upon Death?
Q: I am a widow. About three years ago, when my husband was alive, we sold our old home and purchased our current larger home. He died last year (at age 49 while playing golf) and I inherited all his assets, including his half of our home. Since we deferred the profit tax on about $75,000 profit from our previous home, if I should die, will our children have to pay tax on this profit?
A: No. Your Uncle Sam is very sympathetic. When a homeowner dies owning a home that involves deferred tax from a previously sold home, Uncle Sam forgives the tax.
In other words, if you sell your home today without buying a qualifying replacement principal residence of equal or greater cost, you would owe tax on the deferred profit. But if you should die, all the tax on the deferred profit is forgiven by Uncle Sam. Ask your tax adviser to explain further.
Realty Agent’s Opinion Usually Not Actionable
Q: When we bought our home almost three years ago in a new subdivision, the real estate saleswoman assured us this is a very desirable area and our home was sure to appreciate substantially in market value.
Since then, our home has not gone up in value because the builder didn’t finish the subdivision and it is tied up in his bankruptcy proceedings. Our house is one of only a few which were completed, and there are many vacant lots. As we will need to sell soon due to a job transfer, do you think we can hold the saleswoman liable if we suffer any loss?
A: No. A realty agent usually cannot be held liable for an opinion statement. Only if the agent had stated a fact such as “I guarantee this home will appreciate 10% in value each year” might there be liability. Talk it over with your attorney, but I don’t think the agent is liable.
Inherited Mortgage May Be Assumable
Q: Recently, while I was visiting Los Angeles, I read what you said in The Times about how to assume a nonassumable mortgage. Your advice saved me a small fortune. I am the sole heir of my father, and I inherited his house, which has an old 6.5% mortgage. When I notified the mortgage company, they said I would have to pay off the loan.
When I read the article, I phoned the lender to talk with a supervisor to explain that I had inherited the house and will be moving in. After I cited your article about the Garn-St. Germain Law I had no trouble assuming that beautiful mortgage. Many thanks.
A: I appreciate your feedback because it tells me some lenders tell their loan clerks to inform all inquirers that all their loans cannot be assumed when, as you know, the truth is otherwise. Many loans are assumable even when the loan has a due on sale clause. If in doubt, consult a real estate attorney.
Buyer Can’t Force Acceptance of Offer
Q: We offered the full asking price for a home listing being sold in a divorce action. The husband accepted our purchase offer, but the wife refused to sign, arguing she wanted more.
The listing had been signed by both husband and wife. Is there any way we can force the wife to accept our purchase bid, since it was for the full price?
A: No. To make a purchase offer bid legally enforceable, both husband and wife must accept if they both hold title to the home. Although they both signed the listing and you offered the full asking price, there is nothing you can do to force them to accept your full price offer.
However, a sneaky technique which usually works in hostile situations like this is to have the closing papers prepared and signed by the willing seller. When they are presented to the uncooperative seller and she sees the check waiting for her after she signs, the signature is usually very easy to obtain.
However, if the wife continues to refuse to sign the deed, the realty agent should remind her that she signed the listing, this is a full price offer and her refusal to sell makes her obligated to pay the sales commission. Such pressure is usually enough to make the reluctant owner sign the deed.
Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent him at P.O. Box 280038, San Francisco 94128.
