Buyers of New Home Are Nervous About the Builder’s Inexperience
QUESTION: We are considering buying a new home. It was built by a new builder who told us this is only the third home he has constructed. We noticed several defects the builder promises to correct if we buy. But I am concerned there may be more serious defects that will appear after the purchase. The builder says he will give us a 10-year warranty, but I am concerned as to what recourse we have if the builder goes broke?
ANSWER: You raise an excellent question, to which there is no satisfactory answer. Even many experienced builders now form separate corporations for each subdivision, and then they fold that corporation when the project is completed.
The result is that if construction defects develop there is no builder to sue unless you can “pierce the corporate veil” and sue the individual contractor if you can find him.
The best home builders provide 10-year warranty policies from independent third-party warranty companies such as the well-known HOW (Home Owner’s Warranty) Corp.
If the builder can’t correct any home defects, then HOW steps in to make the necessary repairs. This is your best protection, but not all builders qualify for such policies. Ask your real estate attorney to explain further.
Include a Financing Clause in Your Offer
Q: My husband and I want to buy a home as soon as we save up a down payment. We read your column every week and have learned much about real estate and buying a home. I hope we don’t make the mistakes other people write about to you. My question is how can we be sure we can get the mortgage we will need to finance our home purchase?
A: When buying a home, be sure to include a financing contingency clause in your purchase offer. If for some reason you are not able to obtain the mortgage you need, then you can get your earnest money deposit refunded.
For example, such a finance contingency clause might read: “This purchase offer is contingent on buyers and property qualifying for a new 30-year first mortgage of at least $100,000 with a fixed interest rate not to exceed 10.5%, loan fee not more than 2 points and a monthly payment not more than $914.74.”
Before you go shopping for a home, you may want to prequalify for a mortgage at a local bank or S & L, subject to appraisal of the home you select. Most lenders welcome prospective borrowers to prequalify because they know these buyers are likely to come back to that lender to obtain their home loan.
By prequalifying you will then know the maximum mortgage you can obtain and how much down payment and seller financing you will need. However, just because you prequalify with one lender, don’t stop shopping among other lenders to be sure you got the best loan.
Offer May Not Stand Unless All Owners Sign
Q: We are selling our home. The realty agent brought us an offer by another agent. It is a pretty good offer, but it is signed only by the wife. The agent says the husband is on a long overseas trip and won’t be back until next month. The wife seems very nice and says her husband will like our home. But this seems risky. What do you think?
A: If you accept that offer, I think you have a very shaky sale without the absent husband’s signature on the purchase contract. Watch out. This may be a ploy to renegotiate the sale when the husband returns. Please consult your attorney for further details.
Should Agent Disclose Second, Better Offer?
Q: We listed our home for sale with a real estate agent who works in a large brokerage office of about 50 salespeople. After holding an open house last Sunday, on Monday evening, she presented us with a pretty good purchase offer from a buyer she met on Sunday. Since this was the first offer we received in the two months our home was listed, we were pleased.
On Tuesday morning she phoned to tell us another agent in her office has a “back up” offer. Our agent delivered the second offer to us on Tuesday evening. It was much better than the first offer, which we already had accepted. But the date on the second offer was Monday. When we questioned the agent, she claimed she didn’t know about the offer on Monday evening when she presented her offer, which is about $5,500 lower. I can’t understand why our agent didn’t know about the second offer on Monday, can you? Should we do anything about it?
A: A real estate agent has a duty to present all offers to the property seller. Based on the facts you reported, it appears your listing agent either should have known about the second and better offer or she made herself unavailable until her lower offer could be presented to you.
I suggest you arrange a conference with the brokerage’s manager and the salespeople to resolve this problem. Perhaps the company should pay you the $5,500 lost profit. If you are not satisfied with the outcome, you may want to report the matter to the state real estate commissioner for investigation.
Should a Discount Broker Be Retained?
Q: About six months ago, my neighbor listed her home for sale with one of those discount real estate brokers. If they sold her home, she would only have to pay a $3,900 commission and they would help her with all the details and paper work.
But she was very disappointed. She knew she would have to hold the weekend open houses, but the discount broker gave her virtually no help other than a few newspaper ads. Within two months she canceled the listing and signed up with a regular agent who sold her home within a month.
I am getting ready to sell my home and wonder what you think about the discount real estate brokers?
A: Before signing a listing with one of the so-called discount brokers, please investigate very carefully. Just as you should with a full-service broker, ask for references of previous sellers and phone them to inquire: “Were you in any way unhappy with your agent and would you list another home for sale with the same agent?”
In my area, I watch the “For Sale” signs of the discount brokers very carefully. They are often up for many months. Frequently they are replaced by a for sale sign of a full-service broker who usually sells the home. Rarely do I see a “Sold” sign added to the discount broker’s sign.
While my informal survey is not scientific, I doubt that I would list my property with a discount broker unless I see more evidence of sales success.
Age No Handicap for Becoming Agent
Q: I am 19 and will soon complete my freshman year in college. I hate college. My dad is a very successful realtor, and I have sold homes for his company since I got my sales license when I became 18. I earned over $18,000 in net sales commissions last summer before I went to college. I want to quit college and go full time into real estate sales, but my dad refuses to let me work for his company. He says I am too young. Do you agree?
A: No. I’ve never met a person who is too young or too old to sell real estate. But I agree with your dad that you should get your college degree before entering real estate sales on a full-time basis. If you quit college you probably won’t want to go back to complete your education.
If you are not already majoring in real estate, perhaps you can transfer to a college which offers such a major.
That might be the motivation you need to stay in college to take advantage of the opportunity your father wants to give you. Of course, you can sell real estate in the summers to get the practical knowledge to go along with what you learn in college.
Idea for Selecting the Right Salesperson
Q: I retired from real estate sales about 10 years ago, and have spent full time on realty investing since then. The reason I am writing is to alert you to a technique I learned the hard way.
Like you, I list my properties for sale with a realtor. When I was choosing the wrong agents, I stumbled on an idea that corrected my error. Before listing a property with an agent, I ask them for a list of their last 20 properties in which they were the listing or selling agent and the names and phones of their client.
After phoning these people to ask questions about the agent and the quality of their services, I quickly learn if I should do business with that agent. Have you ever tried this technique?
A: No, but that’s a great idea. Many thanks for sharing it. As you know, I recommend home sellers ask each prospective listing agent for at least three references of previous sellers to phone and inquire “Were you in any way unhappy with your agent and would you list your home for sale with this agent again?”
But I like your idea better. However, now you just got me in trouble with the novice agents who don’t have 20 transactions yet.
Avoiding Tax on Sale of Duplex Not Easy
Q: We are considering selling our two-family duplex where we live in one apartment and rent the other to tenants. Since we have owned this building for many years we have a handsome profit.
But we are receiving conflicting advice on how to avoid tax on the sale. Can we use that “roll-over residence rule” if we buy a single-family house?
A: Avoiding the tax on the sale of the duplex won’t be easy. For income tax purposes you are really selling two properties. One is the sale of your principal residence. The other is the sale of the rental unit.
To defer the tax on the profit from the sale of your personal residence unit, within 24 months before or after the sale you must buy a replacement principal residence costing at least as much as the adjusted (net) sales price of only your personal apartment.
Of course, if you are 55 or older, have owned and lived in your residence three of the five years before the sale and never used this tax break before, you can use the $125,000 home sale tax exemption on the profit from the sale of your personal residence unit (but not the profit from the rental unit).
Or you can move out of your personal residence apartment and rent it to tenants, thereby making it eligible for a “like kind” tax-deferred exchange of property held for investment or use in a trade or business.
To avoid tax on the profit from the sale of the rental unit you will need to make a tax-deferred exchange, as authorized by Internal Revenue Code 1031.
Your situation is ideal for an IRC 1031(a)(3) Starker delayed exchange, so you can sell the rental apartment, have the sale proceeds held by a third-party facilitator, designate another “like kind” property to acquire within 45 days, and complete the acquisition within 180 days. For further details, please consult your tax adviser.
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.
