Inspection Contingency Will Help Buyer With Undisclosed Problems

QUESTION: About two years ago, our best friends bought their first home. They knew it needed fix-up work, but they were not fully aware of all the problems they would encounter. For example, the seller showed them the “new” roof. It turned out only half of the roof had been replaced, and the other side, which was difficult to see due to trees and a down slope, was in very bad shape.

It leaked badly within a few months. However, their worst problem was the leaky plumbing, which appeared to be copper pipe, but was old galvanized pipe with lots of leaky clamps. Our friends sued the seller for not disclosing the defects and won, but now they find collecting their modest judgment is virtually impossible. As we want to buy a home soon, how can we avoid getting into a similar mess?

ANSWER: That’s easy. Just be sure your purchase offer contains a contingency clause for a professional property inspection. Such a clause might read, “This purchase offer is contingent upon buyer approving a professional property inspection report to be obtained at buyer’s expense within 10 days after acceptance of this offer by seller. Any disapproval of the report to be submitted to seller within 15 days from date of acceptance.”

I strongly recommend you or your husband accompany the professional inspector. The inspector will point out possible problem areas and explain how to prevent future damage.

To illustrate, about two years ago, I hired a professional inspector to check out a fixer-upper home. He explained the house looked worse than it really was, and it was not beyond hope. As a result, I fixed up that house and made a handsome profit on its resale.

Check References in Hiring Remodelers

Q: We want to remodel our kitchen. So far, we have interviewed three remodeling contractors and didn’t like any of them. They have an arrogant “take it or leave it” attitude. Their prices seemed very high, so we are still looking for a remodeling contractor we like and can afford. Do you have any suggestions on how we can hire a reputable remodeler we can afford?

A: Don’t be in a hurry to select a remodeling contractor. You are correct that remodelers have a very bad reputation, and you can’t be too careful when selecting one to remodel your kitchen.

Your best method of selecting a contractor is personal recommendations from friends. If they were pleased with a remodeler, you will probably be satisfied, too. Be sure you submit the same plans to each contractor so that you can compare their price and terms for exactly the same work.

However, if you don’t have friends who can recommend a contractor, start with ads in local newspapers and in the Yellow Pages phone book. After you get a written estimate from a contractor, insist on receiving at least three references from his last three completed jobs.

Phone those people to inquire if they were in any way unhappy with the work and if they would use the same contractor again. Ask if you might inspect the job to see if the work is up to the quality you expect. You will soon know which remodeler should do your work.

Where to Obtain a 1-Year Home Warranty

Q: We recently purchased our first home. Then we read in your column about a one-year home warranty. Our real estate agent never mentioned such a warranty is available. Where can we buy such a warranty policy?

A: It is probably too late. Most real estate agents sell one-year home warranty policies. The seller usually pays for the policy, but the buyer or real estate agent can also pay. However, I am not aware that these policies can be purchased by the buyer after the sale has closed. But check with your real estate agent.

Don’t Be Afraid to Make ‘Low Ball’ Offers

Q: I am constantly amazed at how you manage to buy bargain properties in a high-cost area. But the homes in my town also seem so overpriced I feel it is a waste of time to make offers. What is the best way to buy a bargain fixer-upper house where my family can reside while I fix it up to increase its market value?

A: Don’t be afraid to make “low ball” purchase offers. The worst that can happen is that the seller might say no. But the seller will probably make a counteroffer, and with a little negotiation you can get a very good deal.

Be sure to read the newspaper classified ads every day. The homes advertised on the weekdays, incidentally, are often the best bargains. Be sure to leave your name and phone number with every realty agent you meet.

Then follow up with phone calls to each agent at least weekly to remind them of your continuing interest. You will soon be swamped with so many fix-up bargain properties that you can’t buy them all.

It Is Always a Good Time to Buy a Home

Q: My husband and I want to buy a small home. We both have good jobs, he works for the city and I am an executive secretary. But my parents are advising us to wait to buy a home. They say the country is heading for a depression.

My dad works for a defense contractor who is expecting major cutbacks in the next few years so he is not optimistic. Do you think we should wait to buy a home or should we take a chance and buy now?

A: It is always a good time to buy a home. Unless your town is heavily dependent on one industry, such as defense work, I would not be concerned about doom and gloom predictions. Today is a very desirable time to negotiate with home sellers, especially to get good terms on seller financing.

As you may know, in most towns, home sales are a little slow. But there is an excellent inventory of homes for sale. The result is you can negotiate hard.

But I suggest you make as small a cash down payment as possible. One reason is to maximize your income tax deduction for mortgage interest. Another reason is so you maximize your potential leveraged profit in the house. Still another reason is a large mortgage minimizes your risk.

Do Not Get Involved in Commission Dispute

Q: Our home was listed for sale with agent A. Agent B brought us a purchase offer from her buyer and, after negotiation, we accepted. But before the sale closed we received a certified letter from agent C who claims he showed the property to our buyer and agent B stole the buyer from him. The sale is supposed to close the first of next month. What should we do about this commission dispute?

A: Nothing. You owe the sales commission to your agent A. It is then up to agent A to split part of the commission with agent B or C. Unless the local Board of Realtors has a local “first showing rule” it appears agent C is not entitled to any part of the commission. But you should not get involved in the commission dispute. Let the agents resolve the problem among themselves or through their Board of Realtors arbitration committee.

Don’t Buy Retirement Property Too Early

Q: My husband plans to retire in about six years. Last winter, we were in Florida and visited some excellent retirement communities which seemed very affordable. Do you think we should buy our retirement home now and rent it out to tenants until we are ready to move?

A: No. It is not a good idea to buy a retirement home in advance of actual use. Too many unexpected things can happen to change your retirement plans, such as illness, death, disability or other problems.

Pitfalls of Not Having Renter’s Insurance

Q: I rent an apartment. Last week, the apartment next door to mine burned, due to a kitchen grease fire. It destroyed the apartment, and smoke came into my apartment, severely damaging all my furniture and making my apartment uninhabitable.

I temporarily moved in with my girlfriend, but that won’t last long. The landlord refuses to pay for replacing or cleaning my damaged furniture. She says if I don’t pay my rent on the first of next month, she will sue me since my lease has seven months left. My landlord says if I had renter’s insurance, my losses would have been paid by the insurance company. Is this true or is the landlord saying this to get out of paying for my damage?

A: Your landlord is correct. All tenants should have renter’s insurance policies because the landlord is not liable for damage to the tenant’s property unless you can prove negligence by the landlord. If you had a renter’s insurance policy, your furniture would have been repaired or replaced. Some renter’s policies also pay temporary living costs when you are unable to live in your apartment.

Additional coverages offered by renter’s policies include coverages for loss by theft and accidents. The major cause of renter’s policy claims is theft loss. Since the cost of renter’s insurance in minimal and the potential benefits are great, I strongly recommend you buy renter’s insurance.

Forfeited Deposit on Home Is Taxable

Q: Our home is listed for sale. A buyer made a purchase offer, which we accepted. It included a $5,000 earnest money deposit. But the buyer changed her mind about purchasing, so we agreed to let her out of the purchase. However, she forfeited her $5,000 deposit to us. Do we have to pay tax on this money?

A: Yes. A forfeited earnest money deposit is ordinary taxable income. Report it on your income tax return under “miscellaneous income.” Please consult your tax adviser for further details.

High Yield on Discount Mortgage Investments

Q: I checked out some newspaper classified want ads offering sale at a discount. One woman offered a 2-year-old mortgage on some land with a balance of about $6,400, and it would yield me 20%. Another seller has a second mortgage of almost $18,000 secured by a nice house at a yield of about 17%.

Frankly, I like the loan on the house better because I feel more secure than with a land loan. I have studied your report and Jimmy Napier’s excellent book about discounted mortgages but have come to the conclusion they can be great high yield investments but there is no tax shelter. Is this correct?

A: Yes. Investors in discounted mortgages usually earn high yields but this income is fully taxable because there are no tax shelter benefits. Readers interested in my special report on discounted mortgages can obtain it for $3.75 from Newspaperbooks, Box 4386, Orlando, Fla. 32802. Jimmy Napier’s outstanding book “Invest in Debt” is available for $12 from Jim Napier Inc., P.O. Drawer F, Chipley, Fla. 32428.

Where to Look for VA, FHA Mortgages

Q: I am a Vietnam veteran, but I have not yet used my VA loan entitlement. Last week when I was at my bank, I inquired in the loan department about getting a VA mortgage, since you had written the VA home loan maximum was recently raised to $184,000. But the bank says they don’t make VA or FHA loans. I thought all banks made these loans. Where can I find out about VA mortgages?

A: In recent years, many banks and S&Ls; have quit making VA and FHA home loans due to the red tape and limited profit potential. Thankfully, most mortgage bankers, mortgage brokers, and some banks and S&Ls; make VA and FHA mortgages. Just look in your phone book Yellow Pages under “real estate loans” and start dialing for dollars until you find a VA-FHA approved lender.

How to Convey Title Without Any Liability

Q: I own some land, but I am not sure of the location of the boundaries along two sides. My buyer understands this problem but still wants to buy. How can I avoid liability?

A: Use a quitclaim deed instead of a warranty or grant deed. A quitclaim deed conveys only whatever title you might own. In addition, insist that the buyer sign an agreement that says you are unsure of the boundaries and make no warranties or representations. Please consult your real estate attorney for further details.

Some Purchase Pacts Cannot Be Assigned

Q: My wife and I contracted to buy a house from an elderly couple who agreed to carry back the first mortgage for us. But they needed 90 days to move out. However, after about 30 days, we changed our minds about buying a house because my employer may be laying off workers soon, and I don’t want to be stuck with making house payments if I am out of work.

But my brother agreed to step in and take over our purchase contract. When I took him and his wife over to the house to inspect it and to meet the sellers, they didn’t like my brother and refused to allow him to take over our purchase contract. Can they refuse to allow us to get out of the contract?

A: Yes. The reason your real estate purchase contract is not assignable is it is a “personal service” contract, which was based on your income, credit and good looks. The sellers agreed to sell to you and to carry the financing for you. They do not have to accept substitute buyers.

However, an alternative that might be available is for you to go ahead with the purchase. If the mortgage carried back by the sellers does not contain a due-on-sale clause, then you can transfer the house to your brother and his wife who can then take over the seller-financed mortgage. Please consult a real estate attorney for full details.

Sell Old House Before Buying a New One

Q: We need a larger home for our growing family. My husband and I have been looking, off and on, at Sunday open houses. In the last few weeks, we have come to realize there are some incredible bargains available. However, we have not yet put our current home on the market for sale. Is there any way we can buy another home before we sell our old home?

A: Yes. You can make a purchase offer which is contingent on the sale of your old home. However, the seller and the real estate agent will hate you for doing that. Although many sellers will reject such contingent offers, in today’s buyer’s market in most cities many anxious sellers will accept such an offer.

Instead, I suggest you put your current home on the market for sale. But be realistic. In most cities we are in a buyer’s market with more homes for sale than there are qualified buyers. So price your home at its true market value if you want to get it sold so you can buy a larger home.

Drawback of Selling to VA Home Buyer

Q: You should warn home sellers of the extra costs of selling to a VA home buyer. I innocently agreed to sell my home to a GI buyer. Little did I realize I would have to pay about 3% of the loan amount since the law prohibits a VA buyer from paying his own loan fee.

The real estate agent didn’t explain this to me. The only advantage was I got an all-cash sale, but it cost me an extra 3% on top of the realty agent’s sales commission.

A: Thank you for sharing a significant drawback of VA mortgages. Of course, you had the alternative of rejecting that purchase offer from a buyer who wanted to use his VA home loan eligibility. With the new higher VA loan limit of $184,000, I can’t blame him. Perhaps someday VA mortgages will allow the borrower to pay their own loan fees, as FHA allows its borrowers to do.

Seller Should Leave During Home Showing

Q: My house has been listed for sale for about two months. The real estate agent is top notch. He is so cute and courteous it is embarrassing. Although he is only 23, he has an excellent success record, so I have every confidence he will sell my home.

However, he has an annoying habit of phoning me to let me know when he or a colleague will want to show my house. I appreciate that so I can look decent and put the dog in the garage so she won’t disturb the buyers. But the last time, he asked if it is all right if I go shopping while he shows the house. Do you think it is safe to let him show the house without me?

A: Yes. It is not only safe but very highly advisable the owner not be at home when a realty agent shows your house. When the owner is not present, prospective buyers can be critical and honest about the house. Until a prospect starts criticizing a house, they are not serious about buying. My best advice is to get out of your home the next time your realty agent calls. And take the dog with you.

Legal Remedies When You Buy Lemon House

Q: Last September we bought our first home. It turned out to be a disaster. The first problem we discovered was it isn’t connected to the city sewer. The widow who sold it to us forgot to mention the septic tank.

But it just isn’t adequate for our family of five. We had to pay $6,500 to connect to the sewer. When winter came, we discovered the insulation is very poor, and our heating bills were outrageous. Then the spring rains arrived, and we learned the drainage is toward rather than away from the house. This caused us to find out the foundation is bad and needs to be rebuilt. Other problems we have had include inadequate wiring and galvanized plumbing instead of copper pipes. Is there any way we can get our money back?

A: Shame on your seller for not disclosing all the home’s known defects to you in writing. But your difficulty is proving the seller knew of the problems you outlined.

When a property seller misrepresents their property, the buyer has two possible legal remedies for buying a lemon house. One is to rescind the sale and get your down payment money back.

Rescission should be requested within a reasonable time. The second legal remedy is a lawsuit for damages against the seller and the real estate agent. Please consult a real estate attorney for further details.