Five Basic Ways to Get Financing for the Purchase of Real Estate
QUESTION: I am a novice real estate salesman, just getting my feet wet. But I am confused about all the possible ways to finance home sales. Is there any simplified way of explaining the home finance alternatives?
ANSWER: The five basic ways to finance property sales are: all cash (very undesirable, due to the tax laws, leverage disadvantages and inflation); seller financing the sale, such as by carrying back a first or second mortgage or trust deed; buyer assumes or purchases “subject to” an existing mortgage already on the property; buyer obtains a new conventional, FHA or VA mortgage from a lender, and any combination of these methods.
You can never learn too much about real estate financing. Although seller financing is the easiest and best money source, you need to know about the other alternatives because not every seller will help finance their sale.
I strongly recommend you take a real estate finance course at your local community college and read good books on realty finance, such as Peter G. Miller’s “The Common-Sense Mortgage” (Harper & Row, 1990), available in stock or by special order at local bookstores.
Can Contract to Buy Home Be Assigned?
Q: In early January we contracted to buy a new home. We got a bargain price and the best-located house because we were the first buyers in a new subdivision. The area has become very popular and the builder has sold out.
However, we can’t complete our purchase because my employer transferred me out of town. The house will be completed in a few weeks and I want to assign our purchase contract to a friend who will pay me $2,000 for the bargain. But the home builder refuses to allow us to transfer the contract. It says nothing about the purchase contract not being assignable. What can we do about this mess?
A: Consult a real estate attorney. The general rule is that a contract is assignable unless prohibited by its terms or if it is a personal service agreement.
If you contracted to pay all cash for the new house, it shouldn’t matter to the builder if the cash comes from you or your friend. However, if the builder is going to carry back financing, such as a second mortgage, then the purchase contract is a personal service agreement that cannot be assigned without the consent of the seller.
Use Market Analysis When Making Offer
Q: I want to buy my first home this summer. I’ve heard it is wise to offer about 20% below the asking price because many sellers inflate their asking price far above what they are willing to accept. Is this a good rule of thumb?
A: No. If you make a purchase offer 20% below the asking price, you will insult many home sellers who have realistically set their asking price at or close to their home’s fair market value. You might also miss a bargain-priced property with an asking price below its true value because the seller needs a quick sale.
Before making any purchase offer, ask the real estate agent to prepare a written competitive market analysis form for you. In most cities, the agent need only punch a few buttons on the computer to obtain this information instantly.
This form is the same one that was prepared for the seller at the time the home was listed for sale. It contains recent sales prices of comparable nearby houses as well as asking prices of similar neighborhood homes. Only after analyzing this form can you intelligently make a purchase offer on the home you want to buy.
Most sellers will not be insulted if you make an initial offer 5% to 10% below their asking price. Remember, you can always come up in price, but you can’t reduce your offer price. However, if the home is worth its full asking price, don’t hesitate to offer close to that price if the local market is very competitive. It would be a shame to lose the home you want just because you insisted on making such a low offer the seller won’t even make a counteroffer.
How to Ensure Home Has No Hidden Defects
Q: Last weekend we spent about an hour inspecting a home to buy. The seller was there with the real estate agent at the Sunday open house. We asked her to list any defects in the house. She itemized minor things such as a broken screen door, leaky gutters, one cracked window and some warping of the kitchen floor. But how can I be sure there aren’t any hidden serious defects?
A: Some states, such as California, now require sellers to disclose in writing all known defects in the home.
In states where such disclosure is not yet required, you should include in your purchase offer a clause such as: “Seller warrants there are no known defects in this home except the broken screen door, leaky gutters, one cracked window and warping of the kitchen floor.”
If you find other defects after you buy, then the seller is liable to you for damages if you can prove the seller knew about them.
No Tax Deduction for Loss on Home Sale
Q: Due to a job change (my old employer went broke) we had to sell our home after owning it only about a year so we could move to a new town. But our net loss is around $4,500. Can we deduct this loss on our tax returns?
A: Sorry, but Uncle Sam doesn’t allow you to deduct the loss on the sale of your principal residence.
Lease-Options Have Many Advantages
Q: My husband and I are considering buying a home. Recently we noticed several newspaper classified ads for “lease-options.” Please explain how they work and if they are a “good deal.”
A: In my opinion lease-options are the best way to buy and sell homes. But the big obstacle is the real estate agent. Most agents do not like lease-options because they only get part of their sales commission now and they must wait for the balance until the option is exercised.
To illustrate how lease-options work, please let me tell you about the most recent one I signed last month as the seller of a $300,000 home.
The buyer put up $3,000 to move into the house with $1,500 going to the first month’s rent and $1,500 to the non-refundable consideration for the one-year option. Each month that the $1,500 rent is paid on time, the tenant gets a $500 rent credit toward the down payment.
At the end of 12 months, the tenant will have a $6,000 rent credit plus the $1,500 option money or $7,500 total toward the down payment.
Of course the numbers will be different for each home. As a buyer, I’m sure you can see what a good deal a lease-option can be. But as the seller, the lease-option also is a good deal for me. I get to retain all the income tax deductions, but more important, I get top-quality tenants who will treat the home as their own.
In addition, I can charge higher than market rent for the house because lease-option buyers are willing to pay top dollar for these good deals.
Which Appliances Are Included in Home Sale?
Q: We are novice home buyers just starting to look for a home to buy. When we go to a Sunday open houses, some agents tell us the appliances, carpets and drapes are included, but other agents tell us these things are not included. What is the rule on including appliances in the sales price?
A: As master-negotiator Herb Cohen says, “Everything is negotiable.” By the way, his book by that title is outstanding.
When you see a home you want to buy, just include in your written purchase offer a list of the items you want included, such as stove, refrigerator, carpets, drapes, the cat, the dog, the parakeet, the goldfish, the furniture and whatever else you see that you want. The worst that can happen is the seller might cross off items, but the best is those items might be included in the sales price.
Forfeited Damage Money Goes to Owner
Q: My tenant recently moved out of her apartment. She installed a wall without my permission that had to be removed at a cost of $450, which I deducted from her security deposit. As it cost me $450 to make the repairs, how do I account for the expense and the forfeited deposit?
A: The $450 forfeited deposit is rental income to you and the $450 repair expense is deductible on your income tax return Schedule E. In other words, it is a wash as to income and expense.
Can Co-Owner Force Sale of Property?
Q: Almost two years ago, a good friend and I bought a townhouse together as 50-50 owners. All went well for about a year until we started fighting. I don’t approve of his lifestyle. After I protested several times, he said we should sell the townhouse or I should buy him out.
But I don’t want to sell and I can’t afford to buy him out. Last month he went to see a lawyer who filed a lawsuit to force the sale of the townhouse. Is he just trying to blackmail me or can I be forced to sell?
A: A major drawback of joint tenancy and tenant-in-common ownership is one co-owner can force the sale of the property in a partition lawsuit. When it is not feasible to physically divide the property between the co-owners, the court can order the property sold and the sales proceeds divided between the co-owners.
Your situation shows why joint tenancy and tenant-in-common ownership is usually not desirable between co-owners. A better alternative would have been to own the property in a partnership.
The partnership agreement can provide for buyout agreements, sale of the property and other unexpected events, such as when one partner cannot afford to pay for necessary repairs. Although it’s too late for you to change your form of joint ownership, others can learn from your mistake.
Auto Could Serve as Down Payment
Q: My wealthy aunt died recently. As I am her only heir, I was hoping to inherit lots of money. However, after all her debts were paid and her gift to the Humane Society was funded, there wasn’t much left for me. But I did get her brand-new Cadillac with 4,500 miles on it. Frankly, I don’t enjoy driving it, but it is worth at least $20,000. Is there any way we can turn this into cash for a down payment on a house?
A: Yes. Just offer the Cadillac as all or part of your down payment on the home you want to buy. Many home sellers will gladly accept trades for the down payment. Since the Cadillac’s market value is your basis for the car, you won’t have any tax to pay either. Your tax adviser can give you more details on the tax aspects.
