Unaware Seller, Realty Agent May Be Liable for Unreported Defects
QUESTION: About three years ago we sold a house we had inherited. Never having lived in the house, we knew little about it so we sold it “as is.” The obvious defects were clearly disclosed in writing to the buyers.
But shortly after they moved in, they discovered a third bedroom had been added without a city building permit. To legalize the third bedroom, the city required the Sheetrock be removed so the wiring could be inspected. Some of the wiring was dangerous and had to be corrected. The cost of the work was about $6,700.
The buyers then sued us, as well as the realtor who also had no knowledge of the defect. The buyer’s lawyer argued we should have gone to City Hall, and we would have learned there was no building permit for the room addition. Frankly, I was not even aware the room had been added on to the house. Do you think we and the realtor should have to pay?
ANSWER: No. But anything can happen in a trial court. Although you and the realtor were innocent and had no knowledge of the defect, a judge or jury could find you liable, and you have no viable alternative but to pay. An appeal might cost more than the $6,700 amount of the judgment.
Your situation should serve as a warning to all property sellers and their real estate agents. Disclose, disclose, disclose.
Even though you did not know the room was an addition and could not have protected yourself any better than to sell the home “as is,” which means you won’t pay to have any defects repaired, the court found you liable anyway. My opinion: It isn’t fair. But there isn’t much you can do about the unjust result.
Do Franchise Offices Offer the Best Service?
Q: We are debating who should get our listing when we sell our home in a few months. The agent who sold us our home works for a franchise office, but we were not impressed with her service.
The reason we bought the home from her was we moved from out of town and were referred to her by the franchise office that sold our old home. How important do you think it is to list a home for sale with a franchised real estate office? There are several local realty firms which, I hear, also do a good job.
A: What is important when listing a home for sale is the individual agent, not the firm where he or she works. The nationally franchised firms offer excellent training to their agents, but so do many local independent brokerages.
Please interview at least three realty agents before deciding which one should get your listing. Ask each about their firm’s services, fees, relocation referrals and anything else you want to know.
Seller Financing Is Making a Comeback
Q: I am a real estate agent with too many listings of homes for sale and not enough buyers. In recent weeks I’ve been successfully getting some of my sellers to agree to carry back a first or second mortgage. The results in getting these homes sold has been dramatic. However, I haven’t been able to persuade my other sellers to help finance their home sales. Any ideas?
A: Seller financing at below-market interest rates is making a comeback. As you may recall, this method was very popular during the early 1980s.
Smart real estate agents and their home sellers realize seller financing makes a home stand out from the crowd of tired unsold listings.
The best candidates for seller financing are homes being sold by retirees who need extra retirement income. But the worst candidates for seller financing are homes being sold by transferees who need all the cash from their home sale to buy their next residence.
Risk of Buying Home on a Lease-Option
Q: Last weekend we were talking with a builder about buying one of his unsold houses. We brought up the idea of a lease with option to purchase because we read about it in your column. The builder said he will give us a 12-month lease-option at today’s price for the home. Is there any risk for us in a lease-option?
A: I hope you also negotiated a rent credit toward your down payment. Without a rent credit, a lease-option isn’t much fun for the tenant-buyer.
If the builder is highly motivated, he will give you a 100% rent credit toward the down payment. You would be a fool to walk away at the end of a year from a deal like that. However, the builder might only give you a 50% or 33% rent credit toward the down payment. If he won’t give you any rent credit, that lease-option is not a very good deal for you.
As for lease-option risks for the buyer, the only serious one is home mortgage interest rates might skyrocket by the time you are ready to exercise your option to buy. But I doubt that will happen and the slight risk is probably worth taking.
Townhouse or Condo: Which Is Wiser Buy?
Q: I can’t afford to buy a single-family house and have narrowed my choice down to condo or a townhouse. Which do you think is better?
A: A condo is usually a one-level apartment in a building with several condominium apartments. However, a townhouse is a two-level dwelling, usually with soundproof walls between the adjoining townhouses. The land underneath the townhouse is often owned by the townhouse owner but, as with condos, the common areas, such as the grounds and swimming pool, are owned and maintained by the owner’s association.
If the prices of the condo and townhouse you are considering are comparable, the townhouse will probably be a better investment. Townhouses usually appeal to more prospective buyers than do condo apartments, thus increasing the townhouse’s potential for appreciation in market value.
No Tax Break for Sale of Second Home
Q: This summer I plan to sell my second home. The profit should be about $40,000. If I buy a nicer second home, can I avoid tax, just as I did last year when I sold my primary residence and bought a more expensive home?
A: No. The “roll-over residence replacement rule” of Internal Revenue Code 1034 does not apply to tax deferral for the sale and replacement of your second home. Please consult your tax adviser for more details.
Buy Home Even If You Have a Bargain Rental
Q: For the last three years my husband and I have managed a small apartment building where we get a free apartment. At first our goal was to save toward a home down payment what we would have paid for rent. We have saved almost $30,000. But we enjoy managing the apartment building, get along great with the landlord and tenants and would hate to move. Do you think we should move anyway?
A: No. However, it would be a very smart investment to buy a house and rent it to tenants. Someday you will decide to move out of that desirable rental situation. Then you will have a home where you can move. In the meantime, you can enjoy the tax benefits and probably rising market value.
Although most people don’t want to do it, the smartest thing you can do is rent the residence where you live and own a rental property where you might like to move someday if the rental comes to an end.
Assume a Mortgage If You Have Bad Credit
Q: Last year I got married. I knew my husband had poor credit, but I didn’t realize how bad it was. We want to buy a home, so we went to a local S&L;, which advertises it will prequalify borrowers. The loan officer was very kind, but she told us there is no way any lender could approve us for a home loan. Is there any way we can buy a home with bad credit?
A: Of course you can buy a home. You’ll just have to avoid getting a new mortgage from an institutional lender. One choice is to assume an existing assumable mortgage, such as an older VA or FHA mortgage. The seller can then take back a second mortgage, if needed.
Another alternative is to buy a home where the seller will carry back a first mortgage. Retirees are often especially interested in financing the sale of their home, since a carry-back mortgage gives them extra retirement income at a higher interest rate than can be earned elsewhere with safety. Don’t give up. Even with bad credit, one way or another you can buy a home.
Colleges Offer Classes on Real Estate Basics
Q: I have become very interested in real estate, both as a possible sales career and for investing. But I am uncertain I want to quit my engineering job, as I have an excellent income with outstanding benefits. I have read your book “The Smart Investor’s Guide to Real Estate,” but I want to know more about the realty basics. Where would be the best place to learn more before deciding if I should make a career change?
A: In most cities local community colleges and universities offer excellent low-cost real estate classes. Start with the real estate principles course and then take more advanced classes on real estate finance, appraisal and law.
You will soon know if you really want to become a realty salesperson or if you prefer just investing in real estate. Frankly, you will probably earn much more investing in property than earning sales commissions.
But I must add a word of caution. If you think you want to become a real estate salesperson because you think that will give you an advantage finding property bargains, you will be disappointed. Most realty sales agents don’t earn enough to invest in property.
Another problem I discovered is real estate salespeople often don’t recognize the “good deals” because they are too involved in the business. Unless you really want to earn sales commissions, I suggest you forget about obtaining a sales license.
No Way to Force Sale Without Valid Contract
Q: My real estate agent showed me a house that was listed at a bargain price. I immediately made a written purchase offer about $5,000 below the asking price. The seller rejected it and refused to make a counteroffer.
Then I offered the full asking price in cash with no contingencies. But the seller refused to accept my offer and took her house off the market. Both my agent and the listing agent were mad at the seller. However, they tell me they can’t force the seller to sell to me. I think the seller may be refusing to sell to me because my name is obviously Jewish. Should I sue the seller to force her to sell to me?
A: Unless you can prove illegal discrimination, your lawsuit would be a waste of time. A prospective buyer cannot force a seller to sell unless there is a valid, accepted purchase contract.
A real estate listing is just an invitation for purchase offers at the asking price, and a disappointed potential buyer cannot force the sale. However, since the seller rejected a full price all-cash purchase offer, she is liable to the listing agent for the full sales commission. Please consult a real estate attorney for further details.
The Pluses of Mortgage Financed by Seller
Q: Thank you for the recent suggestion that home buyers without a large down payment seek homes for sale by sellers who will carry a first or second mortgage. When we started looking at homes to buy, we told the agent we just wanted to see homes with seller financing. Of the seven homes she showed us, we only liked one. The seller rejected our offer for a 20-year mortgage but made a counteroffer to carry the first mortgage for 10 years when the balloon payment will be due. Do you think this is too short a time period?
A: No. Ten years is an excellent length for a seller-financed mortgage. If you make your loan payments on time each month, the seller will probably extend the loan because you will be paying a higher interest rate than the seller can probably earn elsewhere. However, if the seller refuses to extend the mortgage, in 10 years you will probably have enough equity to refinance with a new conventional mortgage. Congratulations on insisting on selling financing for your new home.
Deduct Prepaid Interest in the Next Tax Year
Q: A friend told me if I had prepaid one year’s mortgage interest in December, 1989, I can deduct my 1990 interest on my 1989 income tax returns. Is this true?
A: No. Sorry, interest you pay in advance on your mortgage is not deductible in the year paid. However, it would be deductible in the following year when earned by the lender. Please consult your tax adviser for further details.
Various Markets Affect Lending Qualification
Q: I am a real estate broker. Recently you discussed the issue of qualifications for home loans. This has been a big problem in our office because home buyers ask us for our lender recommendations. We consider several local lenders “easy,” but their loans are unattractive ARMs with negative amortization. But the lenders with the best fixed-rate loans have tough qualification rules. Why the big difference?
A: Most banks and S&Ls; keep their adjustable-rate mortgage loans in their portfolios. As a result, they can be flexible on their borrower qualifications for ARMs.
But new fixed-rate mortgages are usually sold in the secondary mortgage market to tough lenders, such as Fannie Mae and Freddie Mac. These inflexible lenders have rigid rules and require unreasonable loan file documentation. As a result, qualifying for a “conforming” home loan, which will be sold to one of these lenders is not easy. As an example of their stupid rules, I can’t qualify because I own too many rental properties. Yet that has absolutely nothing to do with the loan security, which is the home being acquired or refinanced.
I hope this helps explain why portfolio lenders who keep their loans can be flexible about borrower qualifications, but lenders who sell their loans in the secondary mortgage market must conform to tough rigid rules.
