Home Buyer & Seller Help
in McDowell Mountain Ranch

An “as is” property is sold without a warranty as to condition, repairs, or structure.  With an “as is” sale, the home buyer is on notice that the seller makes no promises regarding the property’s physical status.  With an “as is” sale, it is extremely difficult to make a claim against a seller if something is found to be wrong with the property after closing.  “As is” clauses should be seen as an absolute requirement to make the transaction contingent on a professional inspection “satisfactory” to you.  With a properly written sale agreement contingency, if you are not satisfied, then the deal is dead and you can get back your deposit in full.

When you apply for a loan, a lender will ask if you intend to use the property as a prime residence.  If the answer is “yes,” then it is expected that you will physically move into the property and live there for some time.  There does not seem to be a set definition in the term “some time,” but what lenders are getting at is this:  They do not want to make residential loans with low rates and little down to investors.

Thus, if someone gets a residential mortgage, instantly moves out, and quickly rents the place, lenders will be more than unhappy – they may call the loan.  They may also review the loan application to see if fraud was involved.  Lenders do not want borrowers to move in and then rapidly move out, but they will look at the “facts and circumstances” if such an event occurs.  For instance, a sudden job change not known in advance might be a valid reason for a move after several months of occupancy.  What lenders do not want are situations where a “residential” borrower is actually a disguised investor.  Given that most homes are occupied for 8-10 years, a move after several months or a year is likely to set off bells.

Yes.  Millions of people have bought real estate with no money down through the VA loan program.

If you mean, can you buy real estate at a discount of 20% or 25% with no cash or credit, and then instantly sell or rent the place at a profit, then the answer is probably not.  Why “probably” instead of “absolutely” not?  Because in a marketplace with millions of transactions each year, somebody somewhere has made a deal with no money down and rented or sold at a profit.  But it is also true that somebody somewhere was hit by lightening.  The problem is that the term “no money down” is sometimes in the worst cases a code expression for a deal where someone without cash or credit wishes to buy property from someone who is needy, unsophisticated, desperate, in mourning, etc.  Under the guise of “helping” the owner, buyers offer to purchase property at 20% off, or more, and with subordination and substitution clauses.  Of course, if purchasers really meant to be helpful, they would surely pay full market values.  Let’s be clear.  If no-money-down schemes are so wonderful, why do folks who engage in such investments have a need for “partners” with cash?

Rather than get-rich-quick tapes and seminars, prospective investors are best served by taking a basic real estate license class in your state.  This will explain much about financing, marketing, title, and other issues.  It will also allow an individual to take the entry-level real estate exam and qualify for a license.

We made an offer on a home that was about 5% below the asking price.  Our offer was rejected.  What can we do to make the owners more reasonable?

Who says the owners aren’t reasonable? They have established a market price for their home.  If they can get that price within a reasonable time frame, then they have logically priced their home.  If the price cannot be obtained, they will lower either the price or the property will be withdrawn from the market.  Because your experience as a home buyer in a different market made selling at a loss acceptable, that does not mean the same logic applies in other markets, or that your choice should in any way impact the sellers.  Perhaps it would make sense to restructure your offer – maybe raise your price but seek better terms.

Where can a Home Buyer get more information regarding accessible housing options?

Try the following sources:

• State architectural associations.
• Local builders.
• State and local builder organizations.
• Hardware and building supply outlets.
• University architectural schools.
• The library of the National Association of Home Builders in Washington, DC.
• Local public housing agencies.
• Local chapters of associations that serve those with special needs.

We are handy and want to buy a house using sweat equity for a down payment. Will lenders go for this?

From time-to-time, you hear about lenders that allow the use of sweat equity as a credit toward a down payment, but not all of it.  Most lenders, however, are not thrilled with this concept.  The problem is valuing labor.  If a professional paints a house there is work completed to a given standard (that helps maintain the value of the home, and the lender’s security if the loan is defaulted) and there is a bill for labor and expenses (paint, caulk, etc.).

With sweat equity, there can be a cost for supplies, but how is labor valued?  At the same rate as for a professional?  A discount?  And what about workmanship?

The best approach is to speak with as many lenders as possible to see if they have a program that allows the use of sweat equity.  Ask about the maximum sweat equity contribution allowed, and other important topics such as the total cash needed to close, rates, and points.

No.  Lenders provide financing based on the sale price or the appraised value, whatever is less.  In the case of a “discounted” price, say selling a home worth $150,000 for $140,000, the sale price is $140,000.  Lenders do not recognize a discount.

A better approach is for a home buyer to pay full market value but to make the transaction dependent on a “seller contribution” at closing.  The effect is the same, but the accounting makes more sense to lenders.

When a home is financed, the borrower agrees to make regular monthly payments.  However, if those payments are not made, if they are late, or if the lender’s security is reduced (by not making payments, damaging the property, not maintaining insurance, not paying property taxes, selling the property, selling a part of the property by placing someone else on the title, etc.), then the lender has the right to call for the complete and immediate (say within 30 days) repayment of the loan.  The mortgage language outlining the lender’s rights is generally called a “due-on-sale” or “acceleration” clause.  One effect of a due-on-sale clause is that it effectively prevents a loan from being assumed.

Borrowers should note that state and federal law may limit the ability of lenders to enforce a due-on-sale clause.  For instance, a title change in the event of an estate situation may be allowed.

A “land contract” or “contract for deed” or “agreement for sale” is an installment sale you buy today but only get title after some or all of the payments are made.  If you miss a payment, you could lose some or all your equity.  Because title has not been transferred, there is nothing to foreclose.  Some states, however, have special provisions protecting those who buy property with a land contract.

Be careful in a land contract situation to look at the proposed financing.  Is lender approval required? If yes, and such approval is not received, the loan could be called.

State rules regarding land contracts vary extensively and such arrangements should be reviewed by an attorney or legal clinic before acceptance.

A land contract may allow a buyer to obtain real estate even if he or she is not able to obtain financing through regular loan channels.  A land contract may allow a seller to market a property when interest rates are high.

If a buyer with limited financial capacity purchases with a land contract, then a seller may have problems collecting monthly payments.  However, since a buyer with a land contract does not have title until all conditions are met, it is often possible for the seller to get the property back with a “forfeiture” rather than a “foreclosure.” The attraction of a forfeiture is that it is much quicker to obtain than a foreclosure.  It is also a complex undertaking that should only be done with an attorney.

If a land contract involves the use of existing financing that cannot be assumed, that could set-off a due-on-sale clause.  Both buyers and sellers could lose the property if the loan cannot be repaid.

Or, suppose Seller Jones sells a property to Buyer Smith using a land contract.  Title will remain in Jones’ name until Smith makes a certain number of payments.  But suppose that Jones goes bankrupt.  What rights does Smith have to the property? Or, suppose Jones does not pay the property taxes? If the local government forecloses, what rights does Smith have?

Also, what happens if Seller Jones goes off to Tahiti? How does Buyer Smith get title? Land contracts should be seen as complex arrangements.  Both buyers and sellers should consult an attorney or legal clinic (separately) to assure that all aspects of the transaction are fully understood.

A sale agreement typically includes both a purchase price for the property as well as terms and conditions.  It sometimes happens that a buyer will make an offer subject to certain terms. (I’ll buy your house, but I want to keep the washer and dryer, etc.)

One possible condition concerns “seller contributions.” (For example, I’ll buy your house if you will pay the first $x of my closing costs.)  Lenders will generally accept seller contributions as part of a transaction providing they are written into the sale agreement, fully disclosed and only represent a limited fraction of the sale price.  Different loan programs have different contribution caps.  Lenders and brokers can provide specific advice.

A seller contribution can be a useful bargaining chip in slow markets.  (Buy my house and you can have a credit of $x at closing.)  It’s a thought that goes a long way with cash-strapped home buyers.

Generally no.  Lenders have no assurance that such income will be regular and continuing.

In theory, yes.  In practice, not really.  The odds against private financing are substantial.  In 1997, according to the NATIONAL ASSOCIATION OF REALTORS®, 74% of all first-time home buyers obtained financing from mortgage companies, 19% from commercial banks, 1% from Saving & Loans, 1% from “other” sources, 1% from credit unions, and 1% from private investors.

We have stock that has significant value and we think its price will increase. How can we come up with a down payment without selling our shares?

This is an increasingly common and delightful problem.  A home purchase typically requires either a sizable down payment by the home buyer, say 20%, or some form of backing by a third party, perhaps the FHA, VA, or a private mortgage insurance (PMI) company to buy with less down.  With a third party, loans with 15, 10, 5, and 3% and even nothing down are possible.  So, one choice is to look for financing with as little down as possible.  A second choice is to look at RAM financing, a reserve account mortgage.

With a RAM loan, you might get 100% financing.  At the same time, you would deposit an asset with the lender; say the stock you do not want to sell.  The lender then holds onto the stock until the property has a certain level of equity caused loan amortization (reducing the size of the loan through payments) and, hopefully, increasing property values.  The borrower has 100% financing.

RAM financing raises important questions:  Who gets the interest on the account?  What if the value of the securities declines? How is the new value for the property determined? What is the monthly payment? Is all interest deductible? Mortgage lenders and securities brokers can provide additional information.

Because states have better credit than people do, they can borrow money at low rates.  Under Mortgage Credit Certificate (MCC) programs, states lend money to first-time buyers and low-income buyers (usually) at below-market rates (but at rates that cover the interest cost of floating bond issues) and with little down (say 1% to 5%).

MCC’s allow you to borrow money and to write off a portion of the interest, up to 20%, as a tax credit.  The remaining interest deduction is just a write off.

For example, suppose your interest cost for a year is $5,000 and that 20% can be used as a tax credit.  On your federal taxes, you would deduct $4,000 as an itemized expense, and you would deduct $1,000 (20% of $5,000) from your tax bill.  See a tax pro for details.

Speak with local lenders to see if MCC financing is now available for you as a home buyer.  Because funding is limited, these programs often run out of money quickly.

Many sale agreements require buyers to apply for a mortgage within a specific time period, say seven days after the contract is signed.  This is a negotiable item, however, and can be any period agreeable to both parties.

This is an important matter because if an application is not made, then a buyer may be in violation of the sale agreement.  A violation of the sale agreement, in turn, could be grounds to forfeit the deposit.  Thus, buyers should go through the sale agreement with great care before signing to assure that all obligations are known and understood.  Work with an appropriate professional such as a buyer broker when reviewing a sale agreement.

When you meet with a lender, be certain to obtain a letter stating that you met and showing when.  Immediately provide this letter to the seller’s broker in the manner required by the sale agreement.

Sure, if the money is there.  But until the matter is finally resolved (appeals run out, and a check is cashed) how does anyone know that there will be money available for a realty purchase?

What if someone contracts to buy a home today with $20,000 in cash due at closing in 60 days, money that will be generated from the settlement of a suit.  And what happens if the suit is delayed?  Money at closing is still required, and if the buyer does not close, there could be substantial damages—and maybe another suit.

I am getting married in two months. I have lousy credit, but my spouse-to-be has excellent credit. Can my future spouse buy a home individually?

Yes.  However, he or she can only borrow based on one income and his or her credit standing.  Together you might have far more income.  Lenders, incidentally, will probably want both parties on the property title even if you are not on the mortgage.  This removes a barrier should foreclosure be required.

The Fair Housing Act is the major legislation prohibiting discrimination in real estate.  It provides that there can be no offer to sell, rent, buy, or exchange property that contains any preference, limitation, or discrimination based on race, color, religion, sex, national origin, handicap, or familial status, or an intention to make such preference, limitation, or discrimination.

This federal law applies to the sale and rental of housing, residential lots, advertising the sale or rental of housing, real estate financing, the provision of realty services, and the appraisal of real property.  It also prohibits the practice of “blockbusting.”

Other federal laws that offer protection include:

• The Civil Rights Act of 1866
• The Civil Rights Act of 1968
• The Americans with Disabilities Act
• The Equal Credit Opportunity Act

State and local laws may also identify additional discriminatory factors that are prohibited.

Brokers, lenders, and attorneys can explain such matters in detail.   

If the appraised value and the sale price of a home are different, what will lenders use when granting a mortgage to a Home Buyer?

Whatever is lower.  Lenders want as little risk as possible, so they will look at both the sale price and the appraised value and then make a loan based on the lower of the two numbers.

With some frequency it happens that buyers often have a sense of remorse after contracting to buy a home.  Why?

A home is a very large purchase.  Not just in terms of dollars, but also in the sense of status, ego, and commitment.  And because it is such a transforming event, it naturally and reasonably causes some concern.

But not to worry.  Buyer’s remorse typically passes in quick order.

Probably.  There are two issues to consider.

First, lenders like to see two years of good credit after a bankruptcy is resolved.  However, there are instances where lenders will finance a home buyer who has a year of good credit.

Second, lenders want to know why you have gone bankrupt.  There is a substantial difference between a bankruptcy that is caused by reckless financial habits and simple financial disasters (a car wreck, medical costs, the plant closed after 30 years, the town was underwater for three weeks, etc.).  In other words, not every bankruptcy is a by-product of financial negligence.

There are properties that are in flawless physical condition but may nevertheless present unusual marketing issues.  For instance, homes that have been the site of murders, suicides, or that are reportedly inhabited by ghosts are known as “stigmatized” properties.  This is a home with a condition that is psychological in nature rather than a matter of bricks and mortar.

The subject of stigmatized houses is complex.  While some people may want a house with a ghost, others do not.  The subject gets tangled even further when one is asked whether murders and suicides at a property must be disclosed.

The rules on this matter vary by state.  Some say a given condition must be disclosed, others say “no.”  Some say disclosure is not necessary after so many years, and some states say nothing one way or the other.  For specifics, please speak with a broker or real estate attorney in your community. 

In general terms: A co-op is a corporation that owns real estate.  If you belong to a co-op, you own stock in the corporation and the exclusive right to a given unit.  There is usually an underlying mortgage on the property and your co-op fee includes some or all mortgage payments as well as other costs.

With a condo, you own real estate and you have access to certain common facilities.  The condo is typically responsible for exterior maintenance and you pay a monthly condo fee.  You have your own title and mortgage, so mortgage costs are not part of the condo fee.

What are some of the basic questions to ask when looking at a co-op?

Co-op ownership raises a number of issues that should be of concern:

1.  What is the value per unit of the underlying mortgage?
2. What is the voting system (one vote per unit or voting based on unit size)?
3. Is there a reserve fund for repairs?  If so, is it adequate?
4. Are major repairs anticipated in the next two years? If so, how will they be funded?
5. Is the co-op now facing or likely to face a lawsuit for any reason? If yes, what are the possible damages?
6. What pricing trends are associated with the co-op? Are prices rising? Falling? Can you review all sales for the past year?
7. Is a property tax rise known or expected?

We are considering the purchase of a condo in a complex that has an interesting pet rule: You can only have a dog or cat that can be carried into the building. Is this fair?

The obvious intent is to limit larger dogs since domesticated cats can be readily carried by most adults.  The real test here is the strength of the owner rather than the size of the animal.

Not all animals make good pets, regardless of size.  Venomous creatures, wild animals, and endangered species are certainly inappropriate.

A more difficult question concerns larger dogs.  There are noise and sanitation issues, and there are special questions regarding breeds with a history of attacks.  It may well be that Rover is the best of his breed, but if Rover has a bad day and mauls a child the liability could be substantial.

The condo association, for the protection of unit owners, raises a valid issue.  However, a better approach would be to speak with insurance carriers to determine how pet coverage is handled, exclude animals not covered, evolve a more precise pet standard, and make certain that owners understand both the condo policy and their personal liability.

In terms of a real estate sales agreement, a “trust” account is typically an account operated by a real estate broker that is used to hold buyer deposits until closing.

Example: Buyer Smith makes an offer to purchase a home.  With the offer is a $10,000 deposit.  That deposit is held by Broker Smith in a trust account.  The money in a broker’s trust account is typically a credit to the buyer at closing.  If the sale does not close, however, then several alternatives are possible:

First, buyer and seller may agree to return the trust money to the purchaser.  Second, buyer and seller may agree to give the money to the seller to resolve claims that the buyer did not perform as agreed under the sales contract.  Third, buyer and seller may dispute how the funds should be distributed.  In this situation, the money is usually turned over to a court or, in at least one jurisdiction, the state real estate commission.

When homes are bought with 80% or more financing from a single lender, the lender generally requires the borrower to make monthly payments to a lender “escrow” (trust) account.

The purpose of the lender escrow account is to accumulate money to assure that the borrower’s property taxes and property insurance are paid (and thus reduce the lender’s risk).

Lenders typically collect 1/12th of the annual costs for property insurance and taxes each month.  They are allowed to keep as much as one full year’s worth of tax and insurance payments in the account, plus a two-month safety margin, plus $50.  The only time the account is likely to have 12 monthly payments plus the two-month cushion is just before property taxes or insurance are due.

Lenders must account to borrowers annually with a statement showing how much is in the account, whether monthly payments will rise or fall in the coming year, and whether any surplus or shortage appears in the account.  If the surplus is more than $50, the excess must be returned to the borrower.  Note that some states require lenders to pay interest on escrow accounts, others do not.

It sometimes happens that not all agreed promises found in a sale agreement can be fulfilled by closing.  For instance, if closing takes place in January in a cold climate it may not be possible to test the air conditioning system.

How does the home buyer know the system works? It is best to wait until warmer weather to test the system.  But what if something is wrong with the system?  To resolve buyer concerns, an “escrow” account can be created at closing.  In this situation, money from the seller is held in reserve to pay for needed repairs as defined in the escrow agreement.  If repairs are not required, or if the cost is less than the amount of money set aside, the difference is returned to the sellers.

There are a number of loan programs directed toward first-time buyers that allow the purchase of property with as little as 3% down.

The way they work is that a purchaser puts up 3% of the sale price and another party puts up 2%.  Who puts up the additional 2%? Programs differ, but some choices include:

• A friend or relative providing a gift.
• A friend or relative providing a loan.
• An employer providing a loan.
• An employer proving a loan that does not have to be repaid if the individual stays with the company for a certain amount of time.
• A community group providing a loan or grant.
• A government agency providing a loan or grant.
• Amazingly enough, a lender who provides both 95% financing and a 2% loan.

For details, please contact local lenders and real estate brokers.

How can a Home Buyer purchase real estate with their children using “shared equity?”

Shared equity is generally seen as a way that families can buy real estate together.  The kids live on the property and get the benefits of property usage and ownership tax advantages while Mom and Dad get an investment write off equal to their proportional interest.  (Shared equity arrangements, incidentally, can also be among friends, relatives, or business partners.)

Under a shared-equity arrangement, if you own half and the kids own half, you must pay half the mortgage, taxes etc.  The kids must pay the other half of the mortgage, taxes, and upkeep costs.