4 common real estate deal-killers
In May of this year, the sellers of an architect-designed home in the hills above Oakland, Calif., received two offers in less than two weeks. They accepted the offer from the buyers who seemed most committed to buying the house.
In less than 12 hours, the buyers backed out. Although they had been looking for a home for months and thought they'd decided where they wanted to live, they had a change of heart -- not about the house, but about the location. Buyer's remorse is one reason transactions fail.
The enthusiasm that permeated the home-sale market when the federal tax credits were available has waned. Economic news has been mixed at best. This has led to an increased reticence on the part of some homebuyers.
HOUSE HUNTING TIP: An easily avoidable reason why contracts fail is failure of sellers to disclose a significant defect in the property before the buyers make an offer. Some sellers resist having presale inspections done because they don't want buyers to know too much about what's wrong with their home until they fall in love with it.
This strategy might work for sellers in a hot market where prices are rising quickly. However, in today's market, buyers are diligent and cautious; falling in love takes a back seat to practicality.
In one case, sellers withheld a report that revealed significant foundation problems that could be fixed only at great expense. The buyers, who were buying at the top of their price range, were furious.
They wouldn't have made an offer had they known about the foundation upfront, particularly since the seller was unwilling to correct the defect. They wasted time and money on their own inspections. The deal fell apart and the sellers had to put the house back on the market.
Often contacts are so loaded with conditions unacceptable to the sellers that they don't make it to first base.
One seller refused to respond to an offer because the price was very low, the offer was contingent on the sale of the buyers' home that was not yet on the market, and the buyers wanted the sellers to take their home off the market until the buyers found a buyer for their home.
Another culprit that can rattle a transaction, even one that's not full of unreasonable contingencies, are conditions pertaining to the buyers' financing. Well-qualified buyers were recently told by their lender that they had to increase their cash downpayment from 20 to 25 percent because of one late payment on their credit report.
The buyers had enough cash to increase their downpayment. But, when defects were pointed out during inspections, the buyers didn't have enough cash left to make the repairs. They asked the seller to credit them money at closing. The seller agreed and the sale closed. However, this could have blown the deal if the seller was unwilling or unable to pay for repairs.
Low appraisals have been a factor in keeping transactions from closing. The situation has improved recently due to a lift in home-sale activity in March and April. However, following the expiration of the tax credits on April 30, the National Association of Realtors reported a 30 percent drop in pending sales -- accepted offers that have not yet closed -- for May compared to the previous month.
If pending sales continue to decline, this could have a negative impact on home prices, which could lead to more low appraisals. Lenders want appraisers to use comparable sales that occurred within the last three months.
THE CLOSING: Keep in mind that the home-sale market is a local business. Although national trends and consumer confidence impact local markets, prices tend to hold up well for well-priced homes in high-demand, low-inventory neighborhoods.
Dian Hymer, a real estate broker with more than 30 years' experience, is a nationally syndicated real estate columnist and author of "House Hunting: The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide."
Reap benefits from cash-in refinance
Cash-in refinancing means putting cash into a transaction by paying down the balance, as opposed to cash-out refinancing where you take cash out by increasing the balance.
Cash-in refinancing has become a hot topic recently because in the current market it is possible for mortgage borrowers to earn a very attractive rate of return on money invested in a balance paydown, at the same time that the returns available on other low-risk investments, such as government securities, CDs and money market funds, are lower than they have been at any time since the 1930s.
The high returns available from cash-in refinancing reflect several features of the current financial scene. Interest rates on very low-risk mortgages have never been lower, creating large spreads between those rates and the rates now being paid by millions of borrowers on their existing loans.
The problem is that the lowest rates on new mortgages are available only to borrowers who meet the risk requirements, which most do not.
These requirements include not only good credit and adequate income, but homeowner equity of 20-25 percent, which translates into loan-to-value ratios (LTVs) of 75-80 percent on new loans.
Many homeowners cannot meet the LTV requirement because of the decline in home prices that has occurred over the last four years. Further, mortgage insurance premiums on loans with LTVs above 80 percent have increased significantly for those without the very best credit.
Cash-in refinancing makes the best rates available to borrowers who would otherwise qualify for them but don't have enough equity in their property. Paying down the loan balance reduces the loan-to-value ratio on the new loan, which reduces the interest rate, mortgage insurance premium, or both.
The balance paydown, and the lower interest rate it makes possible, reduces both the monthly payment over the period the borrower expects to be in the house and the balance that has to be paid off at the end of the period.
The principal question the borrower should ask is whether the rate of return on the money used to pay down the balance and cover the closing costs on the new loan exceeds the return on alternative investments available to the borrower.
With Chuck Freedenberg, I developed a new calculator that shows the rate of return on an investment in a loan paydown in connection with a refinance. It is calculator 3f on my website.
Here is an example: John has a 6 percent mortgage with 300 months to go and a $100,000 balance, but his house is worth only $100,000, which makes him ineligible for a refinance. However, if he pays down the balance to $80,000, he can refinance into a 4.5 percent loan with closing costs of 2 percent.
If John stays in the house for five years, the rate of return on his investment, consisting of $20,000 in balance paydown plus $1,600 in closing costs, would be 9.98 percent. The return is riskless to the borrower.
The rate of return depends on the size of the rate reduction, closing costs on the new loan, how much must be invested to get to an 80 percent LTV, and on how long the borrower expects to have the mortgage.
To illustrate: If John's house is worth $118,000 rather than $100,000 so that he has to invest only $5,600 to get to an 80 percent LTV, his return would jump from 9.98 percent to 21.09 percent. If the new rate is 5.25 percent rather than 4.5 percent, the return would fall from 21.09 percent to 10.41 percent.
If closing costs are 1 percent rather than 2 percent, the return would rise from 10.41 percent to 15.13 percent. And if John sells the house after only two years instead of five, his return would fall from 15.13 percent to 9.45 percent. You can find the returns applicable to your deal using calculator 3f.
Readers who use calculator 3f will notice that it calculates two rates of return. The numbers cited above compare the paid-down mortgage with the current mortgage. The second return compares the paid-down mortgage with a new mortgage that does not have a paydown, and therefore will carry either a higher rate or a mortgage insurance premium.
The second rate of return is for borrowers who can refinance profitably without a paydown, and are therefore not quite sure they want to invest the money in making the refinance more attractive. The return relative to the refinanced loan without a paydown will be lower.
Suppose John's house in the example above is worth $111,200, so that his current balance of $100,000 is 90 percent of value.
In this situation, he can refinance without a paydown by paying mortgage insurance, which I priced at $52 a month. Assuming a rate of 4.75 percent and closing costs of 1 percent with or without the paydown, the returns over five years on an investment in paydown are 14.06 percent relative to the current mortgage, and 10.75 percent relative to a refinance without paydown.
Note that if the return relative to a new loan without paydown is higher, it means that a refinance without a paydown is a loser and should be avoided.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
A pro's take on attic ventilation
Q: My house currently has a continuous ridge vent in the attic and two gable vents (one on each end of the attic). However, it has no soffit vents at all. I'd like to install some but I'm not sure what kind are best. Is it bad to have more ventilation at the eaves than at the ridge? Any tips are appreciated. --Mike
A: For the typical attic, ventilation is achieved by installing a series of low vents along the eaves or soffits of the roof, and a series of high vents along the roof's ridge or gable ends. Since the air in the attic is warmer at the ridge than it is at the eaves, the natural upward movement of the warmed air creates a current of moving air.
The low vents act as air intake vents and the upper ones act as exhaust vents -- lower temperature air is drawn in through the low vents, pushing the higher temperature air out the high vents.
Without the low ventilation, as is the case of your attic, you are dependent solely on wind pressure to move air in through one of the high vents and out through the other, which doesn't work very well.
You want to use a ratio of approximately 1 square foot of ventilation area for every 300 square feet of attic area, including attached garages. That ventilation should be equally divided between high and low vents. So, simply divide the square footage of your attic by 300 to get the total amount of ventilation required, then halve that number to determine approximately how much should be high and how much should be low.
Ideally, you want to keep the amount of high and low ventilation roughly equal, and you also want to keep the low vents roughly balanced on each side of the house. In other words, don't put all the low vents on one side and none on the other.
However, as long as you install the correct total amount of ventilation required for the entire attic, if you have a little more low than high it won't matter.
The type of soffit vents to use depends on the construction of your house. If you have open soffits, where you can look up and see the underside of the roof sheathing, you can remove some of the solid wood blocks between the rafters and replace them with screened eave vents.
If you have a closed soffit, which means the underside of the rafters are covered, you need to cut a slot through the soffit and install long continuous soffit vents, of which there are several types on the market. And in addition to the new vents, make sure all your exhaust fans are vented to the outside to prevent moisture problems in the future!
Q: We have two fairly new appliances (dishwasher and convection/microwave) that are bisque (color). Our present stove is bisque and the fridge has wood panels on the doors to match the cabinets. I have found a fridge and stove in bisque but now am beginning to wonder if the way to go is with stainless steel. Will the bisque "date" the house?
(The brand of cabinets we now have) do have bisque laminate cabinets, but then I'm thinking everything bisque may be way over the top. This is the part I hate about doing anything in the house -- too many decisions! --Virginia B.
A: I definitely sympathize! Too many decisions, and a lot of them -- especially when you're dealing with the kitchen -- can be quite expensive. As such, you need to make your decisions based on what's practical and affordable, not just on what's currently popular. Discarding perfectly good appliances doesn't make any sense.
Stainless steel appliances are hot right now, and have been for several years. I suspect they'll remain so for quite awhile, since they look classy and they blend well with a wide variety of cabinets, counters and flooring. Black appliances tend to do the same thing, and while they're not currently a hot trend, they tend to remain relatively popular year after year.
Bisque will probably date the house to some degree, but it's such a neutral color that I don't think it would be a huge turnoff to a potential buyer. One thing I would strongly recommend against is bisque cabinets! As you mention, that would be way over the top. What's currently popular in the way of cabinets is neutral, softer-grained woods such as maple and alder.
Finally, try not to get too stressed. Don't look at too many options. After a while it all gets confusing and overwhelming, and it takes the fun and excitement out of remodeling.
Remodeling and repair questions? E-mail Paul at paulbianchina@inman.com. All product reviews are based on the author's actual testing of free review samples provided by the manufacturers.
2 companies seeking short-sale strides
This past spring, the Treasury Department put into effect the Home Affordable Foreclosure Alternatives Program (HAFA), which provides incentives in connection with short sales or deeds-in-lieu of foreclosure in an attempt to provide a viable option for homeowners who were unable to keep their homes through the existing Home Affordable Modification Program (HAMP).
For the past two years, short sales have been on the collective minds of everyone from the government to individual brokers hoping to find a way to keep people in their residences, but the process has been difficult and lengthy. So, I've been keeping an eye out for servicers who have instituted programs to help make the process go smoothly, or at least can be of aid to lenders or brokers who want to go in this direction.
Recently, I've come across two much different types of real estate, back-office, service companies that have inserted themselves into the short-sale process: ClearMarkets LLC, a technology firm; and National Creditors Connection Inc., which offers loss mitigation services.
Basically, the short sale happens when the proceeds from the sale of a property are less than the balance owed on the loan (secured by the property being sold). The key in all of this is the lender accepting a price that is less than the amount owed on the property -- and the lender would do that to avoid a foreclosure situation.
The key players in all this are obviously the lender and the homeowner, and I'll start with NCCI of Lake Forest, Calif., first, because the company performs the most basic of services: the on-the-ground contact with homeowners who potentially can benefit from a short sale.
NCCI boasts it has successfully conducted more than 2 million field contacts for more than 600 financial institutions throughout the U.S., and the company recently unveiled a "short sales" desk.
The idea behind the new program is to help assess, on behalf of its servicer clients, whether delinquent borrowers are good candidates for HAFA programs, and it will do this by having its employees personally collect all the necessary documents from borrowers and work with Realtors in an "arm's length transaction."
In short, the company will do the initial door-knock, document retrieval, signature gathering and the extracting of financial information.
"After we hear from our client, we go to the home, knock on the door and tell the homeowners they have not qualified for HAMP or not made payments on time, but based on the data available, they could qualify for HAFA, which would be a short sale or deed-in-lieu," explained Bart Brainard, director of strategic default management for NCCI.
"We will deliver the paperwork, mentioning to the homeowners that they have a specified time frame to respond back with yes or no."
If the answer is positive, NCCI will move to the BPO (broker price opinion) process, determine the price of the home, engage a Realtor, assess any junior liens, negotiate with the junior lien holders and help get the home through the sale process.
"It's a natural fit for our clients right now," said Brainard. "We do a lot of loss mitigation on their behalf. To get right to HAFA is a natural. For people we were dealing with on loss mitigation, we have already collected the documentation -- and if they don't qualify for HAMP, we can go right back and re-solicit them for the HAFA short-sale initiative."
ClearMarkets LLC in New York is going more in an anti-HAFA direction. It has teamed up with LenderLive Network Inc., a provider of business process outservicing, and Keller Williams Global Property Solutions LLC to provide an end-to-end solution to address all components of the short-sale process.
LenderLive unveiled in June its LenderLive Default Solutions for short sales using ClearMarkets technology for bid management and asset sales, marketing and reporting, while Keller Williams will provide agent training, education and certification.
"We approach short sales from a non-HAFA perspective," said Robert D'Loren, ClearMarkets co-chairman. "We contact the borrower with a letter. Then the borrower is sent an opt-in package, including listing agreement with the local broker, an escrow agreement and contract of sale that has a purchase price in it. The borrower signs that contract and it sits in escrow and is only released if there is an offer above the reserve price."
In the ClearMarkets approach, all parties including the bank have signed off on the price. With a clear eye to transparency, everyone knows when an offer has come in and at what price.
ClearMarkets' non-HAFA short-sale process goes from start to finish in 45 days, as opposed to a HAFA program that could easily run 120 days.
"All parties are locked in. We have already run a preliminary title, we know what clouds, if any, there are in the title, and we've run a BPO," said D'Loren.
"The problem with a lot of short sales and the reason they take so long is that no one has agreed on the price and the banks are reluctant to give a price because there is no transparency in the offer process."
The way most short sales work is that a broker identifies a house that is underwater in terms of debt. The broker first makes a deal with the seller and then tries to make a deal with the bank. Generally, there is not a lot of upfront buy-in from the lender, which makes the process iffy at best.
"That's exactly what we don't want to do," D'Loren stressed. "It takes too long and too many of them fall out. We would rather get into a program with a bank, Fannie Mae or Freddie Mac, agree on what a price should be, and then go hire a broker and get to the borrower to make a deal."
ClearMarkets expects to be very active in a few short weeks. As for NCCI, which had done just a limited amount of short-sale work in the past, its pipeline is growing.
The short-sale market could finally get as active as everyone has wished and predicted it would be.
Steve Bergsman is a freelance writer in Arizona and author of several books. His latest book, "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade," has been ranked as a top-selling real estate investment book for the Amazon Kindle e-reader.
Buyer beware of underfunded HOA
Q: If I purchase a condo with a 97 percent occupancy in its complex with a monthly maintenance fee per owner of $500 per month, and three years later, due to the economy, the occupancy rate drops to 70 percent, do the remaining owners absorb the maintenance fees that are not being paid by the missing occupants? --Ken, California
A: Probably the single most underreported effect of the foreclosure crisis is the tailspin into which it has sent many homeowners associations (HOAs) across the country. When HOA members stop paying their dues or, worse, stop paying their mortgages and lose their homes to foreclosure, it has an immediate and intensely negative trickle-down effect on their fellow HOA members.
Most condo owners stop paying their HOA dues long before they stop paying their mortgage. So, by the time condos go into foreclosure, they are often many months or even years delinquent on their dues.
While this seems like it's just the prudent thing to do from the homeowners' perspective -- not throw good HOA dues money after bad on a home that you know will not be yours much longer -- it can actually be devastating to the HOA's financials and those of the other HOA members.
First off, to your question, it is the case that when an HOA is seriously underfunded because people are not paying their dues, the HOA will generally continue to collect funds from those owners who are not paying (in the case of foreclosed homes, the bank) while being forced to increase dues or even impose assessments on all the other owners to make up for the lost income.
While many condo owners and buyers see HOA dues as just another bill, the fact is that the vast majority of the funds paid in as HOA dues go to cover actual expenses incurred for the maintenance of the property, such as landscaping, roof and boiler repairs and long-term upgrades; paying for the buildings' hazard insurance policy; and paying for shared utilities, like gas, water and garbage.
When people stop paying dues, those expenses don't necessarily go away.
However, I think you might be getting two issues confused. The occupancy rate is not a dues issue; even vacant (unoccupied) units are still owned by someone. The owner is legally obligated to pay HOA dues, whether or not he/she occupies the property.
Even vacant foreclosures are owned by the bank, which means the bank is on the hook for the dues incurred by the unit during the time the bank owns the property -- do note, however, that even banks have a habit of falling delinquent on HOA dues on foreclosed units, waiting to pay the arrearage when they resell the home.
Of course, as we just discussed, the fact that people are legally obligated to pay dues doesn't mean they do. And, as you suspect, the shortfalls created by delinquent dues are often passed onto the rest of the HOA's members.
And, as an aside, complexes with greater than a 15 percent dues delinquency rate are very difficult to resell, as most mortgage lenders refuse to lend money on complexes with delinquent dues above that level. Condos that cannot be sold except to cash buyers drop in value very quickly and, often, very significantly.
Lenders know that delinquent dues tend to snowball into full-blown HOA financial crises. The on-time-paying owners get frustrated and stop paying when they see their neighbors stop paying -- or they simply can't afford the rapidly escalating dues and assessments that result from the other owners' delinquencies, and stop paying for that reason.
As such, you're right to be concerned if your HOA has a number of units for which dues are not being paid. Technically speaking, though, I think you might be confusing the issue of dues delinquencies with the issue of owner-occupancy.
Every condo subdivision has an owner-occupancy rate, which the HOA tracks very closely, primarily because it also dramatically impacts the ability of units to be bought and sold and, as a result, their value.
Most mortgage lenders have a guideline of lending only on condo units with 25 percent or less non-owner-occupied (i.e., rental) units. I think this might be what you're thinking of, as 90 percent is a very attractive owner-occupancy rate, while 70 percent is much less so.
Owner-occupancy rates in many complexes have dropped due to foreclosures and delinquent dues rendering the homes able to be purchased only in cash, which makes them primarily attractive to investors who immediately rent the homes out after they buy them.
However, in and of itself, a reduced owner-occupancy rate does not impact dues payment or cause any increase in fees allocated to the remaining owners.
Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.
Neighbor vents over water heater noise
Q: Our neighbor across the street is complaining about the loud humming sound coming from our water heater exhaust vent and is threatening to report us to the authorities.
We installed a through-the-wall gas water heater about seven years ago (not sure why the sound is bothering the neighbor now). Because of space limitations, we had to vent the exhaust horizontally out to the front of the house using 2-inch PVC ducting.
We have been unplugging the water heater every night because the neighbor said the sound was keeping him awake. Now he says the noise is also bothering him during the day.
Would extending the vent around the front of the house and up to the roof lessen the sound? The only other solution we can think of is trying to build a sound barrier around the vent. Do you think this would be feasible, and should we let a professional handle this or can this be a do-it-yourself project?
A: It's difficult for us to believe that the noise from the blower on top of the water heater is producing enough sound to irritate, much less keep someone awake -- especially if that someone lives across the street.
The water heater you describe exhausts flue gases using a blower assembly that pumps gases directly out of the building. This eliminates the need for conventional chimneys or expensive flue systems.
Your heater is different from conventional gas water heaters that discharge combustion gas by convection. The blower/motor assembly can discharge gas vertically or the unit can be rotated to allow for direct horizontal discharge of exhaust gases.
Don't try to build a sound barrier around the vent. Obstructing the vent could result in damage to the blower or worse -- the backing up of carbon monoxide into the house. We think extending the vent is feasible. And yes, gluing PVC pipe together is a DIY project -- just make sure it's done according to the manufacturer's specifications.
But you may not have to do anything at all.
First, determine just how noisy the blower is. Most cities have noise ordinances that establish the number of decibels that constitute a nuisance. A decibel is a unit of sound and can be measured by a special meter. We'd be shocked if the noise from your water heater rises to the nuisance level.
Give the city building department a call, explain your problem, and ask the city to send a worker to come out and take a noise measurement. If you're within the city noise guidelines you can tell the neighbor to get lost. If not, or if peace in the neighborhood is a goal, go to Plan B.
Plan B: Directing the vent pipe around the front of the building to the side, then up, will work. The 2-inch PVC pipe limits you a bit, but our guess is that it's doable.
Check the spec sheet for your model -- for one model we checked a 2-inch PVC vent pipe is limited to a total length of up to 30 feet with three 90-degree elbows.
One elbow will direct the pipe to the side of the building, the second will get the pipe around the corner, and the final elbow will direct the pipe skyward. If you go this route, give a call to the manufacturer or distributor and get the OK for the installation. Finally, get a permit and have the job inspected.
Tax strategy for unused vacation home
Mike and Claudia McIntosh have not spent one night in their mountain cabin in 2010. One of their sons was married in June; Claudia's family held a reunion in Michigan in late July; and Mike plans to take time off from work to move his mother into a retirement home in August, so there has been no time to get to the cabin.
"We've heard for years about people who don't use their second home, and now we are those people," Mike said. "I think we would probably sell the place, but we always stop ourselves when we think about paying a capital gains tax on the place."
One viable option is to convert the cabin to investment property status, rent it out for a couple of years and then sell it via a 1031 tax-free exchange to acquire another investment property closer to home that could produce a monthly cash flow, supplementing household income. The new property could ultimately be placed in the couple's estate or in a charitable trust.
One of the more underestimated financial bonuses available to the average consumer is the ability to convert a primary residence or a second home into a rental property, and vice versa.
Let's look at the McIntoshes' situation from another angle. The couple converts the mountain cabin to an investment property and rents it out for two years.
During that time, they hear of a bargain property in Arizona that has the amenities they require for a retirement home but they are unsure if they would truly want to live there. They could sell the mountain cabin via a 1031 exchange, buy the Arizona property and rent it out.
Tax-free exchanges must involve investment properties. If you eventually decided to live in the "replacement property" of the exchange -- as a primary residence or second home -- it would be difficult for the Internal Revenue Service to question. In this case, that's because the McIntoshes were unsure they wanted to live in the Arizona home when the exchange was made.
If an exchange is contested, the IRS will examine the "objective manifestations of your intent" at the time you conducted the exchange to determine what the intention truly was.
According to several accountants, the only gray issue is how long the property must be held as rental property before the coast is clear to deem it a primary residence. A home that has been a rental nest egg for decades is not an issue, but those that have been acquired in the past three years via a tax-free exchange can be. That's because no specific hold times have ever been written. Remember, intent at the time of the exchange should be toward another investment property.
If taxpayers are going to convert the use of homes, it's best to have at least two tax years in the books. Let's say if the McIntoshes were to buy an Arizona rental today, it would best to keep it a rental at least through 2011. That way, the conversion would not appear on a tax return until the 2011 return, and then actually be viewed sometime in 2012.
Since the Arizona home was acquired via a tax-deferred exchange, the McIntoshes will have to wait five years from the date of purchase to claim the $500,000 ($250,000 for a single person) tax-free exemption on the sale of a principal residence.
Typically, in order to qualify for the $500,000 exclusion ($250,000 for single persons) homeowners must have owned and used the property as a principal residence for two out of five years prior to the date of sale. And, the owner must not have used this same exclusion in the two-year period prior to the sale.
However, a 2004 law limited the scope because legislators did not believe the principal residence exclusion "was appropriate for properties that were recently acquired in like-kind exchanges." When homeowners convert the exchange property into a principal residence, the taxpayer often shelters some or all of the gain.
Legislators were concerned about tax abuse and adopted the five-year law for exchange properties because it "balances the concerns associated with these provisions to reduce this tax shelter concern without unduly limiting the exclusion on sales or exchanges of principal residences."
You have tax options with both your investment properties and your primary residences. Make sure you understand all the possibilities before you sell.
Tom Kelly's book "Cashing In on a Second Home in Central America: How to Buy, Rent and Profit in the World's Bargain Zone" was written with Mitch Creekmore, senior vice president of Stewart International, and Jeff Hornberger, the National Association of Realtors' international market development manager. The book is available in retail stores, on Amazon.com and on tomkelly.com.
Bedbug problem bites at tenant
Q: One unit in our fourplex has a bedbug problem. The landlord hired an exterminator, who found a bug in two other units, so he recommends treating the entire building. We're going to have to take time off from work to prepare our apartment, then spend a night in a motel. We didn't cause this problem. Shouldn't the landlord reimburse us for the time off work, in addition to our lodging costs? --Natalie B.
A: Whether you can fairly (and legally) expect the landlord to cover your expenses depends on whether your state has addressed this situation. Unfortunately, very few have, though that is changing as the bedbugs are once again starting to bite.
Maine has brand-new legislation that sensibly tackles this problem (Maine Rev. Stat. Ann. Section 6021-A). The legislation was crafted by a bipartisan group of interested landlords and tenants, and embraced by the governor.
Under the law, landlords may not rent infested units; if a unit or adjacent unit is being treated for an infestation, the landlord must disclose this to prospective tenants; and if a tenant or prospective tenant asks, the landlord must disclose the last date the unit was inspected and found to be free of any infestation.
Once a landlord is notified of the presence of bedbugs, the time periods for inspection and treatment are very short.
Maine has also addressed the issue of "who pays?" when tenants must leave, though the law is not abundantly clear. First, tenants must comply with all remediation measures; if they don't, they can be held financially responsible for the cost of eradication.
If the tenant can't comply with the inspections or control measures, the landlord must offer "reasonable assistance," including financial assistance. The landlord may charge the tenant a "reasonable amount for any such assistance, subject to a reasonable repayment schedule, not to exceed six months."
This could mean that if the landlord fronts the cost of a night's stay in a motel, the tenant will be expected to pay the landlord back over the next six months.
It's not so clear whether the value of lost time at work (time you'll be spending sorting through your stuff, for example, or making it available for inspection and treatment) is also contemplated by this legislation.
Long story short: If you live in Maine, it's likely that you will have to cover the cost of your night away, but you might get a sort of short-term loan from the landlord to cover the expense.
Tenants living in states that haven't passed laws like Maine's will have to depend on tried-and-true (but often difficult to apply) habitability laws. All states but Arkansas require the landlord to offer and maintain fit and habitable premises, which includes the responsibility to pay for repairs or upkeep when problems arise that are not the fault of the tenant.
The challenge with bedbug infestations is that it's often very hard to figure out who is responsible for their presence.
Consider a broken heater that breaks through no fault of the tenant, or the arrival of ants when heavy rains disturb their outside nests: Tackling these problems must be paid for by the landlord, because the tenant didn't do (or fail to do) anything to prevent them.
But bedbugs don't just appear. Someone brings them in, and landlords understandably seek to identify the culprit and stick him or her with the bill.
Trouble is, it's very hard to trace the infestation to a particular tenant. For this reason, landlords usually end up paying for the eradication efforts. But it's a much more significant burden to make landlords also pay even innocent tenants' costs to relocate.
Perhaps that's why Maine stopped short of such a requirement. It would be surprising to find a judge willing to impose this cost on a landlord short of some proof that the landlord put off dealing with the bugs, which made the problem worse, resulting in drastic or repeated treatments (and nights away for his tenants).
Q: I work for a management company and have been here six months -- I'm still in training. Part of my job is to accept rental applications and do a preliminary review. I looked at one the other day, given to me by a woman who came with four kids. She wanted to rent a small two-bedroom unit; it seemed too small to me.
I wrote a note on the application for my boss, asking if I should direct her to a larger unit. He got real upset, and told me that this could trigger a fair housing lawsuit. I never meant any harm; I just didn't know whether the unit was big enough. Did I do anything wrong? --Henry C.
A: Credit your boss with being super sensitive to the problem of discrimination against families, which often happens when landlords set occupancy standards that effectively eliminate families from consideration.
In response to these practices, the federal government (HUD) has offered guidelines for landlords to follow when setting occupancy policies. That standard is "two per bedroom," but it is not absolute (for example, if a bedroom is unusually large, it might accommodate more).
In addition, landlords may set more restrictive standards if the nature of the property or its systems cannot safely or reasonably handle the number of residents that would result from a "two-per-bedroom" rule.
They may also have to adjust upwards -- for instance, the presence of an infant in the parents' bedroom results in three residents, but no one can seriously claim that the infant overcrowds the room.
Many states have followed the federal rule, and a few have set more generous standards. In California, for example, the rule of thumb is "two per bedroom plus one." But in California, as with the federal rule, the reality of the setup can affect the calculation.
Let's imagine that you, like most, are subject to the two-per-bedroom guideline. Technically, this family of five is over the limit, but as explained, each situation needs to be evaluated in light of the precise setup. If the rental is in California, the family would qualify.
So much for theory. Now, to the heart of your question: Did you do anything wrong? I don't think you did, nor did you expose your boss to a likely charge of housing discrimination. Here's why.
The fair housing laws are designed to prevent landlords from treating specific classes of persons differently (worse) than everyone else, whether by refusing to rent to them, setting more onerous terms and conditions of renting, or making statements that have the effect of discouraging them from living on the property.
You did none of this. Instead, you asked your boss whether the unit you showed the applicant was too small, and whether you should suggest a bigger one.
Critically, you didn't make that observation to the applicant herself, nor did you steer her to the bigger apartment. If you had, and if the original two-bedroom unit would have been appropriate under the occupancy standard of your state, the answer might be different.
That's because your applicant could have concluded that you were trying to discourage her from living there, by telling her that a larger (and presumably more expensive) unit was the only one you'd offer.
Think for a moment about the consequences if the answer were different. No one in your position -- someone learning the business, needing to ask questions of those in the know -- would dare ask a question, for fear of exposing the boss to legal trouble. When people don't ask questions, they don't learn.
Without this opportunity to learn about occupancy standards and steering, you would go your merry way, possibly making risky (though well-meaning) remarks to applicants themselves, thereby discouraging families from renting and possibly violating the law.
Janet Portman is an attorney and managing editor at Nolo. She specializes in landlord/tenant law and is co-author of "Every Landlord's Legal Guide" and "Every Tenant's Legal Guide." She can be reached at janet@inman.com.
Buyer's deposit off-limits in failed sale
Q: The buyer of our home took us right up to one week before the closing date and backed out, stating he found another home he liked better. We had complied with all of his requests, including a quick closing date and home inspection, and he was preapproved for a loan. We purchased another home quickly due to his demands.
We even packed up our whole home and had done minor repairs he demanded be done. Now we are told we are not entitled to the earnest money. Why? --Jan, Utah
A: Well, Jan, you appear to have had your good faith taken advantage of by someone who knew your side was dozing a bit at the wheel. Clearly, I don't know all of the facts of your case, but there are some common misconceptions about deposit refunds and contingency periods that seem to have been present in your situation.
So, virtually every real estate contract in every state has some sort of due diligence time period in which the buyer is able to back out and recoup his deposit for a certain number of days following the execution of the contract. (The number of days varies widely, and is something that is negotiated between the buyer and seller.)
In some states, that time period is known as an objection period: the buyer has 20 days, for example, in which to object to the transaction for any number of reasons listed in the contract. Commonly specified grounds for backing out include the property's failure to appraise at the purchase price, or failure to pass muster after an inspection.
If the buyer does not object within that time period and does not obtain an extension of his objection period from the seller before it expires, his earnest money deposit automatically becomes nonrefundable if he fails to close the transaction for any reason.
In most states, though -- including California and Utah -- the time period for the buyer's due diligence is known as a contingency period. The contract sets forth a specific period of time -- often ranging from 10 to 20 days on today's market -- in which the buyer is supposed to obtain his inspections, finalize his financing, have the property appraised, and so forth.
At the end of that time period, the buyer agrees to either exercise his contingencies and back out of the transaction, or remove them and notify the seller that he intends to do the deal.
That is, in contingency states, the earnest money deposit is rendered nonrefundable only when the buyer actually signs and delivers to you or your agent his express removal of all contingencies.
This nonrefundability is generally contained in a specific liquidated damages clause that provides that both buyer and seller agree that if the buyer breaches the contract by backing out of the deal, the seller can keep the earnest money deposit up to 3 percent of the purchase price.
This specific clause must be initialed by both buyer and seller to apply, in addition to their signatures at the end of the contract.
Despite the fact that the buyer's contingency period might have expired, if either (a) he or you failed to initial the liquidated damages clause in the contract, or (b) he never signed and delivered a document removing all of his contingencies, you do not have the right to keep his earnest money deposit.
I'm assuming you had your own real estate broker or agent; if not, your situation is a crystal clear example of why it is advisable to have an experienced broker represent you even if you think you can get your home sold on your own.
As part of the initial contract negotiations, many agents would have advised you about the importance of including the liquidated damages clause in the contract.
And certainly, before you went out and bought another home, the average broker I know would have verified that the buyer's earnest money deposit check had cleared, and that he had expressly removed all his contingencies so that you would at least be able to retain the deposit if he backed out.
While it sounds extremely rude, selfish and ungrateful for the buyer to flat out tell you the reason he's backing out is that he found another home, the reality is that so long as his inspection contingency is still in effect, he could simply state another, more robust grounds for backing out if pressed, and be well within his rights under the contract.
Given the serious nature of the matter, I would encourage you to try to pinpoint exactly where things went wrong in more detail with your listing agent -- and his or her managing broker.
Avoid landfill cover-up in home sale
DEAR BARRY: Our home is currently for sale and is located across the street from a landfill that is not currently in operation. There is a tree buffer at the front of that property, so it is not apparent that it was a waste site. Our real estate agent wants to disclose that the landfill is there because there are plans to reopen the facility. Since it is not currently in use, do you think we should disclose this to prospective buyers? --Terri
DEAR TERRI: Disclosing a landfill across the street from your home is a legal requirement, as well as a moral obligation. Consider how you would feel if someone sold the home to you and withheld the fact that the adjacent landfill was about to resume operations. Think of the noisy trucks rumbling up and down your street day after day. Think of the odors that might become part of the neighborhood environment.
And if these circumstances don't convince you, consider the possibility of a lawsuit from the buyers when they realize that you withheld that kind of disclosure.
There is a simple answer to every question that involves whether or not to disclose. That answer is, "Disclose!" We live in a very litigious society. A primary purpose of disclosure is to avoid liability. Remember this when you fill out your disclosure statement.
Tell the buyers everything a person could possibly want to know about the property. Tell them what you would want to know if you were buying the property. Not only will you avoid the cost and stress of courtroom trauma, you will sleep with a clear conscience after the close of escrow.
DEAR BARRY: Our home inspector did not report a rotted window sill that was fully visible, and this turned out to be the tip of a much larger problem. Leaking at the sill led to internal damages that now require $10,000 in repairs. We hired our home inspector to find problems of this kind. Had we known about this damage, we would not have bought the property. Therefore, can we hold the inspector liable for the repair costs? --Claire
DEAR CLAIRE: There are several conditions that can affect the home inspector's liability. The first is the inspection contract that you signed prior to the inspection. Most inspection contracts limit the inspector's liability to a specific refund amount, sometimes as little as the inspection fee itself. Some contracts absolve the inspector of liability if the damages are altered, removed or repaired before the inspector has a chance to reinspect the problem. My advice is to read the contract and then to contact the inspector. Inform him of the problem and ask that he reinspect it.
Another consideration is whether the inspector carries insurance for errors and omissions. Many home inspectors cannot personally afford a $10,000 claim. In such cases, insurance makes a big difference.
Keep in mind, also, that the sellers of the property may have been fully aware of the damage but failed to disclose it. Therefore, you should also notify the sellers about this problem.
To write to Barry Stone, please visit him on the Web at www.housedetective.com.
5 vacation-rental need-to-knows
Whether it's the state of the economy or because you just don't get around to using the place a lot, you may find yourself thinking for the first time about renting out your vacation home.
Join the club, said Christine Karpinski, who owns several vacation rentals and is the author of "How to Rent Vacation Properties by Owner." She is also a spokesman for HomeAway.com, a vacation rentals website.
"I'm hearing from lots of consumers who already own and are looking to start renting," she said. Although she said as a homeowner she's had to resolve occasional hurdles with the properties, she's big on the financial benefits and has found that with thorough preparation, the process usually runs surprisingly smoothly.
Five things to know about getting ready to rent out your vacation home:
1. Find out if there are any legal prohibitions or restrictions on short-term rentals.
You'll definitely have to check with your city government, said Karpinski. Some towns may limit the number of weeks per year you can have short-term renters, and some of them may charge special taxes. Some towns limit the number of unrelated adults who might occupy a dwelling, she said. The same questions need to be asked of your condo or co-op board or homeowners association, she said.
"A lot of markets will require you to have a business license and collect sales tax, a tourism tax, a bed tax, etc.," she said.
2. Get the place ready.
"You'll have to depersonalize it a bit," Karpinski said. "You're going to have to take the toothbrushes out of the bathroom, sort out your closets, get the drawers cleaned out, remove family pictures, and clear out the refrigerator. Anything you leave will be considered fair game for renters to use."
HomeAway.com and other rental sites provide checklists of furnishings and implements needed for renters' use.
"Basically, you want to double what you 'sleep,' " she said. "If your place sleeps six, you want 12 forks, 12 knives, etc."
Plan on a certain amount of wear and tear. Karpinski said she usually replaces towels annually -- "Get good, fluffy ones. Renters expect good quality." The sofa might need to be swapped out every 2 1/2 years, she said.
3. Some financial considerations:
Decide on the rental amount by checking for comparable rentals on the Web or by calling local property managers. Typically, managers who provide rental services will charge the owner a percentage of the rent; Karpinski said that she regards most owners as being able to handle the chores themselves.
The size of rental deposit can be a sticky issue, Karpinski said.
"A lot of people seem to be getting away from taking security deposits because they're a hassle" to collect and return, she said. "I'd advise, for new people who are renting: take $200, or 10 percent of the rental cost."
A housekeeper who will come in between rentals is a must, she said. "That's the most difficult part of starting to rent," she said, because the homeowner needs to find someone who's reliable and can report on the condition on the place between renters.
She has found housekeepers through other homeowners and has posted ads at local hardware stores. She once found one by calling a local church and asked if there were any members who were looking for part-time work, she said.
When mechanical problems arise, sometimes the solution is as easy as dialing for a local plumber or heating contractor, she said. Some homeowners prefer to contract with a maintenance company to be on call, handle yard work, etc., she said.
4. The property must be marketed properly, whether you're handling the rentals yourself or using a professional company, she said.
Would-be renters want information about nearby transportation, shopping, entertainment, beaches, skiing, etc.
They also want to see photos of the place, she said. The photos should include an exterior view, and if there's a scenic view, include it, she said. They're also concerned about seeing adequate seating in the living room, the "comfy"-ness of the master bedroom and additional bedrooms, and the workability of the kitchen, she said.
5. How to screen the renters?
The Internet is a great starting point for finding renters, but the phone is a must, Karpinski said.
"I talk to every single guest who rents my homes," she said. "They contact me via e-mail, and we'll go back and forth by e-mail on rates and dates. But I absolutely talk to them and I absolutely advise it.
"I ask them why they're coming to the area, and (if) they've ever been in a vacation rental," she said. "If not, then I'm going to go through a few more things. They might not realize the nuances of staying in a vacation rental that are going to be a bit different, such as the cancellation policy, and that there's nobody on the premises" to field questions.
Mary Umberger is a freelance writer in Chicago.
Buyer seeks justice for faulty disclosure
In the case Johnson v. Baum, Eric Johnson bought a home from David and Norma Baum in Des Moines, Iowa. The terms of the purchase contract provided that Baum had the duty to disclose any material defects in the property about which they knew or should have known, to Johnson.
The contract went on to say that if Baum breached this duty to disclose and Johnson prevailed in a lawsuit, Baum would be liable for Johnson's "reasonable attorney fees."
As part of the transaction, Baum provided Johnson with a form "Seller Disclosure of Property Condition and Lead-Based Paint Disclosure" that expressly stated it was intended to satisfy Baum's duty to disclose defects to Johnson under Iowa law.
After the transaction closed, Johnson had problems with water in the basement of the home, and filed suit against Baum, alleging that Baum had breached both Iowa law requiring disclosure of material defects, and the contractual provision mandating disclosure.
After a trial, the jury found that Baum had not breached the contract, but had breached the Iowa seller disclosure statute, and awarded Johnson $12,000 in damages.
Johnson filed a motion for nearly $40,000 in attorney fees. The sellers argued against an attorney fee award, on grounds that the statute the jury had found the sellers to violate did not authorize an award of attorney fees.
The contract, which did have an attorney fee provision, was found not to have been violated, argued the sellers. Johnson claimed that the contract incorporated the disclosure statement, which the sellers refuted.
The trial court ruled in Johnson's favor, finding that the disclosure statement and, thus, the statute's attorney fee clause, was incorporated into the purchase agreement, entitling Johnson to an attorney fee award -- though the trial court approved an award of only half the requested fees.
Baum, the seller, appealed the attorney fee award. The Iowa Court of Appeals upheld the trial court's decision.
The court explained that the purchase agreement expressly stated that "Sellers and buyers acknowledge that sellers of real property have a legal duty to disclose material defects of which sellers have actual knowledge and which a reasonable inspection by buyers would not reveal."
Johnson argued -- and both the trial and appellate courts agreed -- that the "legal duty" referred to in the contract was the same statutory duty to disclose material defects that the jury ultimately found Baum had breached -- the same statute that was expressly referenced in the faulty form disclosure Baum had provided to Johnson during the transaction.
When that the contract expressly incorporated the breached statute, Baum in effect agreed to pay Johnson's attorney fees in the event Baum breached not only the contract, but also the statute. Because the jury found Baum to have breached the statute, Baum was liable to Johnson for the attorney fees that the trial court had awarded. The Iowa Court of Appeals affirmed the lower court's ruling.
Common contingency hang-ups
Recently, buyers removed the loan contingency after the lender's underwriter told their mortgage broker that the loan was approved. Soon after removing the contingency, the buyers found out that the lender required a second appraisal before the loan would be funded.
The buyers' deposit was at risk if a second appraisal came in at a lower value than the purchase price and the buyers were unable to close the sale, even though the first appraisal was approved by the lender.
This, unfortunately, is not an isolated incident. All too often, underwriters grant buyers' loan approval and then ask that additional conditions be met before the buyers' loan documents are issued. For example, an underwriter might want first-time buyers to provide verification that they made their rent payments on time.
As long as the conditions are satisfied, the transaction closes -- but delays are common.
Buyers should include a financing contingency in their purchase offer for lender approval of their creditworthiness and of the property appraisal. Some contracts specify a time period for this contingency to be satisfied, such as 14 to 30 days from acceptance.
Other contracts state that the financing contingency remains in effect until the buyers' lender funds the loan. Lenders don't fund until all conditions for loan approval have been satisfied. So from the buyers' standpoint, this is the safest alternative.
A financing contingency that runs until the buyers' mortgage is funded poses logistical problems for both buyers and sellers. Most sellers don't want to move out of their home until they're sure the sale will close, or until it has closed. Lenders usually don't fund earlier than the business day before closing. So the parties often don't know until the last minute when they'll move.
It's not much different with a financing contingency that has a deadline that falls a week or more before the closing date if the lender requests more information from the buyers at the last minute, which the lenders often do. Buying and selling in today's rigorous financing environment requires patience and flexibility on the part of all involved.
HOUSE HUNTING TIP: Buyers who need to remove a financing contingency by a certain date should ask the sellers for an extension if their lender grants loan approval subject to conditions that the buyers aren't certain they can satisfy, like a second appraisal.
Most sellers would grant an extension rather than put the house back on the market if all other contract contingencies have been satisfied.
Contingency-free offers are showing up in some high-demand niche markets, reminiscent of the recent bubble market where buyers made offers with no contingencies for financing, appraisal or inspections in order to outcompete other buyers in a multiple-offer situation.
This is risky, particularly if the sellers haven't provided a complete disclosure package before an offer is written that includes a home inspection report, wood-destroying pest ("termite") report, and any additional inspections recommended in the home and pest reports, such as for roof, engineer or drainage evaluations.
Recently, there were six offers on a desirable listing in Piedmont, Calif. Two included no contingencies. The only presale inspection report made available to buyers was a "termite" report.
Although there was no financing contingency in the contract the sellers chose to accept, the buyers needed to qualify for a mortgage and the property needed to be appraised for the sale to go through. It was not an all-cash offer.
The sellers had the good sense to add a short inspection contingency and a financing contingency to the contact. They weren't worried about the buyers' financial capabilities or the house appraising for the purchase price. The buyers found defects when they inspected the property, but nothing they couldn't live with.
THE CLOSING: Both buyers and sellers benefited from including the contingencies.
Tax loophole for 'underwater' owners
DEAR BENNY: I have a question relating to a forgiveness-of-debt issue. Let's say a borrower takes out a home loan for $600,000. Later, the borrower defaults and the lender files for foreclosure. Eventually, the borrower is able to conclude a short sale for $500,000.
The borrower receives a letter from the lender stating his loan is "paid in full." Because of the letter, the borrower is under the impression that he will not receive a 1099-C from the lender showing forgiveness of the $100,000 canceled debt.
In your experience, is this true, even though the lender may have said the loan is "paid in full"? I was under the impression that lenders were obligated to send borrowers a 1099-C if the debt forgiven exceeded $600. --John
DEAR JOHN: According to law -- and the Internal Revenue Service -- if a financial entity cancels or forgives a debt you owe, and that debt is $600 or over, the lender is required to provide you (and the IRS) a Form 1099-C, entitled "Cancellation of Debt."
And unless you meet certain exceptions or exclusions, this canceled debt is taxable as ordinary income and must be reported on your Form 1040 when you file your annual income tax return.
There are a number of exceptions to this taxable requirement. For example, if your creditor cancels your debt as a gift, this is not considered income.
Additionally, if your student loan is canceled because you did some work after college -- such as volunteering to help needy families in low-income neighborhoods -- and if this is permitted under the terms of your loan, the cancellation is not income.
There are also a number of exclusions contained in the law. If your debt is included in a Chapter 11 bankruptcy case, this is not considered income to you.
If you were insolvent immediately before the cancellation -- i.e., your liabilities exceed your assets -- you are not required to pay any tax on the debt that was forgiven. But the burden is on you to honestly demonstrate that you are insolvent.
If the debt cancellation involved your principal residence -- the home in which you live most of the year, vote and pay taxes on -- and if the money you borrowed was used to buy, build or substantially improve that home, you will not have to pay any income tax on the debt that was forgiven by your lender.
This is a departure from the general rule that requires debtors to report all forgiven debt as ordinary income (Section 61(a)(12) of the Internal Revenue Code). Up until the so-called mortgage meltdown, there were only two exceptions referenced above: bankruptcy and insolvency.
However, when thousands of homes across the country began to be foreclosed upon, Congress amended the law. For debts forgiven in calendar years 2007-12, up to $2 million of forgiven debt can be excluded from the obligation to pay income tax ($1 million if married filing separately).
And according to Julian Block, a prominent tax attorney, even if you are a single taxpayer, you still can exclude the full $2 million. Furthermore, the exclusion applies to all years, and not just for one.
This is an interesting loophole in the law. If you own more than one home that is "underwater" -- i.e., the mortgage exceeds the fair market value of the house -- you can claim the exclusion only for your principal house.
If that house is foreclosed upon (or sold via a short sale), nothing prohibits you from moving into your second home, establishing it as your new principal residence, and so long as your total losses do not exceed the statutory cap of $2 million, you can also sell that house as a short sale (or let it go to foreclosure) and not be required to pay any income tax.
Of course, when dealing with the IRS, it seems nothing is easy. The law does not apply to all forgiven or canceled debt. So your vacation home, your car loan or your credit-card debt that is canceled will not qualify for the exclusion, unless you are insolvent or file for bankruptcy relief.
As mentioned earlier, the debt has to be used to buy, build or substantially improve your home. This is called the "qualified principal residence indebtedness" (QPRI). According to the IRS, "Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing."
For additional information, you can get a good publication online from the IRS. It is entitled "Canceled Debts, Foreclosures, Repossessions, and Abandonments" (Publication 4681, available from www.irs.gov: click on forms and publications). You may also want to obtain Form 1099-C (and the instructions for completing that form, from the same website).
DEAR BENNY: What is a "contract for deed"? My real estate broker suggested that I consider this, but I don't understand the concept. --Joe
DEAR JOE: This is also called an "installment contract" or a "land contract."
Oversimplified, you enter into a contract with a buyer for the sale of your property. The contract price, for example, is $200,000. You give the deed to the property, in recordable form, to your attorney to hold in escrow. Your buyer makes periodic payments to you. And when the buyer is able to pay you in full, you instruct your attorney to record the deed into the buyer's name.
It was developed years ago, when the ranchers out West wanted to sell some acres to their farmhands. Because those buyers did not have enough money to pay the full price -- and did not have good credit to get mortgage loans (if mortgages were even available in those days) -- the rancher agreed to receive monthly payments, which were credited toward the full purchase price. When the buyer was able to pay the entire outstanding balance, he received the deed to the property.
Sounds simple, but there are many issues that have to be reviewed. For example, the Internal Revenue Service takes the position that such a transaction is considered a sale for tax purposes. That means that the seller has to determine if there will be any income tax to pay when the contract is entered into.
Also, if the seller currently has a mortgage on the property, unless that loan is paid off in full or the lender approves of the transaction, it could trigger the "due on sale" clause in the seller's loan documents.
The due-on-sale clause is a concept that lenders created decades ago when they did not want their seller to allow a new buyer of the property to assume the existing mortgage. For example, if the current loan was 6 percent, and now the market for interest rates was much higher, the lender wanted to get the higher rate from the new buyer.
In simple terms, if you sold your property -- or entered into a contract for deed -- this would trigger that clause and your entire mortgage would then be due and payable.
So, you and your attorney must review your loan documents to determine if the due-on-sale clause applies. Most loan documents within the last 10-15 years will contain this concept.
Finally, in some states, the seller must record the contract on the land records in the jurisdiction where the property is located. If it is not recorded, the buyer may be entitled to a full refund of the moneys paid.
The recordation can put the lender on notice that you have entered into such a transaction, and once again can call your loan due. You should have your lawyer review the situation and advise you on the applicable laws in your state.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.
Win Ben Stein's money advice
Book Review Title: "The Little Book of Bulletproof Investing: Do's and Don'ts to Protect Your Financial Life" Authors: Ben Stein and Phil DeMuth Publisher: Wiley, 2010; 205 pages; $19.95
Most people who have a general interest in money matters know who Ben Stein is. How you know him, though, is a true sign of the generation to which you belong.
Boomers might recall him as an outspoken critic of corporate fraud during the junk bond scandals of the 1980s, while most of the early Gen Xers born in the '60s know by heart Stein's monotone econ lecture from the classic film "Ferris Bueller's Day Off."
Later Gen Xers like myself can't think of the name "Ben Stein" without remembering his smart trivia Comedy Central game show from the late-'90s: "Win Ben Stein's Money." And even younger folk know him from his recent credit report service commercials -- that monotone, again.
Stein's vocal delivery might be monotone, but he and co-author, investment psychologist Phil DeMuth, certainly hit some educational and comic high notes in their recently released, "The Little Book of Bulletproof Investing: Do's and Don'ts to Protect Your Financial Life."
In fact, I originally flipped through this book out of sequence and was a little concerned to see some bizarre do's, like "Do Subscribe to Market Newsletters," with the elaboration that it "makes total sense that anyone who had uncovered the market would sell it to you for $199 per year."
This advice quickly snapped back into the narrow realm of things both funny and uber-sensible when I noticed the chapter header at the top of the page: How Not to Invest. I could almost see Stein delivering these "what-not-to-do's" in his sarcasm-dripping deadpan -- especially the recommendation to get a "brilliant, prestigious financial adviser like Bernard Madoff ..."
While the book is filled with humorous bits, it is certainly not all fun and games. Like its "Little Book" series brethren, this book is a super-quick, super-useful read that doesn't follow the formula of trying to give you a step-by-step action plan. Rather, it is successful at its aim of distilling a very complex and vast subject matter into the rough and dirty, bullet-point need-to-knows.
The book tackles the entire realm of financial life, including topics ranging from portfolio allocation, to adviser selection, to real estate decision-making, and retirement planning -- and actually does a better job in 200 half pages of offering meaty, wise and sometimes novel advice than many books devoted to any one of these specific subjects.
Stein and DeMuth start out sketching out the dismal picture of the average American's approach to personal finance, which they describe as "opting for the Hindu ideal, where old people forsake all worldly possessions, pick up a begging bowl, and wander the streets. Except in our case, it won't be voluntary."
They then move into investor psychology, DeMuth's professional wheelhouse, which includes a fascinatingly hilarious (and frighteningly accurate) diagram of a Tootsie Pop as the brain of a human investor, as well as the first of many amazingly brief and insightful sets of do's and don'ts that appear throughout the book.
These psychological insights are rendered usable in the next chapter, Wall Street Therapy, after which comes the completely entertaining and error-revealing chapter I flipped the book open to: How NOT to Invest.
Funny enough or, actually, seriously enough, the lengthy list of investment traps to avoid is followed by a chapter with a much shorter list of five core bullets on How To Invest, including some good debunking of get-rich mythology.
Then, there's a half-educational, half-sales-pitch chapter explicating a portfolio fund they have reverse-engineered from the investor psychological reality that many people sell when they lose money, so minimizing risk would help people hold onto their investments long enough to realize the long-term gains from compounding interest that it will take for most of us to retire.
It's not a total sales pitch, though. The authors do offer a full chapter of guidelines on Bulletproofing Your Investments and Pulling the Trigger, for those who would like to replicate their risk-minimizing fund, DIY-style.
Stein and DeMuth then turn their attention to offering advice on maximizing the real-world value of your education and your Human Capital (best line: "children today are luxury goods"); savings strategies; very wise, very simple advice for avoiding your real estate purchases to turn into "Houses of Blues"; and retirement and estate planning advice.
This book is a strong recommend. It's highly readable, offers oodles of strong guiding philosophies and life/money advice, and offers just enough of the psychological primer to help readers grow up and take control of their own financial lives. Oh, and it's pretty funny, too.
