DEAR BENNY: We recently sold our home (in Maryland), and had a ratified contract. The homeowners association (HOA) documents were delivered and received by the buyer, and the inspection was completed. All the "i’s" were dotted and "t’s" crossed.
One week before closing, the buyer backed out, deciding he simply does not want our home. At this point, we have packed, scheduled movers and purchased a new home. The deposit we received is only $5,000; in a different market we could have probably requested more. The funds lost by the buyer are minimal in the grand scheme.
In our opinion, this is a breach of contract and frankly, it has caused severe financial implications for us. The proceeds from the sale were going to be used towards the down payment of our new home. Without these funds, our new monthly mortgage is quite high and we still have our current mortgage to pay. Do we have any recourse? Can we sue for breach of contract and hold the buyer liable in any fashion? By the way, the buyer’s agent has not been helpful and avoids our agent’s calls. –Darryl
DEAR DARRYL: It is too late for your situation, but your first mistake was to take such a low earnest money deposit. If I am representing a seller, I want the seller to give my real estate agent (or the settlement agent) a minimum of 5 percent of the purchase price. You want the buyer to put up enough money so that he or she will think twice about walking away.
I will assume from your question that the buyer is in default. In many states, (including Maryland), when a buyer enters into a contract to buy a condominium or a house in a homeowners association, the buyer has a fixed number of days in which to review the association’s legal documents and back out of the contract.
Basically, you have three alternatives: (1) You can keep the $5,000 earnest money deposit, although your sales contract may require you to split it with the real estate agents; (2) you can sue your buyer for damages (If the house subsequently sells for $10,000 less than the original contract price, this would be the amount of your damages, plus any costs you incurred to carry the house until it finally sells); or (3) sue the buyer for specific performance. That means that you file a lawsuit against the buyer and ask the judge to force the buyer to go to closing.
You should consult a local attorney who should provide you guidance. Keep in mind that litigation is time-consuming, expensive and uncertain.
DEAR BENNY: If you apply for a mortgage or refinance and the lender orders and completes an appraisal and credit report, but then you decide to go with another lender, does the borrower have to reimburse the first lender for the appraisal and credit report? Can that first lender sue the borrower for the cost of those services? –Jeannie
DEAR JEANNIE: The answer to both questions is yes. You asked a lender to do work for you, and usually lenders will charge a borrower up front for costs of the appraisal and the credit report. If you decide to use another lender, it has been my experience that so long as you have paid for these products, some lenders will be willing to turn over this information to your new lender.
However, your new lender may not want to honor the appraisal because it has its own list of appraisers. This is especially true today, when lenders want to be absolutely certain that they are getting a true and independent appraisal.
Can the lender sue you if you decide not to use its services? Yes, but as a practical matter, it is too time-consuming and expensive to take you to court.
DEAR BENNY: I recently moved into a home as a tenant and just found out it is being foreclosed on. The borrower (my landlord) owes $750,000 on it, but it is worth just $525,000 now. How much will the opening bid be if I wanted to buy it? –Justin
DEAR JUSTIN: Each lender who forecloses on property sets its own opening bid. Usually, they start at the amount of the current mortgage, so that they will not lose too much money.
Keep in mind that legitimate lenders do not want to foreclose. They do not want to take the chance that no one will bid (which is often the case) and the lender will be stuck with the property. That means that the lender will have to spend money (1) to pay real estate taxes, (2) to keep the home insurance up to date and (3) to possibly evict the tenants (or the owner) from the property.
My suggestion: Talk to the lender as soon as possible. Try to go to a supervisor and not just some underling in the bank. Explain that you are a tenant in the property. See if the lender will be interested in selling the house to you and at what price. You may be able to get a good deal.
DEAR BENNY: My husband and I are buying a condo along with our daughter. We will have the majority stake in it; she will put it sweat equity and about 10 percent of the money. We plan to hold the condo for five years or longer. My question is: How should title be held with the lowest tax consequence for both parties if and when we decide to sell? –Karen
DEAR KAREN: I would suggest that you enter into a "shared equity" transaction, as some lenders will be willing to provide you with a lower-interest-rate loan rather than an investor-rate loan. Under this arrangement, you and your husband and your daughter sign a written agreement spelling out your respective rights and obligations.
You and your husband should consider taking title as tenants by the entirety as to your percentage interest, and as tenants in common with your daughter. Let’s say she has a 10 percent interest in the property. You and your husband will pay 90 percent of the mortgage, taxes and interest. Your daughter will pay the difference, but she will be obligated to pay you rent for the 90 percent that she rents from you.
Talk to a local real estate agent. What is the market rent for that condominium unit? The IRS will allow you to deduct up to 18-19 percent of that market rent because your daughter will be the "tenant."
Incidentally, if she cannot afford the rent, have her send you a check, deposit it and then gift it back to her. You and your husband have the right to gift your daughter $12,000 each every year — for a total of $24,000 a year.
Although you will have to declare the rental income, you can deduct 90 percent of the taxes and mortgage interest that you pay.
As for selling the property, you will have to pay capital gains tax, but your daughter — if she owns and uses the condo for two years out of five before sale — will be able to exclude up to $250,000 of her percentage of the gain.
When you are in the position to sell the condo, you should consult a financial advisor (and/or an attorney) to see what options you may have to lower your tax obligations.
DEAR BENNY: One thing I haven’t seen mentioned in any of the articles concerning the home mortgage crisis is the PMI and what the outcome from it is. PMI is required on all mortgages where less than 20 percent is put down. Doesn’t PMI come in to play when a borrower defaults/fails to pay the monthly mortgage payments? –Jim
DEAR JIM: PMI is "private mortgage insurance," which, as you state, is required when a borrower does not put up at least 20 percent cash when buying a property. The theory behind PMI is that should you default and the lender has to foreclose on the house, PMI will cover the lender’s potential loss. And the buyer pays for this insurance coverage.
However, in recent years, in order to save borrowers from having to pay the monthly PMI premiums, lenders would make a potential buyer two loans: a first in the amount of 80 percent of the purchase price and a second in the amount of 15 (or even 20) percent of the purchase price.
This was an end run around PMI, and as a result, PMI was (and is) not available for a large number of loans that are now in foreclosure.
Of course, even if there is PMI coverage, that does not help the consumer/homeowner. It is designed to help the lender.
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 firstname.lastname@example.org.
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