Filed under: Advice Needed
Question: Hi- I currently own a home in PA- and renting in FL where I now work. I have been trying to sell my PA home now since January and have come down from 169 to 139 with no offers (I originally bought at 145). I currently have a first mortgage of 120000 and second mortgage/line of credit at 43000 for a total of 163000. I believe I am in a situation now where I will have to foreclose (I cannot afford it anymore) and would appreciate any advice in this area- in particular:
1. I have the opportunity to refinance everything at $168000 so it would just be 1 mortgage that I would then foreclose on. Is it better to foreclose with the 2 mortgages as I have it now- or just 1. In particular I am wondering what the chances are of a shortage/ deficiency judgment and the liklihood that they will “come after me” for that amount. Is it more likely with the scond mortgage- or even with the refinanced?
I have to make this decision in the next couple of days so would really appreciate any advice in this area.
Answer: i) doing a re-fi seems silly since you would end up paying a bunch of closing fees and loan origination fees and not having any of this help you.
ii) in the event that you do keep this property, interest rates are moving up right now, so it doesn’t seem like a good time to re-fi, especially since you will likely get a high rate due to having a high risk credit situation.
iii) yes, they will come after you if they do not sell the home at a price that will cover the loan plus costs.
iv) the lender has no incentive to get a good price for the house. They might end up selling it for far less than what you would sell it for, and you would end up having to make up $30K or $40 rather than just a few thousand if you sell it for yourself.
v) if the market is soft, perhaps you are going to have to sit on this for a while. Perhaps you can rent it out?
vi) even if you do get an offer at $139K right now, how would you close the deal? Unless you have the cash to pay off the mortgages, you cannot sell for less than what you owe.
January 1, 1970
Question: I have recently signed an offer and acceptance contract to buy a house. After signing the contract I had an inspection done and discovered that the house had significant settling (I was unaware of settling before this inspection). The inspector said there is no present damage to the structure and the settling is not uncommon. I had a friend (a structural engineer) look at the house and he said the structure is fine now but in 5 years it may settle more and cause problems. I contacted the seller and gave him my list of repairs, which included the repairs for settling and I requested a 5yr warranty on settling repairs. The contract includes a clause to allow me an inspection and the seller agreed to a max $ amount he is willing to spend on repairs, refusal to carry out these repairs gives the buyer the right to cancel the contract. The seller disagreed to my assessment and hired his own structural engineer, whose report also found the settling but stated that the house is structurally safe and recommended minor repairs. Seller agreed to carry out these repairs, but, 1. The seller never gave me a disclosure, I think he was also unaware of the settling. In my request I asked for a 5 yrs warranty against further settling, which no one is willing to provide, and the seller thinks it is unfair to ask. He is hung on the word repairs and insists that since no party has termed the house damaged or unsafe he is not bound to perform anything beyond minor fixation. He calls everything beyond minor touchups as home improvement and not rpairs. My argument is, settling compromises the value of the house and I had made him an offer assuming there was nothing wrong with the house. If I had known what I know now about the house I would have never made hime an offer. Can I cancel the contract based on this new discovery. 2. Although it was our understanding that the contract we signed was a sale and purchase contract but later on I discovered that the title of the contract said “offer and acceptance”. Does that give me any leverage in terms of cancelling the contract. Although the contract does not say a sale and purchase contract will be signed later. Also what is the legal standing of a offer and acceptance contract as opposed to a sale and purchase contract. 3. The seller is holding my earnest money which I would like to get back. What is the maximum risk I have if I decide to walk out on the contract under my arguments. 4. How about if I keep the seller engaged in negotiations and the closing date passes by. I am just trying to find a way out of this contract without loosing my earnest money or any other legal repercussions.
Need I say the house was FSBO and there were no attorneys involved. If it helps the house is in Arkansas. Any help on this matter is greately appreciated.
Answer: Now that you have added the above facts to the story, things become a bit clearer.
First, the issue of what is a “repair” and what is a “home improvement” is a gray area. If this case were to go to court, the judge would decide which items are repairs and which are home improvements. On the face of it, my guess is that it would all be deemed repairs, but you never know. The problem is that the terms “repairs” and “home improvements” do not appear in Black’s Law Dictionary and, even if they did, the definitions in Black’s are specific to the jurisdictions which Black’s cites for the meaning. The way lawyers generally get around these issues is to define the terms within the contract. In your case, that was not done, presumably because it never occurred to anyone that the seller would come up with “home improvements.”
As for your second issue, the answer is clearly no, you cannot get out of the contract by engaging the seller in discourse past the closing date. The reason is the legal principle of waiver. By continuing to discuss these issues with the seller you are demonstrating waiver of the time is of the essence clause (another clause in all standard earnest money/purchase agreement forms, and a clause which does not mean what it sounds like it means). Therefore, continuing to carry on negotiations means the seller has a reasonable time to perform once the further negotiations are concluded, in spite of the deadline in the contract.
You could, however, get around the waiver issue by telling the seller in writing that you are willing to continue to negotiate but that such negotiation should not be taken as waiver of the time is of the essence clause.
In a case like this you might want to consider instead asking the seller to agree to abide by an informal arbitration. Each of you appoints someone to represent you (perhaps your individual real estate agents) and they decide the case. No muss, no fuss, no lawsuits, no expense, and everyone goes home reasonably happy. Otherwise the danger is that the only winners will be the attorneys. You might also check for an arbitation clause in your contract — many contain clauses requiring arbitration these days.
January 1, 1970
Question: My deceased aunt recently left me a house with an appraised value of $57,500. However her will stipulates that her roommate may live in the house as long as she wishes. Therefore the only way for me to raise any cash from this inheritance is to obtain some sort of mortgage on the property.
My credit sucks (though NO bankruptcy), I have NO job nor recent job history, and have about 2 grand in the bank.
(1) CAN I obtain a mortgage given my above circumstances? If so, through what particular means?
(2) I will not have in-hand a title with my name on it for another 60 to 90 days. 
Has anyone any creative finacing ideas by which I could get my hands on approx. $10,000 NOW, based solely upon the future mortgaging of the property?
Thanks in advance,
Answer: Or perhaps this poster is simply a free person, whereas you are a wage slave. Think about that the next time you are stuck in traffic and gulping down coffee just to stay awake while the free people are still in bed and enjoying life. I have this article called “Winning In The Cash Flow Business” which can show you all about seller financed real estate notes and creative real estate financing. It’s by Russ Dalbey, the founder of America’s Note Network. The article tells you about the note business and the best techniques. And, because the article is a full ten pages, I didn’t want to post it here. Instead, you can receive it within 3-minutes by going to http://notenetwork.com/report.html. I will have it emailed to you so you can read it at your own convenience.
January 1, 1970
Question: Any one out there who has some insight on hotel/condo please email me and tell me if this is a wise choice. pitfalls, etc. My situation is that I would like to buy a condo in orlando becuase I will be taking my family there a few times a year to go to disney etc. From what I have learned, the management rents out my room and gives me 60% of the nightly rent to me.they handle everything. The hotel is in the heart of many popular parks with free shuttls to the parks.I just call a week in advance if I want to stay for free. The owner tells me that he doesnt make positive cash flow, but almost breaks even every year. he gave me the amounts he made from rent alone and that would be a small bit short of my monthly mortgage+ins, etc. The problem is he sais he bought the condo for about the same price he is selling it now after 9 years or so. I am wondering why the price of the property hasent gone up more than a few thousand in 9 years. I would expect it to go up at least 20 or 25 % in that long of a time. Please advise.
Answer: the price of investment property is not based on the same measure of value that a primary house is based on. In the case of a rental unit, which is what you are looking at, the price is determined by how much rent it will support. If the price has not changed in 9 years, that means that rents have not risen in 9 years, or the vacancy rate has not risen in 9 years. The most likely reason is that there is too many units in the area, or the local tourism is down from some earlier point in time when this unit was built.
This deal almost sounds like a sucker play to me. If everything goes just right, you almost break even. If anything goes wrong, you have all the risk. But since there are only 52 weeks in a year, you have no upside to reap during a good year. The management company gets paid for any rentals that do happen, and they take none of the risk of a downturn in rentals.
In addition, there is some tax law that results in different and less favorable tax treatment on a unit that you occupy more than 2 weeks during a given tax year. If you use the unit the way that you are planning to above, you are going to miss out on the tax advantages of owning investment property.
My advice is to carefully consider the cost of staying in one of the resorts at Disney. Chances are it isn’t that much when compared to the property tax and upkeep you will pay on this condo deal.
After you make your plans to stay at a resort or local motel/hotel, then consider the pros and cons of owning property in the area as a totally seperate deal, independent of whether or not you are going to visit the Orlando area each year.
January 1, 1970
Question: Okay, maybe it’s not too unique, but I wanted to get your attention. Here’s the story.
Co-signed for my sister’s house (don’t even start) three years ago and now I’m getting screwed. It has been three years of battles, late payments, calls from the mortgage company, etc. I WANT OUT. We are both on the deed. I have contacted an attorney (Euclid, OH), but do not want to spend that amount of money to force my sister to sell the home through the courts. She does not want to leave the house, although she does not want to pay the payment (#$%@!).
I can gurantee that my sister will sign any paperwork to sell the home, but want to do so without the hassle of getting an attorney involved. Are there places/companies/people that purchase homes as is (current market value)? Is there anywhere that I can turn in which we can just sell the home without the hassle of a lawyer, court, etc?
Thanks for any advice you can give.
Answer: The people who run the “i buy houses” ads are looking to buy wholesale. I personally wouldn’t even go there.
The way to sell at market value is listing it with a realtor in the MLS or possibly with a discount broker without the MLS (cheaper, but less exposure to the market). This decision is probably made by how good your market is.
Trying to solve this by selling it yourselves may cause problems. How would the house show to prospective buyers; is it a mess?
Lay it on the line and if sister won’t cooperate, you’re going to be forced to hire an attorney and do a partition sale. You can buy out her interest at the sale and liquidate it yourself.
There are no easy answers here. I cannot give any useful advice here. You are simply screwed, and you are the poster boy on why you never, ever co-sign for a house unless you intend to pay for a house that someone else lives in.
I wonder if you could simply stop paying the payments. The house would go into forclosure. Your sister would be evicted at some point. Then you could buy the house from the bank, hopefully doing a deal where you let the bank earn a bit of profit in return for them writing you the new loan. You still, however, end up owning a house that your probably don’t need.
January 1, 1970
Question: We just purchased a house which was rented out. We decided to buy with the existing tenants to save the deal. Now the tenants are moving out and I need to know what I can legally deduct from their deposit. We asked for an initial walk-thru list from the seller, he said that he had never done one. We overlooked this since we were getting a good deal on the place. So, we obviously can’t deduct for a broken tile or things that the tenants are claiming was already there when they moved in. But can I deduct for carpet cleaning, general cleaning and painting the place? They have been there for 11 months (6 mo lease and then month to month) and the house is located in California. What is the definition of ‘wear and tear’? How clean should the house be when they move out? Should they legally be given the option to paint/clean themselves before we hire someone? (ie. should we tell them that we’ll be doing this stuff and deducting from their deposit?)
Also, they had an oral agreement with the seller that they will pay $50 less than what the rent on the lease was in exchange for taking care of the yard. Well, the whole grass area was yellow when we visited yesterday.
I would appreciate any advice.
Answer: The rental unit should be clean. However, without an initial move-in checklist from the seller, you will have a difficult time proving the tenants did any damage. Painting and a reasonable amount of nail holes etc is considered normal wear and tear.
Did you do a walk through at the time of purchase and make a list of deficiencies? You bought the property in the condition it was in when you signed the contract/closed the deal. You cannot, at least to the best of my knowledge go back and claim against the tenants for previous damages. If you retain any portion of the security deposit, the tenant may be able to recover substantial damages. You should review the lease with an attorney prior to making any deductions.
January 1, 1970
Question: I’m thinking about investing in a home for purposes a generating a modest positive cash flow through renting. I will sell some stocks to generate any required cash. Will the initial tax benifits of the investment offset the liabilites from the sale of the stocks?
An example would be helpful.
Answer: simply do an amortization on your proposed purchase, then calculate the tax savings of deducting that interest amount from your gross income. this assumes that you are itemizing your taxes. If you are buying the property for investment purposes, mot a residence, then you can also deduct the “purchase costs” and maintenance costs, as well as annual depreciation of a the purchase price over 27.5 years. (this amount will eventually be taxed when you sell, but it’s always better to pay taxes later). Consult a competent tax accountant. He meant to say “cost recovery.” It’s an income tax issue. We use to call it “depreciation,” but the tax laws were changed and the new term is “cost recovery.”
The idea is that the building becomes worthless at the end of its economic life. That is, eventually the building will be so out of date that it must be torn down. Therefore the investor must allocate a portion of the income to replacement of the structure many years from now. The income tax laws allow the investor to claim this amount annually as an expense, even though it doesn’t have to be paid annually.
Many years ago the investor had to estimate the remaining economic life of the structure. Naturally, the shorter the life the greater the annual amount of cost recovery. Since the cost recovery amount usually put the investment into the red (on the books), there would be a loss to report on the investor’s tax return. The shorter the economic life, the greater the paper loss. This loss could be used to offset income from other sources. This is why a real estate investment is usually referred to as a tax shelter.
Back when Reagan was president he got Congress to change the tax laws to provide for a flat 27 1/2 years economic life for residential investment property and 39 years for other kinds of property. The reason for this was because the investor and the IRS used to argue constantly about the real remaining economic life. The investor would claim it was shorter in order to increase the annual paper loss, and the IRS would claim it was longer. Now we just use an arbitrary number and there is no arguing.
You cannot claim cost recovery expense on a personal residence, on vacant land, or on the portion of an investment in an improved property that is allocated to the land under the building. It can be claimed only on structures, and only on those that are held for the production of income, on speculation, or for trade or business purposes.
Note that cost recovery is an income tax fiction that has nothing to do with the real market value of the property.
I should also add that there is a related issue that should be mentioned — capital gains. When you sell the property you must pay tax on the profit. The profit is based on the remaining economic life (unrecovered basis) at the time of the sale, not the original purchase price. So every year when the investor claims the cost recovery it is increasing the pain when the property is sold down the road. Of course, there are ways to alleviate that pain to some degree, but that is beyond the scope of this post. 
January 1, 1970
Question: My deceased aunt recently left me a house with an appraised value of $57,500. However her will stipulates that her roommate may live in the house as long as she wishes. Therefore the only way for me to raise any cash from this inheritance is to obtain some sort of mortgage on the property.
My credit sucks (though NO bankruptcy), I have NO job nor recent job history, and have about 2 grand in the bank.
(1) CAN I obtain a mortgage given my above circumstances? If so, through what particular means?
(2) I will not have in-hand a title with my name on it for another 60 to 90 days. Has anyone any creative finacing ideas by which I could get my hands on approx. $10,000 NOW, based solely upon the future mortgaging of the property?
Thanks in advance,
Answer: From your description it sounds as though your aunt’s roommate may have been left a life estate in the property. If so, you have a remainder interest, not present ownership. The roommate would be the present owner. It’s like there are two ownerships in the property — hers is the present ownership and yours is a future ownership.
From a legal perspective, both of you will have titles. And either of you can do whatever you want with your title, including selling it, mortgaging it, etc. But you can’t mortgage something you don’t own, so in your case all you can mortgage is your remainder interest. I know of no lender who will lend on a regular mortgage on a remainder.
The roommate can also borrow against the life estate but, in the same vein, cannot mortgage any more than the life estate. Again, lenders would be unwilling to take a life estate as collateral. The problem is that upon the death of the roommate you suddenly become vested in full and the life estate is extinguished. If the collateral is extinguished, the mortgage goes bye-bye at the same time, leaving the bank with an unsecured note signed by someone who is now dead. However, it is common to encounter mortgages on life estates where the holder of the future estate (you) agrees to sign the mortgage as well. That way the mortgage reaches both estates and would not be extinguished on the death of the roommate.
What you could do is reverse the procedure and get a mortgage on both estates by getting the roommate to agree to sign the mortgage also. The bank should then be willing to lend. However, from what you said originally it sounds as though it may not be possible to get the roommate to agree to this. In that case, the only thing you can do is try private financing. It would take a lender who really understands real estate law to do this. Perhaps you could find a local attorney or real estate broker who deals in real loans as an investment. Expect a very high interest rate, however.
A better approach might be just to sell the remainder. Again, the buyer would have to be someone who understands real estate law.
But what if my supposition is wrong and you will be getting something other than a remainder? From your description it is possible that you will be getting full title, but subject to a tenancy at will.
Any tenancy where the tenant has a legal right of possession is considered an encumbrance on the title. The definition of “encumbrance” is anything that burdens the title and survives a transfer of the title. In other words, if you sell the property the buyer will take title subject to the tenancy at will.
Now, the same thing happens if you mortgage the property. The tenant’s (roommate’s) rights existed before the mortgage. Therefore, the mortgage is subject to the tenancy at will. If the bank forecloses, they can take the property but must let the roommate stay. As you can imagine, this pretty well nixes the idea of getting a regular mortgage loan on the property.
There is a way around this which is quite commonly used by investors who wish to refinance property that they have leased to others. All they need is a subordination agreement from the tenant. The subordination agreement is between the tenant and the bank. It says that the bank’s rights will be superior to the tenant’s rights. Now if the bank forecloses they can evict the tenant if they wish. Banks are accustomed to this so it should not be a significant problem. The problem, of course, may be in getting the roommate to agree to a subordination to your lender.
Note that regardless of what interest you are getting, you really can’t do much about borrowing against it without the roommate agreeing to sign something as well. It would take someone who understands about real estate and contract law and also likes to invest by lending money. The first thing you need to do is to contact the attorney for the estate and verify exactly what you’re getting. Will it be a remainder, or a fee title subject to a tenancy at will? Whichever it is, that is what you have to pledge as collateral. And what you have right now is the right to that interest in 60-90 days, so you can pledge that as collateral today. Any rights can be pledged as collateral, but first you have to figure out what it is you have.
Having said all the above, it might be simpler just to borrow unsecured. As an alternative, consider selling whatever interest you are going to receive. If it is full title subject to the tenancy at will, then sell that. If it is a remainder, then sell the remainder. At the right price and terms there is always a buyer for anything. Good luck!
January 1, 1970
Question: I have recently signed an offer and acceptance contract to buy a house. After signing the contract I had an inspection done and discovered that the house had significant settling (I was unaware of settling before this inspection). The inspector said there is no present damage to the structure and the settling is not uncommon. I had a friend (a structural engineer) look at the house and he said the structure is fine now but in 5 years it may settle more and cause problems. I contacted the seller and gave him my list of repairs, which included the repairs for settling and I requested a 5yr warranty on settling repairs. The contract includes a clause to allow me an inspection and the seller agreed to a max $ amount he is willing to spend on repairs, refusal to carry out these repairs gives the buyer the right to cancel the contract. The seller disagreed to my assessment and hired his own structural engineer, whose report also found the settling but stated that the house is structurally safe and recommended minor repairs. Seller agreed to carry out these repairs, but, 1. The seller never gave me a disclosure, I think he was also unaware of the settling. In my request I asked for a 5 yrs warranty against further settling, which no one is willing to provide, and the seller thinks it is unfair to ask. He is hung on the word repairs and insists that since no party has termed the house damaged or unsafe he is not bound to perform anything beyond minor fixation. He calls everything beyond minor touchups as home improvement and not rpairs. My argument is, settling compromises the value of the house and I had made him an offer assuming there was nothing wrong with the house. If I had known what I know now about the house I would have never made hime an offer. Can I cancel the contract based on this new discovery. 2. Although it was our understanding that the contract we signed was a sale and purchase contract but later on I discovered that the title of the contract said “offer and acceptance”. Does that give me any leverage in terms of cancelling the contract. Although the contract does not say a sale and purchase contract will be signed later. Also what is the legal standing of a offer and acceptance contract as opposed to a sale and purchase contract. 3. The seller is holding my earnest money which I would like to get back. What is the maximum risk I have if I decide to walk out on the contract under my arguments. 4. How about if I keep the seller engaged in negotiations and the closing date passes by. I am just trying to find a way out of this contract without loosing my earnest money or any other legal repercussions.
Need I say the house was FSBO and there were no attorneys involved. If it helps the house is in Arkansas. Any help on this matter is greately appreciated.
Answer: First, the issue of what is a “repair” and what is a “home improvement” is a gray area. If this case were to go to court, the judge would decide which items are repairs and which are home improvements. On the face of it, my guess is that it would all be deemed repairs, but you never know. The problem is that the terms “repairs” and “home improvements” do not appear in Black’s Law Dictionary and, even if they did, the definitions in Black’s are specific to the jurisdictions which Black’s cites for the meaning. The way lawyers generally get around these issues is to define the terms within the contract. In your case, that was not done, presumably because it never occurred to anyone that the seller would come up with “home improvements.”
As for your second issue, the answer is clearly no, you cannot get out of the contract by engaging the seller in discourse past the closing date. The reason is the legal principle of waiver. By continuing to discuss these issues with the seller you are demonstrating waiver of the time is of the essence clause (another clause in all standard earnest money/purchase agreement forms, and a clause which does not mean what it sounds like it means). Therefore, continuing to carry on negotiations means the seller has a reasonable time to perform once the further negotiations are concluded, in spite of the deadline in the contract.
You could, however, get around the waiver issue by telling the seller in writing that you are willing to continue to negotiate but that such negotiation should not be taken as waiver of the time is of the essence clause.
In a case like this you might want to consider instead asking the seller to agree to abide by an informal arbitration. Each of you appoints someone to represent you (perhaps your individual real estate agents) and they decide the case. No muss, no fuss, no lawsuits, no expense, and everyone goes home reasonably happy. Otherwise the danger is that the only winners will be the attorneys. You might also check for an arbitation clause in your contract — many contain clauses requiring arbitration these days.
January 1, 1970
Question: I need advice badly. I am trying to buy an older frame home in Oak Park, Illinois with asphalt siding. It is a 1&1/2 story with 3 small bedrooms, small closets, small bathroon with a half in the basement and no linen closet. But then, it has a newer roof on the house with insulation, newer energy efficient gas furnace and central air. The basement is finished and there is a summer kitchen in the basement. The owner is leaving all window treatments, appliances in both kitchens, there is an older but okay 2-car garage with opener. It’s roof was not redone. But hey, what do you “experts” think? The owner is asking $129,900 and my husband doesn’t want to pay more than $119,000. I think $122,000. Can you give some expert advice. Any and ALL will be appreciated.
Answer: This is where all the FSBO stuff goes astray. Use a Realtor to determine the comparable sales, or hire an appraiser. It is the only way to insure you are paying market value for any property. Otherwise when you go to sell you may be in for an unplesant surprise You need to determine the market value of the home, usually through an appraiser or realtor. If the market value is close to what your husband is willing to pay I would offer approximately 5% less than market value and attempt to negotiate up to what your husband is willing to pay. Just a little advice off the cuff. The only “Expert” would be a licensed Appraiser and he would have to perform an appraisal in order to determine the value of the property.
If you are using a real estate agent the agent can furnish raw data on comparable sales. If the agent is working for the seller (90% of the cases they are) the agent is *not* allowed to interpret or explain the data to you since it would not be in the sellers best interest.
You could pay a real estate agent to provide the data and help you interpret it for a fixed fee (as long as the agent is not representing the seller).
The most accurate method would be to pay for an appraisal. Since a lender will probably require an appraisal before loaning you any money you should use an appraiser that the lender has approved. You can call the lender and ask them for a list of their approved appraisers. A word of caution: the lender will require that the appraisal be done within a reasonable length of time before closing. Be sure to ask the lender for their requirements. Also, you need to get the sellers *written* permission to do an appraisal if the Appraiser is going to enter the home.
Remember that the Appraisal Report is your property if you order and pay for it yourself so you are not required to reveal the appraised price to anyone. And, you should instruct the Appraiser *in writing* not to discuss the Report with *anyone* unless you give written permission. This is important if the house appraises for a larger amount that you are paying for it.
The cost of an appraisal is very small compared to the price of the property.
Good luck
January 1, 1970
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