REAL ESTATE Q&A; What It Means When the Seller ‘Carries Back a Second’

LA Times Oct 8, 2000 – ROBERT J. BRUSS

Question: I don’t understand how “seller financing” and “carrying back a second mortgage” works. If the home is for sale, why would the seller want to take out an additional mortgage?

Answer: The home sales term “seller financing” means the seller helps finance the buyer’s purchase by loaning the buyer part of the seller’s equity, instead of receiving all cash from the buyer at the time of sale. Seller financing does not mean the seller takes out an additional mortgage before selling.

For example, a few years ago, I sold a rental house to my lease- option tenants. They made a $30,000 down payment (from their lease- option rent credit), obtained a new first mortgage from a bank at 8% interest, and I carried back a second mortgage for the balance of the sales price at 9% interest. They didn’t have to come up with any cash except for closing costs.

The happy result is that I received the cash from their new first mortgage that they obtained at a bank, and I have been receiving monthly payments, plus 9% interest, on my second mortgage ever since.

In other words, when I carried back that second mortgage for my buyers, I loaned my buyers part of my equity that I had in that house at the time of sale. I also created an excellent, safe investment for myself.

If they should default, I can foreclose and either get paid in full at the foreclosure sale or take back the house to sell it again for another profit. However, foreclosure is unlikely because the buyers now have built large equity in their home.

Some New Tips About When to Refinance

Q: The interest rate on our mortgage is 8.5%, but our equity has grown to about $200,000 during the last few years. I started shopping around on the Internet and learned our interest rate can probably be reduced to around 8% if we refinance.

Because I am self-employed, we will have to supply tax returns, profit and loss statements, bank account statements and a bunch of other paperwork, which I dread. Do you think we should refinance just to save half of 1% interest? Will the money we take out be taxable?

A: Forget the old rule that says homeowners should refinance only when they can reduce the interest rate by at least 2% and recover their refinance costs within 36 months from loan payment savings.

Don’t confine your refinance search to Internet lenders. Local banks, mortgage brokers and mortgage bankers are also eager to make loans. Inquire about “no cost” mortgages for which you don’t have to pay upfront fees (on a refinance, those fees must be amortized over the life of the mortgage). Compare the annual percentage rate of each loan offered.

Your refinance “cash out” proceeds will be tax-free for a good reason. Because it is borrowed money, it must be repaid, so Uncle Sam doesn’t tax it. For more details on the tax aspects, please consult your tax advisor.

Something’s Fishy With These Termite Reports

Q: We recently bought our first home. At the time of purchase, we were told the same termite inspection company had inspected the house two years ago, and then again two months before we bought it. Both reports said there were no termites.

About two months after we moved in, we found evidence of termites and called the same termite inspector. He said it looked like the termites had been in the house for three to four years. I asked him how this could be since both of his reports stated there were no termites. He said not to worry and that he would take care of everything at no cost. He put a small amount of spray in a hole in the ground and said he would be back to monitor the situation. That was about a month ago. I have not heard from him since. What should we do?

A: Read the termite inspection report you received. It should give you the name, address and phone of the state agency that regulates that termite inspection firm. Give them a call to be sure that termite inspector is properly licensed and in good standing. They might also be able to give you more specific advice for your situation.

If it were me, I would hire another termite inspection firm to completely reinspect the house. It sounds like your termite inspector could be incompetent and there might be extensive termite damage that he is trying to avoid having to repair at his expense.

With a report from another inspection firm, you have some leverage to get the first inspector to make repairs and to be certain there really are no termites in your home.

Quoted Deposit Price Is in the Stratosphere

Q: My wife and I are in the market to buy a larger house. We’ve been looking, off and on, for about five months. Last weekend we saw a house we both really liked. When we talked with the listing agent about making an offer, she said we had to make a deposit of 10% of the purchase price. Since the asking price is $275,000, that means our deposit would be $27,500. Isn’t that rather high?

A: Yes. That listing agent, who represents the seller, was trying to get you to make a huge deposit so that you would be less likely to cancel the sale after the seller accepts your purchase offer. I can’t blame the listing agent; however, from your viewpoint, a 10% good-faith deposit is very high.

My suggestion is that you and your wife hire your own buyer’s agent to represent your best interests. When no other agent is involved, the listing agent either represents the seller only or acts as a dual agent for both the seller and buyer. Either way, she is anxious to sell the home and could be working primarily for the seller, against your best interests.

If you’re making a “low ball” purchase offer that’s far below the seller’s asking price, then a large earnest money deposit can often convince the seller to accept a low offer. However, in a normal home- purchase situation, a good-faith deposit of 1% to 5% of the offer price shows you are serious. Purchase contracts often specify the deposit is to be increased upon the buyer’s removal of contingencies, such as the mortgage appraisal and a professional inspection.

When Contractors Prove to Be Unreliable

Q: We’re having a terrible time with the installing contractor of our new manufactured home. We demolished the dilapidated old home on our lot. After many delays, and due to the city’s prejudice against even this top-quality home, installation work was started in June.

The house was trucked in on July 14. Since that time, workers have showed up every four to eight days to do a few tasks. The walk- through date, postponed several times, has long come and gone. We tried being patient with the many excuses from the contractor. I’ve called the manufactured home customer service representative, but he doesn’t return my calls. I think we have an unreliable, incompetent contractor. Other than hiring an attorney, what should we do?

A: Did you or the manufactured home seller hire the contractor? If you hired him, then it’s your problem. But it sounds as though the manufactured home seller hired the contractor. Get tough. Phone or visit that firm daily until you get action.

Have you phoned the contractor to find out the cause of the delay? You’ve been nice. Now it’s time to take strong action. Politely tell the contractor, presuming he is licensed, that if he doesn’t quickly complete the job, you will have no alternative but to file a complaint with the state contractor’s license board.

If you hire an attorney, be sure to get the fee agreement in writing so you don’t run up excessive attorney fees over what should be a simple matter: to get the home installation completed.

Written Sale Option Is the Best Policy

Q: Two years ago, I verbally agreed to sell my house to a woman and take back a mortgage for 15 years. She wanted to rent it for a year before buying. I agreed. The rent is the “going rate” in the area. I said if she paid rent on time and kept the house well- maintained, I would deduct “something” when she finally bought. She is still renting and doesn’t know when she will be able to buy.

If she doesn’t buy for several years, am I morally obligated to sell at the original price? How much of her monthly rent should be allowed as a rent credit when she buys (no down payment was made)? Would it be better tax-wise not to allow a rent credit and just lower the price of the house?

A: What a mess. The general rule is that the statute of frauds requires all real estate contracts to be in writing to be legally enforceable. However, an exception occurs if one party (your tenant) relies on an oral contract (the verbal lease-option) and enters into performance of her part of the contract. By moving into the house and paying rent on time, that partial performance and detrimental reliance takes the lease-option contract out of the statute of frauds writing requirement.

Unless you have raised the option purchase price, the original price still stands. As to how much of the tenant’s rent credit toward the purchase price should be allowed, that’s up to you and the tenant to agree upon.

Personally, I give 33% rent credits. But I know other rental owners who give only 10%, which I think is too little to motivate the tenant to buy. When the purchase option is exercised, the rent credit is subtracted from the gross sales price, similar to a sales expense.

You should immediately consult a local real estate attorney to prepare a written lease-option so there is no further possibility of a misunderstanding. If you don’t, your tenant might sue you for specific performance of the alleged lease-option, based on her understanding of the oral agreement, after the house has gone up in market value.

Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to 251 Park Road, Burlingame, CA 94010, or contact Bruss suggests consulting an attorney or tax advisor before making important real estate decisions.