Q–The home sale market in our town is hot. We received two purchase offers for our home and accepted the best one, but then the second buyer raised his offer to $7,500 more than the offer we accepted. We couldn’t get out of the first offer, so our realty agent advised us to accept the second offer as a backup offer, which we did.
When the closing date came for the first buyer, he asked us for a one-week extension. Since we had the better backup offer, we refused. Then the first buyer went to a real estate lawyer, sued us for specific performance of the sales contract (even though the buyer didn’t close the sale on time) and recorded a “lis pendens” against our title.
Our lawyer is now trying to get the lis pendens removed so we can convey title to the backup buyer. Can we sue the first buyer for damages?
A–Yes. I am shocked a lawyer would take the first buyer’s case, because (1) he was in breach of contract and (2) time is of the essence in a real estate sales contract.
Surely, he must have known the harm such a lawsuit and recording the lis pendens would do to you and the back-up buyer. I’m sure your attorney has talked with you about suing the first buyer for slander of title damages for delaying your sale to the backup buyer.
Your unfortunate situation shows why home buyers should complete their purchases on time, especially when they know a second buyer is waiting in case of a default.
Q–I am considering buying a home. Is there a formula for how much income a first-time buyer should spend on mortgage payments?
A–The old formula used to be housing costs should not take more than 25 percent of the homeowner’s gross income. But most mortgage lenders will now approve home loans taking 28 to 33 percent of gross family income.
I’ve even seen mortgages approved that took up to 40 percent of the homeowner’s gross income, if the borrower had good credit and no or few other debts.
Before shopping for a home, get preapproved (not just prequalified) for a home mortgage by the actual lender (not just a mortgage broker). Then you will know for sure the maximum mortgage you can afford after considering the amount of your down payment and other financial obligations.
Q–I’ve been studying your articles about the 1997 Tax Act’s new $250,000 per owner home sale tax exemption. My wife and I own a nice beach property, which has gone up amazingly in market value. If we sell, our net profit will be about $325,000. Can we retire and move into the beach house as our full-time residence for two years, even though we keep our current home, then use the new tax exemption when we sell the beach house?
A–Yes. New Internal Revenue Code 121 says the $250,000 home sale tax exemption (up to $500,000 for a married couple filing jointly) is available on the sale of your principal residence.
To qualify, you must own and occupy the principal residence any two of the last five years before its sale. Living full-time in your beach home should qualify for this new tax break. Please consult your tax adviser for details.
Q–About three years ago, we bought our home on a land contract for deed. The seller said he wanted to use this method to avoid a prepayment penalty on his mortgage. Now we want to refinance and pay off the amount we owe the seller.
Our new mortgage is ready to fund. But the title insurance company says the seller has a $23,000 judgment lien that he must pay off to deliver marketable title to us.
The seller won’t be receiving that much cash from us, as we already paid a $30,000 down payment to him three years ago. He doesn’t have $23,000. How can we get the seller’s judgment lien removed so we can get title to our home?
A–In land contracts for deed–also called agreements for sale, contracts of sale, installment land contracts, and a zillion other names–the seller retains the title until the buyer makes an agreed number of payments. The seller remains the legal owner, although the buyer is the equitable owner, entitled to all the ownership benefits and burdens, including income tax deductions.
The situation you describe, in which the land contract for deed seller is unable to deliver marketable title, is not unusual. If your seller doesn’t have the $23,000 to pay his judgment lien, which is recorded against the title to the house he contracted to sell to you, you don’t have an effective legal remedy against him unless he has other assets. This is a major pitfall of land contract sales. Consult a real estate attorney.
Q–I want to refinance my home mortgage to consolidate a first and second mortgage, plus reduce the interest rate. A friend recommended a mortgage broker, so I applied with her. But she keeps asking for more documentation and doesn’t seem to be able to deliver the mortgage terms she quoted to me. Do you recommend mortgage brokers or should I go to a bank to refinance?
A–As in any profession, there are good and bad mortgage brokers. I’ve had excellent experiences with mortgage brokers, as well as a few misrepresentations, too. There are hundreds of mortgage lenders. If you aren’t happy with your mortgage broker, shop around. Banks, S&Ls, mortgage brokers and mortgage bankers are all eager for your business. Get everything in writing to prevent misunderstandings.
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Please note: Real estate laws vary from place to place. Be sure to check the laws of your state and municipality before making decisions on real estate matters. You may need to consult a lawyer.
Write to Robert Bruss at Tribune Media Services, 435 N. Michigan Ave., Chicago, Ill. 60611.
