Q–You often recommend including a “professional home inspection contingency clause” in a home purchase offer. As a first-time home buyer, I’m confused about how this is handled. Should I have the house inspected before making a purchase offer? Or after? What if the inspection turns up a serious problem? Can I then get out of the purchase? Please clarify.
A–Professional home inspection contingency clauses have come into widespread use during the last 15 years. Before then, the rule in virtually every state was “caveat emptor” (let the buyer beware). Today, any real estate agent who does not advise the buyer to include a professional inspection contingency clause in the purchase offer is not looking out for the buyer’s best interests.
It could be a waste of your money to have the home professionally inspected before making a purchase offer, because the buyer pays for the inspection and you don’t know if you and the seller can reach agreement on price and terms.
There should be a reasonable time limit for the inspection, such as 5 or 10 days. Be sure to accompany the inspector to discuss any defects discovered and the probable repair cost. If the seller refuses to pay for necessary repairs, you can disapprove the inspection report, cancel the purchase and get your earnest money deposit refunded. For further details, please consult a local real estate attorney.
Q–My parents own a beautiful old house that’s now too large for them. Meanwhile, my wife and I own a two-bedroom house that we and our two sons have outgrown. We need a larger house and my parents need a smaller one that’s easier to maintain.
The problem is, if my parents sell, their net profit will be over $600,000 (they’ve owned the house about 30 years and it has appreciated greatly in market value). We want to swap houses and balance the equities by taking out a mortgage on their larger house. Will this work to help my parents avoid tax on their home sale profit exceeding their new $500,000 tax exemption?
A–No. Internal Revenue Code 1031, which authorizes tax-deferred exchanges, applies to business and investment properties only. It does not apply to personal residences. Even if both houses were rental houses before being exchanged, you would get a tax-deferred trade up, but your parents would be taxable on their trade down. The exchange rule is that tax-deferral requires a trade for an acquired property of equal or greater in value without receiving any taxable “boot” (“unlike kind” personal property, such as cash or net mortgage relief).
Sorry, I don’t see any way for your parents to avoid tax on their home sale profit. Ask your tax adviser to explain further.
Q–After five months of searching, we finally found a house we like and can afford. The seller accepted our offer. But then he learned his old mortgage has a prepayment penalty. Now he insists we get our mortgage from the same lender so he can save the prepayment penalty. However, that lender’s interest rate is about 0.5 percent higher than the preapproved mortgage we arranged with another lender. Can the seller force us to borrow from his lender so he can save the prepayment penalty?
A–Legally, no. In reality, yes. If the seller counteroffered your offer by accepting your offer but insisting in writing that you get your mortgage from his lender, then you are obligated to do so. However, your letter indicates the seller later learned about his prepayment penalty and is now orally insisting you get your mortgage from his lender.
Legally, he can’t force you to do so after the sales contract was signed. However, as a practical matter, he might refuse to complete the sale unless you get your mortgage there. If he refuses to deliver the deed as agreed, you could sue him for specific performance of the contract. But that could get costly and would surely delay your purchase. Instead, I suggest you try to work out a compromise with the seller, such as his lowering the sales price if you use his lender.
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Have a question about real estate? You can write to Robert Bruss in care of Tribune Real Estate Features Service, 435 N. Michigan Ave., Suite 1400, Chicago, Ill. 60611. Answers will be provided only through the column. Please note that laws vary from state to state and area to area. Consult an attorney for specific legal advice.
