Q–We are just starting to buy a home. As you constantly harangue, we are already preapproved by a major mortgage lender. The blank purchase contract our buyer’s agent gave us to study contains a binding arbitration clause for any dispute that might arise. She suggests signing it. What do you recommend?
A–I do not recommend signing arbitration clauses in real estate purchase contracts. Why give up your legal rights in advance?
If you sign that optional arbitration clause, you forfeit your right to a jury trial of the dispute, court rules of evidence and discovery, right of appeal if the arbitrator is wrong, and protection of a judge conducting the trial. If a dispute later arises, you and the other party can always agree to arbitrate if your attorney then advises you to do so.
Q–We are in the process of buying a new house. The huge, nationwide developer-builder strongly recommends we use his “closing agent”; however, the builder disclosed it owns the firm that will be handling the closing. I don’t feel comfortable about this, but my wife shopped around to see if we can do better elsewhere on the closing costs, especially the title insurance, and we can’t find a better deal. Should we use the home builder’s agent?
A–Most home builders arrange discounts on closing costs from mortgage lenders, title insurers and closing agents. Buyers usually cannot do better elsewhere.
However, if you feel uncomfortable, you should retain a real estate attorney to represent you at the closing. Just be sure your attorney understands you don’t want to kill the deal unless he or she discovers legitimate problems.
Q–We have a first mortgage at 7.25 percent and a home equity mortgage at the prime rate, which is now 9 percent. We’ve been shopping around among mortgage lenders to refinance and consolidate both loans.
We were approved and ready to close on one loan, but the closing papers were far different from the lender’s original “good faith estimate,” so we backed out. That broker was mad at us, but when I asked for his license number, he quickly apologized and refunded our credit report and appraisal fees.
Now we found another lender who locked in for 60 days, at no fee to us, a cash-out, “no-cost” mortgage at 8.25 percent. Is this a “good deal?”
A–Unfortunately, there are lots of “con artist” mortgage lenders like that who promise loan terms they know they can’t deliver. I’m glad you walked out on that dishonest lender.
Since you are refinancing, a so-called “no-cost” mortgage, which includes virtually all loan charges, can be a good deal because any loan fee you pay on a refinance mortgage must be amortized (deducted) over the life of the mortgage. To illustrate, suppose you pay a $2,000 loan fee to refinance. That means you can only deduct $66.66 each year for the next 30 years.
Although a no-cost mortgage has a slightly higher interest rate than when the borrower pays normal loan costs, it includes all the refinancing costs in the tax deductible interest rate. Since you will probably refinance or sell before that 30-year mortgage is paid off, a no-cost refinance mortgage is usually a better deal than paying loan fees up front at the time of refinancing.
Q–Thank you for the recent information on lease-options. I am a landlord with tenants who may want to buy their rental house from me on a lease-option. You recommend at least a 33-percent rent credit toward the purchase price, but how do you set the rent? Is it market rent or higher?
You also mention asking for several thousand dollars of nonrefundable option money. What option percent range is reasonable? As a landlord, I do not see much advantage for me to offer a lease-option in a marketplace where home values are rising. Should a Realtor be used for the final sale? Please be more specific.
A–In most cities around the country, home prices are escalating at least 5 to 10 percent annually. This discourages lease-options, which work best in stable or slowly-rising markets.
I recommend setting lease-option rents at least 20 to 25 percent higher than market rents for comparable rentals. Tenants are willing to pay that.
Here’s an example, based on what one of my lease-option buyers told me after the purchase closing. The rent was $1,500 per month, at least $300 higher than market rent. My tenants knew that, but they received a $500 per month rent credit. The wife said they looked at the situation as $1,000 per month rent (a bargain) plus $500 toward a forced savings account for their down payment. I, as the landlord, viewed the same situation as $1,500 above-market rent. We both were happy. Traditionally, option consideration has been 1 to 3 percent of the option purchase price. If the house is worth $200,000, for example, you should require $2,000 to $6,000 of nonrefundable lease-option money up front before the tenant moves in.
You do not need a Realtor for a lease-option sale because most agents know virtually nothing about lease-options.
Q–My home is “for sale by owner.” I know you don’t recommend that, but I have little equity and cannot afford to pay a real estate sales commission. I had one prospect, a real estate investor, who gave me a written purchase offer. His offer was too low, but it had a 60-day contingency clause for obtaining a mortgage. Isn’t that too long?
A–Yes. Ten to 15 days would be adequate. But the best-qualified home buyers are preapproved for a home mortgage and will show you their preapproval letter or certificate from a reputable lender. Don’t accept preapprovals from mortgage brokers because they are not actual lenders.
Accept only preapprovals from real mortgage lenders, such as banks and mortgage bankers. Don’t even consider prequalification letters. In today’s extremely active home-sales market, buyers who don’t have a preapproval letter or certificate from a lender are not serious buyers.
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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.
Write to Robert Bruss at Tribune Media Services, 435 N. Michigan Ave., Chicago, Ill. 60611.
