Skip to content

Tortious interference and backup contracts

04-May-08

A reader asks:

If a Seller executes a backup contract, is that tortious interference in the primary contract?

This is a situation that both the original buyer, the backup buyer and the seller as well as all the agents involved need to be addressing with their attorneys. The one obvious answer though is “Not always.” If it were always tortious interference for a backup contract to be executed, there would be a lot less backup contracts (approaching zero!).

The law is going to vary by jurisdiction, which is one reason that an answer on a website is no substitute for speaking with local counsel, but here’s some interesting information from Findlaw on tortious interference in one jurisdiction (Georgia) just as “food for thought”:

The courts have further defined the claim of tortious interference to require proof that the defendant did the following: (1) acted improperly and without privilege; (2) acted purposefully and maliciously with intent to injure; (3) induced a third party or parties not to enter into or continue a business relationship with the plaintiff; and (4) caused the plaintiff some financial injury…

Defenses to tortious interference claims include various privileges, such as the privilege of fair competition. It has long been recognized that fair competition is always legal.

One thing is clear - the seller can’t have committed tortious interference. The seller might have committed breach of contract, of course.

If the seller didn’t breach the primary contract, for example if the financing contingency date had passed with no loan commitment, it would be hard to maintain that there was an interference by the backup buyer. It’s hard to claim interference at that point, if the primary contract is no longer valid. If the backup buyer convinced the seller to exercise a contingency to void the primary contract, maybe.

Those elements of intent, purposefulness and malice are going to be tough as well. Plus, a backup contract buyer is likely to be covered by some of the defenses - not least the fair competition defense mentioned. Of course, a good attorney might well be able to convince a court otherwise.

Interference With Contractual or Business Relations: The Business Claim

Three bottom lines here:

  • If it were commonly considered interference to enter a backup contract, the practice would be a lot less commonplace.
  • If there’s reason to think there might be a claim, it’s worth consulting a lawyer. A good lawyer may want a fee for the consultation, but the answer you get is going to be worth a lot more than the answer of a nonlawyer writing on a website, with no specifics and merely speculating for his own entertainment and that of his readers.
  • No Professional Advice
    This website is for informational purposes only and is not intended to provide specific financial, investment, tax, legal or accounting advice for you, and should not be relied upon in that regard. The Information is believed to be accurate and reliable when placed on the Site, but is not guaranteed and may not be complete or current at all times (especially historic archives).

Thoughts for my fellow real estate agents in this situation:

  • Chances are the cost of a quick legal consultation, if any, will be pretty minimal compared to the sums involved in a real estate transaction.  If my buyer felt he’d been shafted, I’d encourage him to get that consultation.
  • I’d make sure the client understands that I am still on his side.  My service doesn’t end because an attorney’s service begins.  Consider accompanying the client to that legal consultation for moral support and to be able to provide information, if needed.
  • Before speaking to the client’s attorney, check with your E & O company, company attorney or your own attorney.  Consider having your attorney, or your company’s, go with you or available by phone during the client’s legal consultation.
Filed in Real Estate | Comments (0) »

What is “a months supply for existing home sales”?

20-Jan-08

With the Existing Home Sales report for December 2007 due out Thursday, now is a good time to answer this reader question, “What’s the definition of a months supply for existing home sales?” The report, released every month by the National Association of Realtors, gives a top line number of the seasonally adjusted annual unit sales. It also includes reports on prices and inventories. So, there are a few other terms that are worth defining while we’re at it.

Seasonally adjusted is one of those terms we hear in a lot of economic reports that may sound intimidating, but is really exactly what it sounds like. Home sales vary a lot by season, due to weather, school and work vacation schedules, holidays, the timing of tax refunds and other factors. Spring, when the weather is nice, potential buyers have tax refund checks in hand and school is still in session so vacations and holidays don’t interfere is prime selling season in most parts of the country. Summers tend to slow down a bit with hot weather and family vacations. Winter, with holidays and cold weather is generally the worst part of the year. (An informal survey I did in our local market a few years ago showed a drop in both number of sales and prices of around 8-12% every year for the December-February season compared to the previous June peak.) Seasonal adjustment just means that a formula has been applied, based on previous years seasonal variations, to turn one month’s sales figures into a meaningful annual figure.

That figure is expressed as annual “unit” sales. A unit is simply one home - that may be a single family home or a single condo or coop unit. A duplex or triplex would be two or three units.

The report includes information on inventories of existing homes. This is not an actual count of the number of homes in the country. It’s a count of the number of homes listed for sale. To put the number in context, the report always gives both the number and a reference to the number of “month’s supply”. The more month’s supply that is available, the more the situation favors buyers, while a smaller month’s supply available means a tighter supply and favors sellers. Month’s supply is another of those fairly simple things that looks daunting - it’s the seasonally adjusted annual unit sales divided by 12. Take the available inventory and divide it by a month’s supply and you’ve got the number of month’s supply available for a given month.

The report also includes information on price and gives both “median” and “average” prices. The average price is the simple mathematical average you learned in basic math - total sales dollars divided by number of sales - though it’s certainly not simple to compute with the large number of sales involved. Median is the actual midpoint. It’s the price where exactly half of homes sold for more and exactly half sold for less. Normally, that’s an important number because the sale of one really expensive home still only counts as one sale and it doesn’t move the numbers too much. The last few months, it’s cause a little problem as the “jumbo loan” market for mortgages above $417,000 dried up. Even though homes below $417,000 were still selling at about the same price, the median was pushed down simply because the number of higher priced homes dropped - so July’s “median” home was actually above the median by December and might actually be worth more than it was in July.

For the average home buyer or seller, the important things to look for in the report are your regional numbers and the long run trends. That means looking not just at this month’s report, but at several month’s reports. The month’s supply of available homes is a great number for getting a sense of where the market is heading and one of the most effective ways to use it is to put yourself in the typical seller’s shoes. How fast do you want your home sold? Many sellers expect a sale time of 60-120 days. Currently, the months available supply is running from 8 to 10 months, or about 3 times as long. Another important factor is to look at where the number is in good times (or seller’s markets). With some sellers always willing to hold out for a higher price, even in boom times the number doesn’t go much below 5 to 6 months.

Technorati Tags: , ,

Filed in Real Estate, Residential | Comments (0) »

How many back up contracts can you have?

18-Nov-07

Backup offer questions are really common right now as many sellers in a down market are concerned with holding tight to any buyer and since there are problems in mortgage markets, there’s even more reason for sellers to take backups when they can. But in a market where buyers often have their choice of bargain properties, even primary contracts are hard to come by, let alone backups. When markets get hot, buyers clamor to put in backup offers on hot properties and the questions center on getting sellers to consider backup offers.

G wrote in to ask “How many backup contracts can you have?” As far as how many backups you can have, there are slightly different answers depending if you’re the buyer or the seller.

As the seller, there are some ethical considerations here but this is mostly a matter of practicality. How many backup contracts do you want to keep track of? Do you have a mechanism in place for notifying each of the backups properly if the primary offer falls through and making sure that each of them is properly aware of their new standing in the line, new deadlines, any new obligations? The more contracts in place, the more likelihood that you’re going to end up with two parties thinking they’ve moved to the head of the line and possibly being able to convince a court that the error was yours. Your best bet - disclose, disclose, disclose and do it all in writing. If you do have multiple backup offers in place, it’s in your best interest as a seller to let the buyer and the buyer’s mortgage lender know that you have multiple backups and there won’t be any extensions.

So, what if you’re the buyer, with a backup contract on a house you like and interested in another house that is also under contract. Should you enter a backup contract on the second property as well? The thing to remember is that depending on the exact terms of the backup offer you could end up on the hook to buy two properties, though it is not likely. The key here would be to make sure each primary contract expires on a different day and to be sure a provision is included to allow you to withdraw up until the time your backup offer becomes the primary offer. (The second part is pretty standard in backup contingencies in this area.) If you can afford the loss of earnest money, you may also consider a provision allowing you to withdraw and release the earnest money at your option rather than the sellers. Again, it would be in your best interest to disclose the fact that you are in a backup position on another property to both sellers as it does the double service of avoiding confusion and adding urgency for the other parties to close.

There are common concerns for buyers or sellers in multiple backup offer situations: disclosure, understanding the other party’s negotiating position and giving yourself a proper “out”.

Technorati Tags: ,

Filed in Backup Offers, Real Estate | Comments (0) »

Who are Ginnie Mae, Freddie Mac and Fannie Mae and what do they do?

28-Oct-07

If you find this helpful, please vote for it at Millionaire Mommy Next Door before Nov. 4, 2007. Thanks!

This reader question is especially timely given the turmoil in the mortgage markets the last three months:

Who are Ginnie Mae, Freddie Mac and Fannie Mae and what do they do?

Freddie Mac and Fannie Mae are the two biggest players in the US mortgage markets, dominating the market for loans under the conforming loan limit (currently $417,000) and ultimately purchasing about 2/3 of all single family mortgages between them. Ginnie Mae is a much smaller player, focused entirely on government guaranteed (FHA, VA, Agriculture Department) mortgages. I’ll get to their exact roles further on, but what’s really important to understand is that over 2/3 of the mortgage market would function much differently, if it functioned at all, without these three players. The second thing worth noting, and this is the timely part, is that these players have little involvement with the “subprime” or “jumbo” sections of the market and all three of them are functioning normally. (Freddie Mac and Fannie Mae do purchase some of the very top subprime mortgages, called “Alt-A” paper, that barely miss the requirements to be considered “conventional” loans.)

Freddie Mac has a portfolio of $1.5 trillion in loans, more than the Gross Domestic Product of Russia, Canada, India or Mexico. Fannie Mae’s portfolio is even larger. Freddie Mac’s revenue, which is a fraction of a percent of the loans it underwrites, is over $40 billion a year and Fannie Mae’s is over $50 billion.

Fannie Mae was initially Federal National Mortgage Corporation, Freddie Mac was the Federal Home Loan Mortgage Corporation and Ginnie Mae was the Government National Mortgage Association. Fannie Mae and Freddie Mac are privately owned corporations chartered by Congress and have lines of credit with the US Treasury for $2.5 billion. Though there is a common perception that they have an implicit federal guarantee against failure, there is no legal guarantee and in fact the law authorizing them specifically disclaims any government guarantee. Ginnie Mae is a government agency and as such is legally backed by the full faith and credit of the US government.

But what do they actually do? Fannie Mae and Freddie Mac perform similar roles, while Ginnie Mae performs a bit different role. The typical mortgage loan is for a 15 or 30-year term. Bank deposits are mostly in checking accounts, savings accounts and certificates of deposit with terms of a few years. So, when a bank makes a mortgage loan, the bank may not want to actually hold the loan for its full life. This is where Fannie Mae, Freddie Mac and Ginnie Mae step in. Freddie Mac and Fannie Mae buy mortgage loans from the banks, package large numbers of loans into securities and then sell the securities, Mortgage Backed Securities, to investors and the banks get cash for the loans. (Technically, in most cases, the banks actually receive Fannie Mae, Freddie Mac or Ginnie Mae securities in exchange for the loans and the banks can then sell those securities to investors for cash or can use them in lieu of cash for some purposes.) The function of the three agencies is to package loans for sale to investors so the banks can cash out. They make a market for the loans, called the secondary market. Because of their size and their relationship to the federal government, Fannie Mae and Freddie Mac are able to translate the demand for their securities into lower interest rates for mortgage borrowers and a more stable market for mortgage loans.

So, why three agencies instead of one? Each has a different purpose written into its charter.

Ginnie Mae has the narrowest charter of the three. Ginnie Mae doesn’t actually issue any securities or buy and sell any loans. Ginnie Mae does “guarantee investors the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans.” These are insured or guaranteed by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), the Department of Agriculture’s Rural Housing Service (RHS) and the Department of Housing and Urban Development’s Office of Public and Indian Housing (PIH). Ginnie Mae also provides a computer platform that allows Ginnie Mae approved lenders to package the mortgage backed securities that Ginnie Mae ultimately guarantees.

Fannie Mae was initially chartered to create and guarantee Mortgage Backed Securities for government loan programs and then for conventional mortgages. In 1968, Ginnie Mae was split off from Fannie Mae and Fannie Mae was privatized. From 1968, it’s purpose was to promote liquidity in mortgage markets by packaging conventional loans into securities for resale to investors.

In 1970, Congress chartered Freddie Mac. Part of the rationale was to provide competition for the newly private Fannie Mae, to avoid a mortgage market monopoly. Freddie Mac was also chartered specifically to promote “activities relating to mortgages
on housing for low- and moderate-income families” and “to promote access to mortgage credit throughout the Nation (including central cities, rural areas, and underserved
areas).”

Freddie Mac and Fannie Mae are both regulated by the Department of Housing and Urban Development (HUD) and the Office of Federal Housing Enterprise Oversight (OFHEO).

For the home buyer or seller, what’s most important to understand is that Freddie Mac and Fannie Mae may ultimately end up owning your mortgage loan. As such, they have the right to set certain requirements on the lender who makes the loan. What this means for you is that it won’t matter how nice a tie you wear when you apply, whether you lose to your lender on purpose at golf or who you buy lunch for - if you and the house you are buying don’t meet the loan requirements set by Fannie Mae or Freddie Mac, you’re out of luck. If you’re getting a government guaranteed loan, Ginnie Mae won’t end up owning the loan, but the role of it and the government agencies involved will give them similar power to set requirements for the borrower and the property.

Investors should note a couple of things about Fannie Mae, Freddie Mac and Ginnie Mae securities. First, Fannie Mae and Freddie Mac securities are high quality debt securities backed by high quality mortgages. As private securities go, they are quite low risk. But, the market probably prices them as if they carried less risk than they do, because of the mistaken perception of a federal guarantee. By law, there is no federal guarantee on Fannie Maes or Freddie Macs. It’s also important to note that the capital requirement on Fannie Mae and Freddie Mac is 1/2 the required capital for other mortgage backed securities.

Ginnie Mae securities on the other hand are backed by the full faith and credit of the US government and are also backed by high quality mortgages making Ginnie Maes a very low risk fixed income security. (Arguably the backing by real estate makes them slightly less risky than even Treasury securities, though the distinction is trivial and for capital purposes they have a risk-weighting of zero.)

Technorati Tags: , ,

Further reading:
Fannie Mae
Freddie Mac
Ginnie Mae
OFHEO

Filed in Financing, Mortgage, Real Estate | Comments (0) »

What is the average loan amount for $50,000 income with good credit?

19-Oct-07

One reader wanted to know the “average” loan amount for a household with good credit and an income of $50,000. This is a great example as $50,000 is pretty close to the national median household income of $48,201 in 2006. If your household income is lower or higher than $50,000, just multiply all the “answers” by the percent of $50,000 that is your household income. One other note, before we start. If only one party in the household has good credit, a loan is still possible, but you’ll need to base all the figures on the income of the person with good credit alone.

So, what’s the average loan amount? I don’t know of any good source for that statistic. But fortunately I have some more useful information, the answer to this question: “How much can a household with good credit and $50,000 income borrow?” That answer varies a little depending on the type of loan. It also varies literally day-by-day as interest rates change.

For conventional, conforming loans, there are two relevant “debt ratios” - 28% of gross income for housing and 36% of gross income for total debt. Gross income is your total pay before any taxes are withheld. This means that the allowed house payment, including taxes and insurance, for a $50,000 income, good credit borrower is $1166.67/month. But that’s not the full picture. Total debt payments, including the house payment plus credit cards, car payment and any other consumer debt that shows up on the credit report, are limited to 36% of gross income. For a borrower with $50,000 income this total is $1,500. So, if the borrower has a $350 car payment and $150 in credit card payments, that leaves $1,000 available for the house payment. In other words, the total debt ratio can leave the borrower with less than 28% for the house payment, but generally speaking it’s not possible to exceed that 28%.

Let’s assume that our $50,000 borrower has little other debt and can spend the full 28%. Let’s set aside a reasonable amount for taxes and insurance, $2,000/year or just under $167/month. This leaves $1,000 a month for the principal and interest payment - the actual loan payment. For a 30-year Fixed Rate Mortgage today’s rate (Oct. 19, 2007) according to the Freddie Mac Primary Mortgage Market Survey is 6.4%. This allows a loan amount of $159,870.59. For a 15-year mortgage, current rate is 6.08%. This allows a loan amount of $117,898.80. With a 1-year Adjustable Rate Mortgage with a 30-year amortization, you could borrow $163,793.83 - but that rate could adjust upward and the payment would also increase. (Thanks to Bret Whissel for the amortization calculator I used to figure these loan amounts. When rates change, you can use his calculator to find the answers for the new rates.)

With an FHA loan, the borrower can get a slightly larger housing debt ratio of 29% and a bigger total debt ratio of 41%. The 1% difference in the housing payment isn’t a big difference, but the extra 5% on total debt could mean an extra $200 for our $50,000 borrower each month for car payments, credit cards, etc.

The reader was interested in average amounts and I suspect was as interested in knowing what’s advisable as what’s average or allowed. Those are the allowable amounts. Does that mean they are advisable amounts? Not necessarily. A lot will depend on your current situation. If you’re paying high rent, those amounts could represent a drop in your monthly bills. If you’re in one of the, increasingly common, areas where house prices have run up faster than rents, buying may mean substantially raising your monthly payments. Of course, there is a savings component to paying off a mortgage, so if you currently have a good savings plan, you may still be in good shape saving a little less and paying a little higher mortgage than your current rent. The main point to consider is that all those decisions are yours to make in the context of a your own budget and your own financial goals. The banks and mortgage companies are not concerned with whether you have extra money to buy pizza on Friday nights. They are perfectly content with your eating a bowl of beans and rice as long as you can, in theory, meet the house payment.

Technorati Tags: , , , ,

Filed in Financing, Mortgage, Real Estate | Comments (0) »

With a drop in property value can I be foreclosed on?

02-Oct-07

A reader wanted to know whether his 30-year Fixed Rate Mortgage could be foreclosed simply due to a drop in the market value of the property. As with many questions of this type, there are two specific pieces of advice I can give: Read your mortgage or deed of trust and see if there’s a provision allowing the bank to foreclose due to a drop in the market and, if in doubt, consult an attorney. But more generally, let me relieve a little stress by stating that I’ve never heard of such a provision. I think the reader was probably worried because we talk about loans requiring a certain “loan-to-value” percentage. The only purpose of that terminology, to my knowledge, is in actually securing the loan. Once you have the loan, loan-to-value doesn’t come into play unless you want to refinance, take out a second mortgage, etc.

That said, market factors could come into play with any mortgage foreclosure scenario and may be one thing the bank considers. But with falling values, I’d generally expect this to work in the homeowners favor. The thing to remember is that the bank or mortgage company is only concerned with protecting its investment. Foreclosing in a temporary downturn would mean taking a loss and all downturns are temporary in the context of a 30-year fixed rate mortgage. Even if the bank had the right to foreclose in such a situation, without some other factor being involved, it would be a very bad business decision to foreclose on someone whose payments were coming in on time and with no indication of any other problem.

There’s the rub. If the bank thinks it is going to have to foreclose anyway in the near future and it sees a possibility that the market could get even worse, it may foreclose sooner rather than waiting for losses to get worse. But in that scenario, the drop in value is only a factor in deciding when to foreclose - it’s not the actual justification for the foreclosure. The actual justification is the late payments, etc.

Now it is also important to consider why there was a drop in property value. If it is simply a matter of market forces, all of the above applies. If it’s because the property is not being taken care of, that’s a whole different ballgame. Check your mortgage or note and deed of trust, but most of them specify that the borrower will take proper care of the property. Now I can tell you from experience in dealing with actual foreclosures that banks don’t often foreclose for this reason alone either, but it is a possibility. At the least a homeowner should make sure that the yard and exterior of the home are kept in good order, as when mortgage companies sell packages of loans some properties are picked at random for drive-by inspections. A single late payment may also be enough to trigger a similar drive-by inspection and serious exterior problems may lead the bank to get aggressive about inspecting the interior and protecting the property against further damage. If you leave a property vacant and it is falling into disrepair, the bank may also have the right to secure the property and take other actions to preserve it and they may be able to bill you for the expense if they don’t foreclose.

If for some reason you are in a foreclosure scenario and market value has played a role, start with the bank’s normal workout procedure as the last thing they will want to do is foreclose at a loss. If for some reason that doesn’t solve it, the best bet would be, in consultation with an attorney, to adopt every possible delaying tactic to make foreclosure less attractive while catching up the payments and working with the bank on any other issues such as repairs.

Technorati Tags: , , ,

Filed in Real Estate | Comments (0) »

How do I break a real estate contract with no close date?

21-Sep-07

Part of this is really a legal question, so you should definitely consult an attorney unless you can negotiate an amicable end to the contract.

If you what you really want is to break the contract, you’ve already decided that you’re taking a route other than the legal one. The way you break any contract is to break it and take the consequences the contract specifies. Of course, aside from breaking the contract there are two other options:

  1. Seek legal advice to void or otherwise end the contract
  2. Negotiate a release agreeable to both parties

As the buyer in a contract with no close date, negotiating a release might mean relinquishing your earnest money, but at least if you can get the seller to agree to accept the earnest money and sign a release you’ll be done with the deal.

As the seller in a contract with no close date, you’re a little more stuck as a buyer wandering around with a contract on your property could interfere with future sales, so you have more at stake than a few hundred or even thousand dollars earnest money. If you want to cancel the sale because you simply no longer want to sell to this buyer, you should try negotiating a release with return of the earnest money; if it’s worth it to you, you may want to offer the buyer some compensation for their trouble if they will sign a solid release. If you want the sale to go through but the buyer is stalling, you might want to consider legal action to compel specific performance. It’s possible that a court may order a closing, essentially setting a close date. It’s more likely that the court will determine that the absense of a closing date represents a failure to have a “meeting of the minds” and could end up releasing you from further obligation. Of course any decision on legal action should involve an attorney.

Why would the court set aside the contract? A closing date isn’t itself one of the key elements of a contract, but it certainly is a major flaw if a contract doesn’t have one. It may even mean there was no “meeting of the minds”, which is one of the key elements:

…each side must be clear as to the essential details, rights, and obligations of the contract. Putting the deal down on paper prior to signing it goes A LONG way to avoid future misunderstandings and disputes. Meeting of the minds sometimes can be expressed by words spoken or gestures made or can be inferred from the surrounding circumstances. There is no meeting of the minds if: (1) one side is obviously joking or bragging, (2) there is no actual agreement (i.e., the farmer who is selling a gelding and the buyer thinks the horse is a brood mare), or (3) both sides have made a material mistake as to the terms or details of the contract.

From Key elements“>Key elements?

The parties to the contract have a mutual understanding of what the contract covers. For example, in a contract for the sale of a “mustang”, the buyer thinks he will obtain a car and the seller believes he is contracting to sell a horse, there is no meeting of the minds and the contract will likely be held unenforceable.

From Contract law an introduction

I thought surely this must be a pretty uncommon situation until I ran across this from Monika McGillicuddy, New Hampshire Real Estate Broker & Trainer:

Listing agent…”Well uhhh that’s part of the problem…we don’t have a closing date!”
Me…”What?? No closing date…How could that be? No closing date…no contract…not a valid contract in my opinion…BUT why would you have your seller sign a contact without an end/closing date? And what about the addendum…the kick out clause…gotta have a date on that?”
Listing agent…”Well ummm that’s the other problem. It’s a loosely written addendum written by the buyer agent and has no date.”

Me …”A Loosely written addendum…no closing date? How in the world could a professional let that slip by them?”

So guess what? No dates, anywhere and this contract was fully executed by all parties and now buyer # 1 won’t sign a release…even though I know it’s not a contract…I’m not an attorney… just a real estate agent who happens to know contract law.

Now these sellers will need to hire an attorney to help get them out of an invalid contract that they never should have signed to begin with. They are not happy sellers and the listing agent and his broker are both squirming. They are hoping that the seller just plays nice and gives buyer # 1 a little more time, they know if the seller hires an attorney that they will be the first one the attorney points a finger at.

Technorati Tags: ,

Filed in Real Estate | Comments (0) »

How are points determined in a mortgage?

29-Aug-07

A reader asked “How are points determined in a mortgage?” There are actually two questions here and a bit of explanation of the basics of “points” will help answer both. Points, or more specifically discount points, are prepaid interest on a mortgage loan. They are sometimes called a “buydown” of the interest rate. The principal in paying points is that by prepaying some of the interest, the annual interest rate and the monthly payment can be reduced. A point is simply 1% of the loan amount. According to MortgageQuotes.com, “A general rule of thumb is that one full Discount Point will lower your fixed interest rate .250% or your adjustable rate .375%.”

Done right, paying points can allow a buyer to purchase a higher priced home. Since paying points can allow for a higher purchase price, some sellers will pay points for the buyer.

So, the reader’s question could be “How do we determine who pays the points?” or “How do we determine how many points to pay?”

The answer to the first question is that it’s a matter of negotiation. Traditionally there have been limits on buyers paying points on Veteran’s Administration loans and, because VA loans almost created the suburban real estate marketplace after World War II, a lot of the VA requirements were assumed by many people to be legal requirements for all loans. This wasn’t, and isn’t, the case. Who pays points is entirely a matter of negotiation. Though some loan requirements may still not allow the buyer to pay, this simply means that if the seller is unwilling to pay points, the options are to nix the deal or to not pay points at all.

Which gives a big hint as to the answer to “How do we determine how many points to pay?” The answer is, whatever makes your budget work. Don’t confuse points with the origination fee charged by the lender, which is also usually expressed as a percentage of the loan amount. (Unfortunately, the Mortgage Bankers Association’s weekly reports on interest rates now combine discount points and origination fees under the blanket term “points”, confusing the issue.) You can pay points or not pay points and the amount you pay is entirely determined by the trade-off you, as a buyer, want to make between cash up front and monthly payment. Of course, if the seller is willing to pay points, but won’t negotiate on price, as a buyer you’d want to maximize the amount the seller will pay. As a seller, your chief concern is how paying points versus negotiating on price affect your post-tax bottom line. Tour real estate professional, along with your tax professional, should help you put pencil to paper to determine that when evaluating offers.

Since discount points are interest and interest can be tax deductible in some situations, both buyers and sellers will want to consider the tax implications of paying points and of negotiating points instead of an equivalent reduction in price. Specific factors to discuss with your professional tax planner are, as a seller, selling expenses versus reduced sale price and, as a buyer, amortizing points over the loan.

Technorati Tags: ,

Filed in Real Estate, Residential | Comments (0) »

Is a backup offer legal?

20-Aug-07

Since the earlier post on backup offers, several readers have wondered if backup offers are legal. Since I’m not a judge or jury or even an attorney, I can’t really answer that question, but can provide some information on the status of backup offers as a well established real estate contract contingency. If for some reason you feel that a specific backup offer situation is violating some law, your best bet is to consult a local attorney familiar with your own state’s laws and local practice, not a national website. That said, I would respond to the question with a question of my own: Why wouldn’t a backup offer be legal?

With regard to backup offers specifically, I can’t speak to law because I’m not a lawyer, but I can speak to professional ethics. Not only do backup offers not violate professional ethics, in some circumstances they’re actually ethically required. From the National Association of Realtors Code of Ethics:

REALTORS® shall recommend that sellers/landlords obtain the advice of legal counsel prior to acceptance of a subsequent offer except where the acceptance is contingent on the termination of the pre-existing purchase contract or lease.

[Realtor Code of Ethics Standard of Practice 1-7]

The phrase “contingent on the termination of the pre-existing purchase contract or lease” in layman’s terms is “backup offer” and, in fact, “contingent on the termination of [X offer]” is typical of the wording used in actual backup offers. So, if a seller has accepted a previous offer Realtors required to recommend legal advice if another offer comes in unless it is a backup offer - Realtors are ethically free to recommend accepting a backup offer without consulting an attorney.

In Missouri, while I can’t speak to the legality of a backup offer, I can say that as a real estate licensee I am legally required to present backup offers. This is specifically required by state regulation 20 CSR 2250-8.100 (which has the force of law):

Every licensee shall promptly tender to the seller or seller’s agent every written offer to purchase and shall promptly tender to the buyer or buyer’s agent any counteroffer made
by the seller, including any back-up contracts properly identified
as such… [Emphasis mine]

So, in Missouri, whether the backup offer is legal may be open to question, but the real estate agents obligation to present it is not. With national codes of ethics and at least my own state’s real estate license law requiring agents to present backup offers, as an agent I have to proceed under the assumption that they are valid and must be presented. In practice, backup offers are obviously an accepted real estate contract contingency.

Technorati Tags: ,

Filed in Real Estate | Comments (0) »

What is Option Pending on a for sale home?

19-Aug-07

A reader wanted to know “What is ‘Option Pending’ on a home sale?” Presumably this is something he saw on a for sale sign or in an MLS listing. If there’s an option pending on a home he’s actually contracted to purchase then it’s time to slow down.

For your purposes as a buyer, a home with an option pending is about as useful as a home with a contract pending. An option pending means that the seller has committed to sell the home to a buyer for a certain price with a certain deadline. The difference between an option and a purchase contract is that the buyer isn’t obligated to purchase, but merely has the <em>option to purchase</em> at the buyer’s discretion. There may be any number of reasons for this, but if the option is valid the buyer has done something to make it worth the seller’s while, usually paying a price for the option itself.

As a potential buyer, you may want to keep an eye on this property to see if the option expires and the “Option Pending” is removed. You may want to inquire as to when the option will expire, so you can make an offer at that point.

It is also possible to buy the property subject to the option, but the obligation to sell would merely pass to you as the new owner, so the situations where you’d want to actually do this are very narrow. Since most well written options are notarized and recorded, they can cloud the title to the property if breached, so if you purchased a property with a valid option pending, you would have to honor it. If you are using a the property as collateral on a loan, the pending option would likely prevent getting a loan, so even buying the property subject to the option is only a real possibility for cash buyers.

Technorati Tags: , , , ,

Filed in Real Estate, Residential | Comments (0) »