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Q: I'm a real-estate broker. Our area has seen a steep decline in sales volume and prices, though things have begun to pick up lately. I was just called by an agent who asked if the owner of one of my listings would be interested in a sale that worked like this: First, settlement in four months. Second, the buyer will have the right to fix-up the property before closing so it can quickly be re-sold. Third, the purchase would be made "subject to" the mortgage. I'm wary, what would you say to my client?
A: I'd start by saying that a delayed settlement poses big problems. A buyer who is qualified today may not be qualified in four months if rates rise, home values fall, a job is lost or financial circumstances change, thus your owner would be best served by a quick closing.
Fixing up a home before settlement sounds logical and alluring except that you don't know what changes will be made to the property. The "right" to fix up the property is not the same as an obligation to make a specific list of repairs or spend a particular dollar amount. No less important, you have to wonder how the repairs would be treated if the transaction falls through. Would your owner have to pay for the repair costs?
If the buyer wants to quickly re-sell the property, that's great -- let him buy it. If settlement is delayed four months that means your owner is paying the mortgage for that period and not the buyer. Meanwhile, rather than fixing up the property it would make more sense for the buyer to flip the contract before closing and thus avoid the costs of settlement.
Buying a property "subject to" the mortgage means that the current loan would be kept in place and the purchaser would make payments. However, what happens if the buyer doesn't make payments? In the event of default your owner -- and not the buyer -- would be responsible for repayment of the debt. Whether in default or not, if the lender finds out it's likely that the loan will be called, but how can your owner repay the debt without title to the property? No less interesting, imagine that the first buyer sells the property and the second purchaser also buys "subject to" the mortgage. Your owner would remain responsible for the mortgage.
If the buyer has an interest in the property then no doubt your owner would sell it for the right price, the right terms, a deposit up front, the use of your sale agreement form and closing within a reasonable timeframe. Otherwise, I'd say no dice.
Q: Can I back out of an offer to sell my home if a better offer comes along?
A: The whole idea of a written real-estate agreement is to assure that both buyer and seller perform as promised. For instance, how would you feel if there was no Buyer No. 2, and Buyer No. 1 changed his mind? Just a guess, but you might be interested in keeping the deposit.
Buyers have no deposit to keep, but they can sue for damages and for "specific performance" in most jurisdictions when a sale agreement is broken by an owner. And if you do break the sale agreement for reasons that are not allowed by the contract the damages could be heavy if the buyer has given up a home and has no place to live.
You need to have your existing agreement reviewed by an attorney. Most agreements today are initially contingent arrangements dependent on such things as the availability of certain financing or the completion of an inspection "satisfactory" to the buyer. It may be possible to void the agreement without penalty if a given condition has not been met.
It may also be possible to work out a mutual arrangement with the first buyer to end your agreement. Perhaps some cash to the purchaser in exchange for an end to the contract would help.
Also, think about the brokers who put together the first agreement. Take a look at your listing contract -- it likely says the brokers are owed a fee when a ready, willing and able buyer has been found.
Lastly, imagine if you dump the first buyer and the second buyer never closes. You could then wind up with an unsold home -- and lots of costs and fees.
Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to firstname.lastname@example.org.View Foreclosure Article Archives
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