Ask Realty Times - October 15, 2004
by Peter G. Miller
Question: In a nearby upscale subdivision, one of the sales agents owns a particular lot for which she was asking $129,000. My husband and I wished to purchase it in order to build a custom home some eight months later. The agent offered to sell it to us under the following terms: $10,000 down, with the rest financed at 10 percent over 120 months. We had no problem with the down payment amount, but the $1,440 monthly payment was nearly twice as much as we could comfortably afford to carry, so we declined the offer. Are these terms typical for owner-financed improved lots? ("Improved" means paving and drainage in place, sewer and water lines and other utilities in place.) Are the terms offered considered "the norm"? Are commercial lenders' terms similar? Answer: The financing offer you received differs from a typical commercial loan in several ways. - The property was offered to you with 7.75 percent down versus 20 percent with a commercial lender.
- The seller wants 10 percent interest. That compares with 6 percent or so for a 10-year fixed-rate loan.
In effect, the seller's financing offer has pros and cons. Given that a sale price has been established, try this: Speak with commercial lenders and see if you can find financing that works better for you. If the down payment is an issue, ask the seller to take back a second trust so you can obtain 80-percent financing from a commercial lender. Question: I've been living in this house for more than two years. The house belonged to my grandmother who passed away a year ago. We paid rent into her account and when she passed away the money went to the estate. When my grandmother passed away we had an agreement with the benefactors of the will that when the estate settled we would purchase the house. This is all verbal -- nothing in writing. When we were getting our financing, we thought we could refinance the house via a lease to purchase but have run into problems. Is this not possible without a written agreement? Before we moved into the house we did sign a rental contract that stated we would have the option to buy after two years. Answer: Family real estate deals without paper can be difficult. That the heirs are honoring the understanding that you can buy the home is a huge plus. The problem here concerns financing. A lease-purchase option arrangement typically means the payment of a fair market rental plus money that will be a credit toward the purchase if the tenant buys. Lenders increasingly want such arrangements documented and sometimes even require that sellers set aside the extra money toward closing. In your situation the best approach probably works like this: Offer to buy the home at the lowest possible fair market value. Ask the heirs if they would take back some or all of the mortgage. If that's not possible, speak with local lenders about financing. If the heirs will hold financing and you can obtain title, then given appropriate credit, income and time it may be possible to refinance with a local lender down the road. Both the sale terms and any financing must be set out in writing -- once you have an agreement with the heirs have an attorney write a formal sale agreement that can be shown to a lender. Question: My mother inherited a house from my grandmother. My grandfather built the house so we don't exactly have a purchase price to compare to the sale price. How do we determine the capital gains tax? Answer: Your mother is an heir. Most estates -- about 98 percent -- owe no federal taxes so it's unlikely that there are any payments due to Uncle Sam. Your mother has no capital gains to pay until she sells. For details, speak with a tax professional -- and be sure to ask about both state and federal rules. When your mother received title to the property she acquired it on the basis of its "stepped-up" value -- its fair market worth at the time of your grandmother's passing, not its acquisition or construction cost. Thus if your mother sells her cost basis for the property is its stepped-up value. It would be a good idea for your mother to create a file outlining how title was obtained. Include the assessment notices for property taxes, they can provide a conservative estimate of value which may be important in the future. If there was an appraisal done after your grandmother's death that would certainly be valuable. Question: I am buying a second home. It's an investment. Should I consider an interest-only loan? Answer: Borrowers are well-served by considering all loan options, so yes. The advantage of an interest-only loan is a lower monthly cost -- at least up front. For example, you might have a loan that's interest-only for 10 years and then amortizes during the final 20 years of the loan term. Because the loan is being repaid in 20 years rather than 30 years the monthly cost can be steep. As an example: You borrow $100,000 at 6 percent. On an interest-only basis at 5.75 percent, the monthly cost would be $479.17. However, once the interest-only period ends, the monthly cost can rise substantially. If the new rate is 7.5 percent, then the monthly cost for principal and interest over 20 years would rise to $806. But does it matter? If you sell during the first 10 years then higher costs in the future are not an issue. Of course, if the value of the property declines then the picture changes.... Question: I'm interested in buying a house that has some damaged areas, including the pool and the two bathrooms. What are my options in terms of buying it with the damaged areas? Can I qualify for a conventional loan? Do I need to have the damage repaired before I can buy? What are my loan options with the damaged areas? Do I qualify for a better rate if the damage is repaired before I buy? Would I pay extra to buy the damaged property? Answer: Given two properties, one damaged and one undamaged, you would plainly offer less for the damaged home or require specified repairs as a condition of the purchase. Lenders will provide financing on the basis of the sale price or the appraisal, whichever is less. However, if the damage is substantial then it may be that a lender would not want to finance the transaction at all because in the event of foreclosure it may be difficult to sell the home. You need to work with a buyer broker and you certainly need to get a professional home inspection -- if the property has big damage you can see does it also have some that is not instantly visible? Question: I've been having problems with my general contractor. Upon final payment to my general contractor, I asked for a lien release of all labor and material before I paid it. He refuses. Now, I know he hasn't paid the electrical guy his full amount. Now the electrical subcontractor wants $4,000 that he hasn't been paid for by the general contractor. The general contractor has said he's not going to pay the $4,000 and he's going to put a lien on my house. He doesn't care. The final payment is $14,000 -- I'm afraid if I pay it in full, I will have to pay another $4,000 when the electrical contractor is not paid. What can I do? Answer: You could provide a check written so that endorsement settles all claims, requires payment to all sub-contractors and prohibits liens against the property. The contractor can then get his money by agreeing to your terms. See a real estate attorney for specifics.
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