> Columnist Ask Realty Times
Ask Realty Times - April 16, 2004
by Peter G. Miller
Question: We have had three buyer contracts fall through and are now working on a fourth. Two backed out and one could not secure a mortgage even though they were "pre-approved." What is the broker's responsibility for this situation? Answer: Real estate transactions involve a variety of risks. You have had four parties offer contracts on your property, but each agreement has been contingent on something. In three cases, so far, buyers opted not to complete the transaction. You certainly can't fault the broker's marketing effort -- the broker continues to find individuals with an interest in the property. Moreover, it's not unusual for contingent agreements to fail -- that's why homes are shown as being "under contract" rather than "sold" until closing so that marketing can continue. As to the "pre-qualified" buyer who could not get financing, the "pre-qualification" and "pre-approval process" do not assure a loan. For example, it may be that the buyers have great credit but the house does not properly appraise. Even though the buyer has been "approved" for a given amount of funding by a lender, other factors will end the loan. What might be useful is this: Sit down with the salesperson and his or her broker and review each transaction. Is there a common reason each has failed? If yes, what steps can you take should buyer #4 fall through? Or, is it just circumstances? Sometimes bad things happen to good sellers. Question: I have a rental property worth $240,000. I owe $180,000 and pay $1,400 per month. I can rent the place for $1,800 per month, or $4,800 more than principal, interest, taxes and insurance. The $4,800 is approximately the amount money I need to maintain the property. My market has been one of the worst performers in the past two years as compared with such locales as San Diego and Washington. At last report real estate values increased approximately 2.3 percent in 2003. Does it make sense to keep a rental with only a 2.3 percent increase expected (future performance based on past performance), or should I sell and invest in equities, bonds and gold? Answer: Past performance does not guarantee future results and may be irrelevant. Think how well Enron did for several years.... As to what happened in other markets, all real estate is local. It may be that while you have an ability to buy an investment property in your market you would not have the same ability in San Diego or Washington -- or it might be that investment properties in those locations would not produce a positive cashflow. But let's look at that 2.3 percent. That is 2.3 percent of the market value, not 2.3 percent of what you invested -- unless you paid cash for the property. Let's say you bought for $200,000 with 10 percent down. That gives you an initial mortgage of $180,000. The property is now worth $240,000 -- $40,000 more than the purchase price before marketing expenses. If you paid $20,000 in cash for the property, have no out-of-pocket costs and make 2.3 percent appreciation on a value of $240,000, you are increasing your wealth by $5,520 before taxes and inflation -- that's a return of 27.6 percent on your cash investment. I have no idea how equities, bonds or gold will do in the future -- or real estate. But as a patient investor I see nothing unattractive with your current results. Question: I am 24-years-old and just bought a house. My first investing plan was to purchase a 2-4 unit building, but we did not find one that would accommodate our needs as a growing family. How long should I wait before getting another loan for an investment property? Our total income is about $40,000 a year and our monthly debt with the new house is now $1,300. Will a lender provide a loan with that debt-to-income ratio? Answer: You have a really good approach and should be applauded for a sensible perspective. How much of that monthly debt is for your home and how much is for credit, cars and such? The less consumer debt the better, and solid savings are a plus. How much you can borrow will depend on how much equity is available with your home, your income, credit standing, monthly debts -- and how much debt you want to assume. There are other possibilities to consider: After you have owned for awhile speak with local brokers regarding the rental market for your property. If rental rates will cover all your costs or most of them, perhaps you could rent your current home and then buy another. Alternatively, perhaps buy a 2-to-4 unit property rather than another home. You'll qualify for home mortgage rates if you're an owner-occupant and the income from the rental units will off-set costs and help you qualify for financing. Be aware that there is risk -- for instance, you could have vacancies, repairs, damage, loss of a job and other adversities. So plan with care and keep your options open. Question: Can you tell me under what conditions one can cancel a 90-day buyer brokerage agreement before the end of the term? We are dissatisfied with our agent. Answer: Part of life is that not everything works out as planned. Even with the best of intentions and good skills, sometimes folks don't mesh. Is there some reason why you're unhappy? Perhaps sit down with the salesperson and his or her broker to review what has happened so far and see if something can be worked out. Some buyer brokerage agreements have clauses that allow for early termination without penalty. If there is no such clause, sit down with the salesperson and broker. Professional time is valuable, so if there is no better solution a mutual agreement to end the arrangement may work best for everyone -- especially if you're willing to pay reasonable broker costs to date.
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