DEAR BENNY: We bought a house (built in 1965) on Dec. 18, 2006. Six days later, heavy rains flooded a storage-room area on the lower level. We called the real estate agent who claimed that the prior owners had no knowledge of any water problems and suggested we call a handyman, who came over and did some work. The room has continued to flood whenever there is a heavy rain. Now that we are very aware of the problem, there is evidence that the prior owners also knew, but did not disclose it. Is it possible to bring legal action now or is there a statute of limitations on this type of thing? Also, how difficult would it be to prove the prior owners knew? –Nancy
DEAR NANCY: Every state has what is known as a "statute of limitations," which means that after the statutory period of time, you can no longer file a lawsuit. In some states (such as in the District of Columbia where I practice law) it is three years; it will vary from state to state. You should check with a local attorney to determine what this period is in your state. And although you discovered the problem on Christmas Eve, if you are still within time, I would treat the day you bought the property as your target date.
However, you raise a key question: How difficult would it be to prove that your seller knew about the problems? If you can find repair or plumber bills during the time your seller owned the property — or if some of your neighbors are willing to testify that they saw plumbers in the property on several occasions — that may be strong enough to take the matter to court.
But litigation is time consuming, expensive and — more important — always uncertain. Perhaps you would be wise to chalk this up to a bad learning experience and correct the problem on your own. You may be able to get your insurance company to assist with some of the repair dollars.
Did you have the house inspected before you went to closing? If so, you may have a case against that inspector.
DEAR BENNY: My daughter and her husband own a small, unoccupied, well-maintained home that has been on the market since October 2007. They have received no reasonable offers to buy and have been under a great deal of pressure from the Realtor to reduce the price. They did reduce it by $20,000, but still no offers have been made anywhere close to the asking price. In February they took the house off the market and listed it with a rental agency. Among the interested parties was a rent-to-buy offer. They are not sure how safe this situation is, but feel that someone who may purchase the home in two years would take better care of it than a short-term renter. What is your advice on such an arrangement? –Dinah
DEAR DINAH: Clearly, having a rental income and having someone live in the house is better than having no rent and a vacant property. There are two kinds of "rent to buy" arrangements:
- Rent with an option to buy. Here, you set a price that the tenant will buy at the end of the stated term. There is no guarantee, however, that a sale will ultimately take place. Furthermore, this is a gamble on both sides. The property may be more valuable two years from now, but you will be selling at the price you set today. Alternatively, the market value may decrease, in which case your tenant will either want to negotiate a new price or walk away from the transaction. In recent years, to make the deal attractive and to give an incentive for the tenant to buy, many landlords are giving some credit for rent paid toward the ultimate sales price.
- Right of first refusal. Here, no price is set, but at the end of the term, you try to sell the property and when you get a valid offer, your tenant has the right to match that price.
In either situation, you need a local attorney to assist you in drafting the legal documents to reflect your agreement. Your real estate agent can — and should — check out the prospective tenant, to make sure that he or she can pay the monthly rent, and that all references have been carefully checked and confirmed.
So long as you get a decent tenant, I agree that if the tenant ever plans to buy your property, he or she may take better care of it.
DEAR BENNY: What rights does a buyer have to walk away from a transaction if the seller does not comply with the terms and conditions of the contract or is in default? –Dan
DEAR DAN: The answer should be spelled out in the sales contract. Typically, from my experience, buyers have two options when their seller refuses to complete the sale. They can sue for specific performance, which means that a lawsuit is filed asking the court to force the seller to sell the property to you. Or they can file suit for damages — such as the loss of the bargain, and any out-of-pocket expenses they incurred in getting ready for settlement. If the buyers ended up buying another house, and had to pay a higher interest rate than they would have with the first house, this may also be included in your list of damages.
And in many cases, depending on the facts, the judge may award damages as well as specific performance. If your sales contract provides that the prevailing party in litigation can recover legal fees from the losing party, the judge may be willing to order that you get your reasonable fees. Otherwise, each side pays its own attorneys.
DEAR BENNY: In our covenants it is clearly stated that no business vehicles are allowed to park in driveways through the night. Can you tell me if that restriction applies to "official sheriff’s cars" that are driven home by officers after work? –Tricia
DEAR TRICIA: That’s an interesting question that ultimately only a judge will be able to decide. My opinion, however, is that this does not violate your legal documents.
First, a strong argument can be made that when the officer drives home after work, he or she is not on official business. I believe that the purpose of the covenant restriction is to prohibit unsightly trucks and other business cars from parking in driveways. I don’t believe that a sheriff’s car is an eyesore in your community.
But more importantly, why are you objecting? I would think that you and all of your neighbors would be pleased to have a police (sheriff’s) car parked overnight in your area. It clearly is a potential deterrent against crime and vandalism.
DEAR BENNY: We own a $400,000 condo free and clear. We rent it out at $1,350 per month with HOA fees at $336 per month and real estate taxes at $125 per month. We have a very good renter. We will need the funds from the sale of that property at retirement in the next year or two, but would like to avoid the tax liability that the sale will incur. We have been advised to sell by carrying the loan and thus receiving both principal and interest payments with a contract that assures that the buyer cannot refinance and pay off for five years. What size down payment do you recommend? And is this a good idea? –David
DEAR DAVID: You are discussing what is known as an installment sale. Because this is investment property, you are not eligible for the up-to-$500,000 exclusion of gain that married couples who file a joint income tax return can get for their principal residence ($250,000 if you file a separate tax return).
If you sold the house and got all of the cash at settlement (also called "escrow" in western states), you would have to pay capital gains tax on your profit. Currently, the federal tax rate is 15 percent. Additionally, you may have to pay a state capital gains tax and you may also have to recapture any depreciation that you have taken over the years.
If, on the other hand, you take back financing, you will pay tax on the interest you receive (at your ordinary income rate), but there is a formula by which you will pay capital gains tax. According to the IRS, "An installment sale is a sale of property at a gain where at least one payment is to be received after the tax year in which the sale occurs. You are required to report the sale on the installment method unless you ‘elect out’ in the year of the sale. If you elect out, you report all the gain as income in the year of the sale … Under the installment method, you include in income each year only part of the gain you receive, or are considered to have received. Use Form 6252, Installment Sale Income, to report installment income each year. You will need to file Form 1040, and may need to attach Form 4797 and Form 1040, Schedule D."
How much of a down payment should you take? I recommend a minimum of at least 20 percent of the purchase price. You want to make sure that your buyers put down enough money so that they will be reluctant to go into default.
Talk with your accountant for specifics involving your transaction.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.
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