DEAR BENNY: We live in California and own a second home within five miles of our primary residence. This second home has been used as a rental, initially to persons we were not connected with in any way. For the past 10 years, two different sets of relatives who were in need of a new start in life lived in the home.
Each set of relatives lived there at different times. The current set has been there five years. The rental contract is for fair market value, though much less than the mortgage. Obviously, we have been paying the difference — at a loss.
A few years back we obtained an interest-only loan on the home (prior to the current relatives moving in). We had the intent of selling the home within a couple of years. Now, the market is where it is. We are extremely upside down in the value of the home with no equity whatsoever.
Financially, we are able to make the payment, but both my husband and I feel that we are just throwing money away each month. We would like to know what our options could be regarding this home.
We have heard from our tax person that if a short sale is done we could have a huge tax burden, which we cannot afford at this point in our lives (my husband is retired). We have excellent credit but feel that it would be extremely difficult to get a new loan because of the value and the fact that I am not working at this time.
We have actually considered moving into the home ourselves and living in it for the required number of years and then selling it, but we are unsure how this would be beneficial. –Kathryn
DEAR KATHRYN: It will not be a consolation to you, but you are not alone with this problem. Fortunately for you, however, you still can afford the monthly payments.
There are several options available. But under no circumstances should you decide to walk away from the house; that’s merely burying your head in the sand, and will have serious financial consequences for you.
1. Deed in lieu: Some lenders will allow you to give them the deed. This is "in lieu" of foreclosure. It will impact on your credit, but not as much as some of the other options below.
2. Short sale: This is an option whereby the house will be sold for less than the outstanding mortgage. Discuss this with your lender; sometimes you may not have to pay the entire difference between the sales price and the mortgage balance. However, this will impact your credit rating. Your tax adviser is correct, however. Because this is not your principal residence, you will have to pay income tax on the canceled debt. I call it "phantom income."
3. Bankruptcy: You must discuss the pros and cons with an experienced bankruptcy attorney. However, filing for bankruptcy relief will not impact your credit as much as allowing the property to be foreclosed upon.
4. Foreclosure: In my opinion, this is the absolute last resort.
But here’s a suggestion: Before you proceed along any of these paths, contact your lender and discuss your situation with them. It is often difficult to find a person with authority, but you should try as best you can. You may be able to work out some arrangement with the lender such as a lower interest rate, a loan modification, or a moratorium on making payments for several months.
It’s worth spending the time before it’s too late.
DEAR BENNY: We have a purchase agreement with buyers that states they will close, as a cash sale, on or before a specific date. This agreement was signed one month before that closing date.
Shortly after the agreement was signed, the buyers decided they wanted to get into our home before closing and offered to put funds in their broker’s account and to give us cash upfront to move out. We proposed back that they give us the money instead of the broker. The upfront cash would go toward closing, once we got to closing. Because our things were going into storage, we wanted to be sure that we actually closed before we moved out. We wanted upfront cash money that was to be nonrefundable if they walked away from the deal.
We presented our proposal on a Friday and gave them until Monday to get back to us. That was a couple of weeks ago. They have never responded to our proposal. It has been pulling teeth to get them to move forward with a closing date in writing and they must also sign off on inspections.
A week before the scheduled settlement date, we received a call from our Realtor who told us that the buyers’ Realtor has not been in contact with the buyers for a few days now. We have canceled our movers because we have no agreement in writing as far as a closing date and they never signed off on the inspection items.
The only signed contract I have states a specific date as the date for closing. The last we heard from the buyer’s agent was that the buyers were working on getting their funds from overseas by yesterday, which was two days before the scheduled settlement date. That has not been confirmed.
We are wondering what happens after the settlement date passes and we have nothing further in writing. I am very disappointed in my Realtor/broker considering that the Realtor fees on the sale of my house are very high. This is been quite the roller coaster and no one seems to be sharing any answers. I am tempted to get an attorney to explain it all to me, but that would be yet another expense. –Pam
DEAR PAM: My column will run long after your closing date has passed, so I hope that all worked out well for you. However, your question is important. What happens when a buyer decides — for whatever reason — not to complete the transaction and go to settlement?
Different states have different laws and procedures, so my answer has to be general in nature. However, from my experience, most form real estate contracts — especially those prepared and used by real estate brokers and agents — spell out very clearly what happens in the event of a buyer default.
First, you have to determine whether the buyer really is in default. Are there any contingencies in the contract, such as obtaining a satisfactory home inspection, getting an acceptable appraisal, obtaining the necessary financing or reviewing the condominium or homeowner association documents?
Clearly, a buyer does not want to lose his/her earnest money deposit and will take the position he/she is excused from going to settlement (escrow) based on one or more of these contingencies.
So you have to be very careful to review the situation — and the real estate contract — before calling the buyer in default.
If there is a default, typically the seller has one of three remedies: (1) keep the earnest money deposit; (2) sue the buyer for damages; or (3) sue for specific performance.
1. Keep the earnest money deposit. Usually, those funds are held in escrow by the real estate broker or by the settlement (escrow) company. You have to understand that when money is held in escrow, the escrow agent cannot unilaterally release the funds to either side unless the parties sign a release or a court of law issues an order. So it is not always easy to access the deposit.
Furthermore, many real estate contracts specifically state that the real estate agent is entitled to a portion of the deposit not to exceed what the commission would have been had the transaction gone through.
2. Sue for damages. You lost the sale and finally resold it for $50,000 less than the first contract price. That’s one of your damages. Additionally, you had to pay additional real estate taxes, mortgage payments and insurance, and those costs also can be included in your lawsuit.
But litigation is time consuming, expensive and always uncertain. And unless your sales contract specifically states that the prevailing (winning) party can get attorney fees awarded by the court, you will have to pay your lawyer out of your own pocket.
3. Sue for specific performance. Here, you tell a judge, "The buyer signed a contract and has the money, so please order the buyer to go to closing." Once again, my cautionary comments about litigation are applicable here also.
Bottom line: Unless you really want to spend a long time (and potentially a lot of money) in court, try to negotiate with the buyer about releasing all or some of the earnest money deposit. And further to the bottom line: Sellers should try to get as large a deposit as possible, at least 5 percent of the purchase price.
