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Wednesday, April 12, 2017

What are some unique things that I may not have asked about as the Seller?

 Understanding the Real Estate Process from A – Z – A Seller’s Guide to Real Estate – Part 12

This is the twelfth post of a series in an FAQ format that I hope will help would be sellers better understand the real estate process that they are about to go through. There will be a follow-on series for real estate buyers.

FAQ – What are some unique things that I may not have to asked about as the Seller?

There are an infinite number of variations that could occur to the process of selling your home. The 11-post sequence that was just finished took you through a fairly straightforward sale. That is not always the case. I have listed and expanded upon a number of variations below, in no particular order.

Question – The Buyers’ offer says that they will be using an FHA/VA/USDA RD mortgage; how does that impact me?

Conventional mortgages are the norm for homes above $400,000. In Michigan most buyers of properties that are listed for less than $375,000 will end up using an FHA-backed mortgage, but some may use their VA benefits and do a VA-backed mortgage. A few may take advantage of the USDA’s (Yes, it’s the same USDA that inspects meats) Rural Development (RD) loan program. Each area of the country can have different FHA loan limits, with California (of course) having the highest at $625,000. You can find the FHA loan limit for your area by Googling FHGA Loan limits for (your county and state goes here).

Each of these loan guarantee programs has its own set of rules and qualification requirements, but all three impose special requirements on the seller that are different from the requirements of a conventional loan. I will expand on them further in the series for Buyers. Here I will just look at the things that the Seller needs to be aware of that are different from a conventional mortgage.

The differences are mainly in the appraisal. All mortgage loans require an appraisal, so that the bank can assess the protection that the home provides as a protection against the risk involved in making the loan. You house is the asset that secures the loan and banks prefer to have assets backing the loan that can be sold readily and which carry sufficient value to make sure that they get their money back if it needs to be sold after a foreclosure. For FHA/VA/USDA mortgages the loan programs require the appraisers to also assess the health risk hazards that the property might have, such as electrical circuits that are not properly protected against shock, if they are in areas like the kitchen or baths and trip and fall hazards, such as stairs of more than three steps without handrails. They are also required to peek into the attic to see if there is visible evidence of mold in the attic space.

Because people know that the FHA/VA/USDA appraiser will be looking for those things the appraisals are often called an inspection; however, they are not really inspections like the buyers will have done by a qualified home inspector.  If the FHA/VA/USDA appraiser finds a health or hazard issue they will write it up and the Seller MUST have the issue remediated. There is a provision to have the work re-inspected by the appraiser before he/she will sign off on the appraisal and the mortgage can move forward. Many times the appraiser will charge for that return visit and the Seller may be asked to pay a nominal fee for that service. On most VA loans a termite inspection is also required. On a VA purchase loan, borrowers in all but nine states are not allowed to pay the pest inspection fee. Check with your mortgage company or ask your Realtor® about whether you have to pay for that inspection. Obviously, if they find termites, you’ll be on the hook to remediate that, too. 

For more on these different mortgage options just Google each one. The added requirements and risks involved in the FHA/VA/USDA mortgages have caused some Sellers to market their homes for sale with Conventional mortgages or cash only and that is their right; however, it will significantly reduce the buyer pool and most likely prolong the selling process.

Question – The Buyers have offered me a Land Contract. What is that all about?

Land contracts are sometimes called Seller Financing, because that’s really what it is. You, the Seller, are assuming the role of the mortgage company and financing the sale your own house to the Buyers. Usually a hefty down payment is required, which may be all that you need right away anyway; and the “loan” that you are making to the Buyer is financed at a rate that is a little above what they might get at a bank. Why do they do that? Usually because they have damaged their credit to the point where they can’t qualify for a mortgage. Maybe they had a short sale, a foreclosure or a bankruptcy in their immediate past. For whatever reason they are now asking you to take the chance on them and be the mortgage lender for this sale. The Land Contract is just that – a contract between you and them that defines their obligation to pay you back and your rights to repossess the property through foreclosure if they don’t pay you back. This was a quite popular option just after the Great Recession, but has settled back into a seldom used option for Buyers. See this NoLo web site for a good tutorial on Land Contracts.

Question – I have to move to my new job and leave my house empty before the closing is scheduled to happen. What should I know about that?

There are many reasons that a house may sit empty while wait for a sale or for closing. Perhaps it is the need to move to a new location for job reasons or perhaps the property is in an estate of someone who had passed away and is now sitting empty.  Whatever the reason, you as the Seller (maybe the executor of the estate) need to understand a few things that are different. One of the biggest is that the homeowners’ home insurance policy that covered you or them (the deceased) does not apply if the
property is left empty. If something like a break in or even a fire where to happen and cause damage, the property would not be covered under those old policies. There are special home insurance policies available to cover empty houses and you should have one of those. They are more expensive than regular homeowner’s policies; but, there is also more risk involved, especially for break-ins. At the height of the recent recession many homes were broken into by copper thieves who cut out all of the copper plumbing, and sometimes even the electrical wiring, to sell to scape metal dealers.

In the wintertime, any house that will sit empty should also be winterized. The house’s water will be shut off and the plumbing drained so that if the heating system fails for any reason the pipes won’t freeze. That service usually casts between $300-500 and is the Seller’s responsibility. If a Buyer makes an otherwise acceptable offer, a point of negotiation is determining who will pay to have the place de-winterized and re-winterized for the home inspection. It is reasonable to ask the Buyer to pay for re-winterizing it, but the Seller is usually responsible for making arrangement to have the place ready to inspect, which could also involve turning back on the utilities if they had been shut off (not a good idea, by the way). It’s not worth queering the deal over this small amount.
It is also the Sellers responsibility to keep the empty property maintained while it is for sale and while awaiting the closing. That can involve snow/ice removal in the winter and grass cutting in the warmer months.

Question - We couldn’t reach a final agreement on a contingency or the deal fell through and now the Buyer wants his Earnest Money Deposit (EMD) back. Do I have to give that back?

In most circumstances the answer is “Yes”, you do have to return the EMD. That money was likely being held in a special escrow account at the Buyers agent’s office. The Buyer agent will present a form to be signed that specifies the disposition and distribution of the EMD funds. Remember all of those contingencies that we discussed in an earlier post; well you probably just hit one that could not be resolved to the Buyers’ satisfaction and the terms of that contingency undoubtedly specify the Buyers get the EMD money back.

One situation that can lead to you getting to keep some or all of the EMD is if the Buyer, having removed all other contingencies just gets “Buyers’ remorse” and backs out of the deal. I have had that happen once in my career. I represented the Buyer in that case and he lost over $4,000 by backing out at the last minute with no valid reason that met the terms and conditions of the Purchase Agreement contract. Did he have a reason? Sure, but that reason wasn’t covered in the terms of the contract. In most cases the listing real estate company may split the forfeited EMD with the Seller. The forfeiture of the EMD is view as compensation to the Seller for having removed his property from the market for some period of time.

Question – What happens if I refuse to fix something that is found during the home inspection and refuse to offer any monetary concession for it? 

Let’s assume that you aren’t balking over some minor thing that cost less than $1,000. Just do those or offer the Buyer a concession at closing. For bigger issue, like, maybe, the Buyer asking for a new roof or some other repair that is going to cost thousands; you may wish to get a few quotes for the work and average them, so that you can offer the Buyer a compromise where you pay for a part of the work and the Buyer pays for a part (usually 50-50). Just flat out refusing to negotiate with the Buyer on the needed repair is likely to be a deal breaker and result in the deal being cancelled.

In addition to the deal falling apart, you would now know about an issue with the property that you may not have known about before and you may have to disclose it on your Seller’s Disclosure Statement. If the home inspection revealed extensive mold in the attic, you can’t just go “Nah, nah, nah, I don’t hear you” and not disclose that known fault. There are very specific questions on that disclosure form that address those things and you would now be committing fraud if you didn’t disclose it. The best course of action is to try to negotiate some split with the Buyers; but you really have to go ahead and do the mold remediation anyway. 

The demand for a new roof is a bit more subjective. The reason that Buyers ask for that is usually because their home inspector told them that a new roof will be needed soon. You might get a roofing company or two to look at your roof and let you know if they think it needs to be replaced immediately or can last a few more years. The same applies for Buyer demands for replacement of the mechanicals (heater and hot water tank). Yours may be old, but they may not necessarily need to be replaced, if you have maintained them well. Show the Buyer the recommendations of the companies that you contacted and negotiate.

Question - The Buyer is not putting any money down on the sale, should I be concerned?

Not necessarily. There are still a few mortgages available to Buyers, under the VA and USDA programs that have zero down payments. They will still have some Earnest Money in the deal, but that is often very low, too. The programs themselves are very valid and do work. What is hard to properly evaluate is the Buyers themselves. You may want to look a little closer at the Buyers qualifications for those programs, to make sure that he/she isn’t going to get a few weeks into the deal and get turned down by the VA or the USDA. VA buyers should already have their VA qualification documents, before they make a VA-backed offer. Your agent and their agent should have a good conversation about what steps they’ve already taken to meet the requirements.

Question – My property taxes are due before closing, should I go ahead and pay them or wait?

This is a 6 of one, half a dozen of the other question. The end result will be the same in terms of what you get out of it. The title company will pay any taxes that are due out of the proceeds and they will refund any taxes that you have paid for which you deserve a refund. If there is any penalty that would result from you not paying it now, it doesn’t make sense not to pay it. If there is no penalty, then it may not make sense to you to take money out of the bank only to put it right back in within a few weeks. It’s up to you. Listen to the advice of the title company on this one.

Question – I’ve got some furniture and other items that I don’t really want to move. How can I sell those items to the Buyers?

You can certainly put a price on them and see if the Buyers are interested in having them. Many times your taste and the taste of the Buyers may be completely different, so don’t be offended if they don’t want your stuff. Call Salvation Army or Goodwill. They’d probably love to come pick up your stuff. Any deal that you make with the Buyers for furniture or other personal property items (lawn mowers or patio furniture) is between you and them and you should negotiate how they will pay for the items that you are leaving for them. That is all outside the real estate deal and outside of the closing.

Question – What if I decide not to sell and want to rent it out instead?

That’s certainly up to you. You should probably have your Realtor do a market analysis of the rental market in the area, so that you can determine a fair rental rate to ask for the place. You may also wantHere’s an interesting bog post by one such company - Propertyware. Accumulating rental properties is a great way to build wealth, but only if you know what you are doing.
to look into companies that can manage the rental property for you and take care of upkeep on the property. Some companies also do the vetting of potential renters for you, saving you the headache of trying to analyze their credit report and do background checks.  If this is one of many rental properties that you own, you might look into a property management firm (if you don’t already have one) or property management software that help you with the financials,

Question – What are the tax consequences of selling my house?

First, I’m not a tax expert, so I’ll refer you to your tax person. For most Sellers, this sale is probably not that of the last home that they will own; so, they will go on to buy something else. Depending upon whether they are moving up the property ladder or downsizing the tax consequences will be different.  The gain from selling your home is treated like a capital gain for tax purposes and there are all sorts of rules about that which only a tax expert understands. Here is a good article by lawyer Stephen Fishman on the NoLo site about avoiding capital gains taxes on the sale of your home.

Question – Am I still on the hook for defects that the buyer may find in the property after the sale has closed?

You may be. It depends upon whether you knew about the issue and failed to disclose it to the Buyer on the Sellers’ Disclosure form. You don’t get a free pass by saying, “Oops, my bad. I forgot about that.” The Buyers lawyer will have a field day with that excuse. It is also very likely that the Buyers’ lawyer will interview friends and neighbors to determine how aware you were of the issue and how long you knew about it before the sale. Situations like this lead to charges of fraud and cold result in both civil and criminal lawsuits and charges. If you know that there is an issue the rule of thumb is disclose, disclose, disclose. That is not to say that there may be issues in the property that you honestly were unaware of when you filled out the Sellers’ Disclosure. That happens a lot with mold issue. Very few homeowners go up into their attic spaces looking for mold, but the inspector will and may find some spots of mold. It is possible that the Buyers didn’t have a very good inspector and they don’t discover the mold problem until later. In that case you would seem to have a reasonable defense against charges of fraud. Consult your attorney!

Question – My home was foreclosed upon a few months ago and we are in the “redemption period”. How does that impact the closing?

For one, the company that now owns the house due to foreclosure undoubtedly had to agree to the sale at the sale price. The closing may be interrupted while someone takes a check to the foreclosure company for the amount that they agreed to take for the house (i.e. the redemption price) and picks up a receipt and release of the property. Once those documents are brought back to the closing the closing can proceed. Sometimes this process can be done via Faxes or Emails and wire transfers.

There are doubtless many other scenarios that could generate questions from the Seller. I hope the few that made up this series of posts helped the reader understand better the process involved in selling a house and the Sellers roles in that process. Next, I will post a similar series looking at the process from the buyer’s perspective. 

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