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What happens if a home sale falls through?

OCT 01, 2004
Realty Times
 

Question: My home was to supposed to close Sept. 30th. The property was inspected and needed four minor repairs, all of which were made by a contractor. Now, with five days to go until closing, the buyer has backed out of the contract because he cannot get a loan due to a credit problem. I had already packed everything and purchased a new home. I think the credit problem should have been caught much sooner. What action can I take?

 

Answer: When homes are sold with financing there is a need to assure as quickly as possible that the buyer can qualify for the required mortgage. Therefore, there is usually a requirement to apply for a loan within a few days to quickly secure a loan, thus minimizing damage if financing is unavailable for one reason or another.

In this case you proceeded with the presumption that your home would be sold. In practice, not all contracts evolve into property transfers and when transactions fall through there can be lots of debate and dispute.

Read your sale agreement. Does it have a clause saying that if the borrower cannot get required financing that the transaction is off and the deposit must be returned? Or does it lack a financial contingency?

See if there is another loan source which might allow the transaction to be salvaged. If that doesn't work, and before releasing the deposit, have a local real estate attorney review the agreement and the borrower's efforts to obtain a loan. It may simply be something that could not be worked out despite a good faith effort by the purchaser to get a loan. Or, you may be advised that you have a right to keep the deposit.

 

Question: We purchased an older home (1976) six months ago. During the disclosure process, no major problems were listed. We bought the house "as is" because it needed a lot of updating (newer appliances) and what we thought was simply cosmetic work.

With Hurricane Frances, the downstairs flooded out. One of our neighbors informed us that the house had flooded before -- something we were never told, nor does our broker remember this item being disclosed. We are now faced with a large flood deductible and a lot of work (time, hassle, smell, etc.) to replace all the drywall and furniture in the downstairs as well as the half bath. Do we have any recourse against the seller or the seller's broker?

 

Answer: None of this is easy given the size of your loss, but let's look at some questions:

Did your buyer broker mention that you were in a flood zone, if that's the case? Have other local homes flooded in the past? Did the insurance broker discuss coverage limitations and premiums? Is it possible the neighbor is wrong and that the home did not previously flood?

 

Did you get a home inspection? Even when a property is bought "as is" it is still possible to obtain a home inspection to better understand the home's condition.

 

Did you get a "CLUE" insurance report for the property from ChoiceTrust.com which details property claims during the past five years?

Would you want to pursue the seller if there had not been a hurricane? What if there is a hurricane in 50 years? Would the sellers still be responsible for the flood damage?

 

You were prudent and had a buyer broker and insurance coverage -- but even such assistance cannot stop the forces of nature. Or eliminate all risk.

 

Question: We are trying to refinance because we have many credit card debts and poor credit. We found someone who said he could get us a loan. He sent papers in the mail for us to sign and return back to him the next day.

The papers look like the paper you sign when you are closing and a lot of things were left blank. For instance, he didn't check if the rate is fixed or variable.

 

We are supposed to get this loan at 9.5 percent rate for 3 years and that's not even written in. We are in such a bind we are just going to sign anything and get it back to him and then he can fill whatever he wants to add in. Is this the right approach?

 

Answer: This could be the greatest loan on earth in your circumstances, but if you feel uncomfortable then why sign anything?

Why not speak with more lenders? Why not speak with a local community group that offers credit counseling? Why not speak with local real estate brokers and get their lender recommendations? Can your current lender help?

 

If your credit is truly bad, then you need to ask why that is. Have you experienced a medical expense, job lay-off or similar problem? Or, is it just over-spending? It may be that refinancing will not resolve the problems you face, so before going further sit down with a financial professional and see what needs to be done.

 

Question: What's happening now with the capital gains waiver? Has the requirement that you must reside in a home for two of the past five years been relaxed?

 

Answer: I'm not sure if "relaxed" is the proper term, but the rules have plainly been clarified.

New regulations were issued August 16, 2004. The complete list can be found in the Federal Register. (See "page 50302" -- use quotes with your search term)

The final rules provide a series of "safe harbors" which allow a seller to obtain a full capital gains benefit under certain circumstances such as:

  • Death.

     

  • A job loss which qualifies you for unemployment compensation.

     

  • A change in employment or self-employment status that "results in the taxpayer's inability to pay housing costs and reasonable basic living expenses for the taxpayer's household."

     

  • Divorce or legal separation under a decree of divorce or separate maintenance.

     

  • Multiple births resulting from the same pregnancy.

     

  • Military service overseas:

    Under section 121(d)(9), a taxpayer who is serving (or whose spouse is serving) on qualified official extended duty as a member of the uniformed services or Foreign Service of the United States may elect to suspend the running of the 5-year period of ownership and use during such service but for not more than 10 years. The election does not suspend the running of the 5-year period for any period during which the running of the 5-year period with respect to any other property of the taxpayer is suspended by an election under section 121(d)(9).

As with all things involving taxes, speak with a tax professional to determine your specific obligations as well as an English professor to decipher the paragraph above