Getting out of an owner-financed deal

I closed on a home in 2008. The owner is financing the property for us.

The property was on the market for nine months and didn’t sell. We asked specifically about the condition of the property, as the owner listed it herself. The owner stated that the house was newly remodeled and triple-insulated. We told her we’d like to have it inspected, and she said it would be a waste of money seeing as she just had remodeled it in order to sell it.

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We took her advice and did not have an inspection. Shortly after moving in, my wife started having terrible migraine headaches. After some investigation, we found that there were pipes leaking in the wall and that the drain from the bathtub drains directly onto the ground under the house. There is no insulation in the roof, the windows were installed upside down and not sealed properly, and the septic system is faulty.

Within weeks of moving in, we told the seller about the septic issue, insulation and windows, and we informed her that the air conditioning didn’t work. We didn’t find out about the mold until later.

She refuses to fix any of the problems and won’t give us an adjustment for the harm to my wife’s health because of the mold. She says she sold her home in “as is” condition.

We want out, and we want the $40,000 we have already given her. I have a lot of pictures documenting the flaws in the house. She is threatening to foreclose on me.

Will a judge rule against me if I go to court and sue her? She did not provide a seller-disclosure form, which is required in my state, and I only signed a warranty deed and promise to pay. I feel as though the condition of the home was misrepresented at best. What do you think?

You should run to see a lawyer who specializes in real estate litigation. If the information you have provided is accurate, you might be able to rescind the sales contract due to your seller’s misrepresentation and possible fraud.

While your seller might have sold the home to you “as is,” she still had a duty to answer your questions truthfully. Furthermore, if your state requires a seller to deliver a disclosure form to you, you might have an action against her even if the home was sold “as is.” Given the amount of the renovations made to the home, you might even be able to sue the seller as the person responsible for the poor construction.

Based on your description, there are many avenues a lawyer could take with your case and in making a determination as to whether you should try to void the sale and get your money back, find another home and start over, or sue the seller for damages and stay in the home.

That’s why you should talk to a lawyer and walk through these issues together. You may have to sue the seller, but you may have a better chance of protecting the money you have invested by being proactive rather than waiting for the seller to come after you.

You already made the mistake of seeking her advice and taking it when it came to doing an inspection. Now you should not let her bully you into believing that you have no choices. You should at least talk to a lawyer and see what protections the laws of your state may afford. You might be pleasantly surprised.

Never take a seller’s advice when he or she tells you not to hire an inspector. If you were buying a car and the seller told you the engine was in great shape, would you take his word, or would you talk to your mechanic?

I read your recent column about the 48-year-old lake property that was transferred to a family member via quitclaim deed. I have a similar situation with a waterfront house that my mother owns. I have been warned about the capital gains taxes that would have to be paid if the deed were changed.

I was told that since my mother is not a permanent resident of the property, the federal tax exclusion of $250,000 would not apply.

Should we consider gifting the property in this situation rather than a sale to family members? (I understand we would be keeping the value at the original purchase price.)

We were also warned that if Mom needs additional money for medical expenses after a deed transfer, the government could use the look-back rule for a number of years to recoup an asset that could be collected from.

Mom will be 102 in July, and we’d like to find a resolution that would keep the property in the family rather than losing it to the government or taxes.

If your mom purchased her waterfront property many years ago, she might find herself paying quite a bit of tax if she sells the home. You need to figure out how much profit she has on the home.

Let’s deal with the sale of the home first. Because the property isn’t your mom’s principal residence, she will probably have to pay capital gains taxes on the profit from the sale. (If the home were her primary residence, she could exclude from federal income tax $250,000 on the sale of the home.)

Keep in mind, however, that the she would have to pay tax only on these profits. If she made capital improvements to the home over the years, including additions, a new roof, or a new boathouse or dock, all of those improvements reduce the amount of her profit and the amount she would owe in tax.

The good news is that the capital-gains tax rate is rather low and, depending on her income level, she might only pay 15 percent in taxes. So, if you find out that she has $100,000 in profit that is subject to tax, she might only have to pay $15,000. And that’s better than having to pay at a rate of up to 35 percent for income taxes.

Now, if your mom sells or even transfers the home by quitclaim deed or by other means, and she needs medical care in the near future that she can’t pay for, she would be obligated to first spend her money before Medicaid would pay for her long-term care expenses. If she got rid of all of her assets, Medicaid could look back up to five years to see what assets she had and who received them, and then attempt to get the value back for those assets.

Medicaid won’t go after assets sold if they are sold at market value and the seller received the cash from that sale. But Medicaid will look to that cash for payment of Medicaid services. If your mom transfers all or part of the property by gift, Medicaid can still go after the gift portion given for reimbursement during the look-back period. In some cases, that look-back period is five years.

There are some minor exceptions to this rule. Of course, a mother or grandmother can give gifts to her children and grandchildren, but any disposition of the home in the entirety would certainly raise scrutiny later on.

You may want to talk to an estate planner once you determine the value of the home and the profit your mom might get out of it. If she stands to make little profit and not much cash from the sale, you might not want her to do anything other than sell the home and keep the little cash she can get out of it.

If the sale would yield quite a bit of profit and your mom would get quite a bit of cash out of the sale of the home, the estate planner might be able to help you decide how to deal with the home without running into legal roadblocks with the federal Medicaid rules and even your own state’s rules.

While you might not be able to shelter all of the money from Medicaid, you might be able to shelter some of it from tax and payment to Medicaid.

One last consideration: Some states impose a significant tax on the sale of real estate. If your state has such a tax, you might want to see what effect the sale of the home would have not only from the federal tax perspective but also from your state tax law perspective.

Late last year, I started the process of refinancing my condo, and I was scheduled to close Jan. 31.

The paperwork was given to the bank’s lawyer for the closing, but when I didn’t hear from him, I called him. It was at this point that I was told that my loan from 1994 had not been signed off on even though I refinanced with the same bank in 2003.

The current lawyer asked that I call the lawyer who worked on my previous refinancing and find out what happened. Now both lawyers are going back and forth on this issue, including trying to find the lawyer from the time I purchased my home in 1994.

The bank gave me a one-month extension on my loan to resolve these issues, but I had to keep calling to get something done. Close to closing, the lawyer said I needed insurance to refinance my condominium even though I had given the document to the bank.

Even getting the lawyer to schedule the closing was frustrating. Does what I went through sound right to you?

Your frustration in trying to get your loan closed is rather common. Wouldn’t it be nice if closings could go smoothly and without delays and repeated requests for documents?

It seems that you had a problem with the title to your home. More specifically, when you refinanced your home in 2003, the lawyer handling your transaction paid off your prior loan at the time you received the new one.

When a lender gives you a loan, it puts a lien — a mortgage or trust deed — on the title to your property. When you pay off the loan, the lender is supposed to release the lien. But in many cases back in those days, lenders failed to prepare and send that lien-release documentation.

Even though you might have had the same bank refinance your loan repeatedly, it was (and remains) common for banks to immediately sell off the loan to a different lender or investor. The fact that you refinanced with the same lender probably didn’t help you; your lawyer had to figure out whether the prior loan was paid off.

Your current lawyer closing your loan transaction had a couple of routes to take in trying to clear the title to the home and allow you to close on the refinance. One way he could determine whether the loan was paid off was to contact the prior closing lawyer to determine whether that person had the original document that released your prior mortgage and see whether he failed to record that document with the department that accepts land documents for recording.

Or that lawyer could have called the lender that ended up holding that loan to see whether that lender or loan servicer could produce another original releasing the lien of your prior mortgage.

In some parts of the country, title agents and title insurance companies facilitate the documentation relating to these releases by working with each other and promising to hold one company harmless if the other company handled the closing. So, if your closing lawyer also handled the title insurance for the refinancing, he could have called the closing lawyer from the prior deal to determine which title company he worked with. The title companies could clear that title issue between themselves.

Some lenders send the releases of their liens directly to their borrowers. So it could have been possible that you received the lien, did not send it to be recorded, and that the document might be sitting in your file.

If the closing lawyer figured it out — and it usually does not take more than one week to 10 days to take care of this issue — you should have been set for your closing.

When it comes to insurance, lenders these days will want to see proof that every borrower has a valid homeowners insurance policy.

If you are buying or refinancing a condominium, the lender will want to make sure that the condominium association has insurance on the building and that the homeowner has insurance on the contents of the home.

While your closing lawyer could have checked with the lender to see if you had provided copies of the insurance, sometimes it’s easier to ask the borrower for the information.

Some borrowers feel put out that they have to go through all sorts of hoops to get their deals closed. Closing on a loan isn’t like ordering food at the drive-through. Although it’s unfortunate that your lawyer wasn’t able to reach the right people and had to contact you for assistance, I hope you were able to give him what he needed so you could get to the finish line.

The current mortgage marketplace is fraught with difficulties, and if you’ve been able to close, even if you’ve had some frustrations and delays, that’s all that matters.

Ilyce R. Glink is an author and nationally syndicated columnist. Her latest book is “Buy, Close, Move In!” Samuel J. Tamkin is a real estate lawyer in Chicago. If you have questions for them, write to Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or contact them through Glink’s Web sites, thinkglink.com and expertrealestatetips.net.

 
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