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Beartraps in Real Estate

The battlefield is not the only place where expensive mistakes can be made. The consequences can certainly be far different, but there are some surprising ways to make yourself miserable in the real estate game. Here are a few traps to monitor.

Nonwarrantable Condominiums

These are condos where more than 40 percent of the units in the condo project are owned by people who do not live in them. We call these people "investors." They buy the units and then rent them out. Not a bad strategy, right? It?s not a bad strategy unless you want to borrow some money with one of these units as your collateral. If your condo building is over 40 percent investor owned, your choices for a loan will be dramatically diminished -- almost to nil. Why? Because Fannie Mae and Freddie Mac both agree that large percentages of investor owners mean higher risk of default on loans. Why this position has never been successfully litigated is tough to understand, but there it is -- a big, big problem. You need to always know what the investor/owner ratio will be before you sign the purchase contract. Don't let it sneak up on you. What happens if you buy a condo that has a low investor ratio and five years later it has gone almost completely investor owned? You will not likely refinance, and you may have severe difficulty selling. Ouch!

Assigned Purchase Contract

This is where you add the words "or assigns" on the buyer line in the real estate purchase contract. It means that you can freely sell or assign the purchase contract. Few lenders in the country will lend on it because of the Department of Housing and Urban Development regulations against illegal flipping. Flipping is a trick where bad guys sign a purchase contract with that term and then sell the contract before they own the house. Sometimes these contracts are signed by unwitting sellers who could be in financial straights, only to have their contract peddled from assignee to assignee before it comes to rest with someone who pays full value for the house. Who gets the money? Not the seller, and therein lies the rub. The result is a surprisingly intolerant bar against assignment language in purchase contracts. Even the innocent uses of assignments are caught up in the prohibition.

Purchase Offers With Zero Contingencies

In many of today's hot real estate markets, real estate brokers request "clean" offers to submit to sellers. These offers have a low likelihood of being rejected because they present a near certainty that the deal will close. Remember that the brokers bleed off 6 percent of the value of the property when it closes, so they are in hyperdrive to make it happen. This mindset translates to pressure on you to remove contingencies, such as home inspection, septic certification, financing, etc. Your five-figure deposit is therefore at full risk, even if your loan blows up. My counsel to you is to try to avoid this scenario. If you march up this hill -- without the protection of any contingencies -- and a problem erupts that prevents you from closing, you are at risk for not only your deposit but also possibly a nasty legal weapon called "specific performance." Your broker could also be liable for the purchase if he or she can be proven to have knowingly uttered something false in the contracting process. If a zero contingency contract becomes important in the pursuit of a certain highly attractive house, go find another house and don't try this stunt.

Home Inspection

Sometimes you will be tempted to drop the home inspection. Remember, you have two chances to see the place before you close -- one in the front of the process and one at the end. Use both opportunities wisely, and do not let anyone convince you that either one is unnecessary. The inspection is where you find the cracks in the joists, gushing water on a rainy day, the underground storage tank for fuel, and anything else that a trained eye can see. Make certain that you have a trained, licensed, and insured engineer perform the inspection up front.

Escrow Failure

I'm willing to bet that between 10 to 20 percent of all escrow accounts are somehow flawed. That could mean no insurance if your house is damaged or lost, and it could mean that your house could be in a courthouse auction for failure to pay taxes, all without your knowledge. At least once a year check with your lender, your insurance carrier, and your property taxing authority to make certain all of the numbers are in sync.

In conclusion, these are some of the beartraps that people encounter in the home ownership game. I hope you never see them, but if you do, now you should recognize them before you take the wrong step.

This article first appeared in the July 2005 issue of Marine Corps Gazette.

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