Real Estate
winter 2018





How parents are financing their children’s home

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With all-cash offers dominating the housing market in some highly competitive cities, first-time homebuyers are finding themselves shut out of negotiations, particularly for the more affordable and in-demand starter homes.

Saving enough for a down payment and closing costs has always been a challenge for young home buyers. But in tight real estate markets, the old standby of 20 percent down with a traditional mortgage loan isn’t enough to win a home.

These kids might once have looked to mom or dad for help with a down payment, but now they’re approaching their parents with a much bigger request: enough funds to make a full cash offer.

That means instead of ponying up some extra cash, parents today are extending a dramatic new kind of helping hand. They’re refinancing their own homes to fund the full cost of their child’s home purchase. In turn, their son or daughter agrees to mortgage their own newly acquired property and pay their parents back in one lump sum.

Potential pitfalls
Families interested in pursuing this kind of mortgage “trade” should consult with several advisors well in advance. In addition to the legal protections parents may want in place to ensure their son or daughter actually pays them back, other considerations such as gift taxes, refinance waiting periods, and loan qualifications may come into play.

Money always has the potential to create family conflict, and you don’t want any unpleasant surprises cropping up. Imagine, for instance, your son or daughter pays well over appraisal value to win his or her new home. It’s unlikely a lender will remortgage the property for more than the appraised value, leaving a financial gap in the amount your child can pay back.

Under advisement
For safety’s sake, be transparent with your lenders or consider working with one designated banker who understands and supports the full arrangement, from the parents’ mortgage loan through the child’s refinance.

Parents should also feel comfortable asking to vet their child’s financial position before entering into such an arrangement. Some may even want to negotiate a stake in future real estate gains, in exchange for their investment and risk. Consult a lawyer for help in setting up special requirements, payment plans and other terms.

Ready to pay
In hot real estate markets, sellers have the leverage and are free to turn up their nose at contingency offers. Housing stocks are down, and in many communities bidding wars are the new normal.

Buyer with the all-cash resources to get the deal done, and get it done fast, are rising to the top in negotiations. Sellers prefer cash offers because they eliminate the typical 30 to 60 day waiting period for traditional mortgage loans and reduce the chance buyers will walk away from the deal.


 

Families interested in pursuing this kind of mortgage “trade” should consult with several advisors well in advance. In addition to the legal protections parents may want in place to ensure their son or daughter actually pays them back, other considerations such as gift taxes, refinance waiting periods, and loan qualifications may come into play.

 


 

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Tips for choosing your next mortgage lender

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Home buyers today have a variety of options when it comes to finding a mortgage lender. They can choose a traditional face-to-face relationship with a lender at their local bank, opt for a mortgage broker who will shop the best deals for them, or go it online with a range of non-bank lenders, such as Quicken Loans, Rocket Mortgage, or Lenda.

Be aware, however, that more than a quarter of first-time home buyers regret their choice. According to a mortgage satisfaction study by J.D. Power, 27 percent of first-time buyers and 21 percent of all home buyers wish they had chosen an alternate lender.

Customers reported dissatisfaction with communication, unmet promises, and feeling pressured to choose a particular lending product.

To help you complete your next home loan experience without regret, here are some factors to consider beyond finding the lowest rate:

Speed: Ask lenders about estimated closing dates and work with a responsive lender who will get you to the closing table on time. Time-to-close can be a key negotiating factor in competitive real estate markets.


 

You simply need to consider your own temperament and comfort with the real estate lending process. Are you content to work with an online entity or do you want to sit down and chat with a local lender?

 


Experience: If you’re looking for a VA or other government loan, if you have bad credit, or if you are looking for a jumbo loan, seek out lenders that have experience in that area. You don’t want to be the one who helps your lender “learn on the job” for a specialized loan.

Portfolio lenders: These lenders keep mortgages in-house rather than reselling them on the secondary market. That means they often have more flexibility to finance non-traditional properties or to make exceptions for special factors, such as low credit scores or debt-to-income ratios.

Mortgage brokers: These professionals shop your deal to multiple lenders in order to find the best rate and structure. They can help coach you through the process, steer you away from onerous terms, or provide access to special discounted rates. You’ll pay a fee for this service, but ask if your mortgage broker is getting compensated by the lender as well. Your broker may have incentives that don’t always align with your goals.

Finally, you simply need to consider your own temperament and comfort with the real estate lending process. Are you content to work with an online entity or do you want to sit down and chat with a local lender?

If you’ve been through the process before and simply want a fast, automated option, online may be right for you. But if you would like a little extra hand-holding, or someone who will go to bat on your behalf, a personal relationship could be in your best interest.

 


 

Be aware that more than a quarter of first-time home buyers regret their choice. According to a mortgage satisfaction study by J.D. Power, 27 percent of first-time buyers and 21 percent of all home buyers wish they had chosen an alternate lender.

 

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Contingencies create a way out of real estate contracts

You’ve signed the contract and transferred the earnest money, but just how binding is your real estate contract? That depends on the nature of any contingencies built into the agreement. For buyers, such contingencies provide an exit strategy if the house doesn’t live up to initial impressions.

Here are some common contingencies that could allow a buyer out of a real estate contract:

* Financing. The buyer may be unable to get financing from his or her lender, or unable to get financing within defined terms.

* Appraisal. This is another financing issue that comes into play if the house is appraised for less than the purchase price. If that happens, the lender may not be able to provide sufficient financing to close the deal.

* Inspection. This can cause issues if the home has significant flaws or repair needs that weren’t disclosed at the time of the offer.

* Buyer’s home sale. Under this contingency, the buyer must first sell his or her home before closing on the new property.

* Title search. A title search provides confirmation that the sellers have the right to sell.

While sellers can get some protection from a contingency (such as time limits on how fast the buyer must complete the deal), most are written to benefit the buyer and provide a way out if something unexpected happens before closing.

When contingencies aren’t met, buyers will usually get back any earnest money being held in escrow. However, if contingencies are met, buyers may be held to the terms of the contract.

Choose the right entity for real estate investments

When purchasing an investment property, most real estate owners form a holding company or a legal entity designed to provide certain tax advantages and a level of protection from personal liability.

Which entity you choose depends on how you’ll manage your investment and your overall financial goals. To make an informed choice, seek professional counsel from a tax and/or legal advisor.

Sole proprietorships and general partnerships generally offer the least benefit, as the person running the business remains personally accountable for any debts or liabilities. That means if an accident occurs on your property, your personal wealth is at stake.

A limited liability entity, however, provides some key protections. An LLC, Limited Partnership, or S-Corp will shield you from common business liabilities, such as accidental injuries.

A limited liability entity will not protect you from certain debt obligations, because banks will usually require a personal guarantee on the loan. However, that presents a limited level of exposure, as property values do not usually exceed the value of the loan.

Limited liability companies do provide certain tax advantages. With these entities, any income earned on a real estate investment is counted as personal income. By comparison, when real estate is held in a C-Corp, the business is taxed once on the income and then the owners are taxed a second time on any gains.

Meanwhile, real estate held in a limited liability entity could decrease your taxable income. If the property shows a loss (which may be legally calculated through depreciation deductions), your overall tax burden declines even if the property didn’t appear to lose money when a basic income in, expenses out analysis is used.

On the other hand, choosing a C-Corp may provide certain advantages. Because a C-Corp is considered a wholly separate entity, financing arrangements may be streamlined. That’s because lending underwriters can only look at your C-Corp investment, not your personal finances and separate business investments. That may be of particular concern for active investors who hold multiple properties with short-term goals, such as real estate flips.

This newsletter is designed to keep you up-to-date with changes in the law. For help with these or any other legal issues, please call today. The information in this newsletter is intended solely for your information. It does not constitute legal advice, and it should not be relied on without a discussion of your specific situation with an attorney.