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Real Estate Q & A

Purchase Contract Must Be Worded Exactly to Be Enforceable in Court

October 15, 1989|ROBERT J. BRUSS

QUESTION: Some time ago, your column had a question from a home buyer whose seller changed her mind about selling. You suggested contacting a real estate lawyer about a specific performance lawsuit to force the seller to deliver the deed.

We had a similar situation. But when we talked to a real estate lawyer, she said our purchase contract was so indefinite there is no way a judge would order the seller to deliver the deed. I thought you said a specific performance lawsuit could force the seller to honor the sales contract. Please explain.

ANSWER: Your situation shows why the person preparing a real estate purchase contract should pretend a judge is looking over his shoulder. The purchase agreement you have apparently was poorly prepared and is too vague for a court to order specifically performed.

For example, if the finance contingency clause says, "This offer is contingent upon buyer finding a satisfactory mortgage at the current interest rate and loan terms," the contract is probably too vague to specifically enforce. In fact, perhaps no contract was formed because there was no meeting of the minds.

But a finance clause such as, "This offer contingent upon property and buyer qualifying for a new 30-year $100,000 first mortgage with interest not exceeding 10%, a monthly payment not over $877.57, and a loan fee not more than 2 points," is exact, so a contract can be formed.

I'm sorry you lost that house because the seller backed out. But you could have enforced the purchase contract if it had been prepared more carefully. In the future, be more exact.

Don't Let Borrower Fall Behind on Loan

Q: About three years ago, we sold our home and carried back a $24,000 second mortgage. The borrowers made their payments on time every month for the first year. Then the payments came in later and later each month.

When I complained, the wife was real nasty to me. For the last four months we have not received any payments.

I called the borrowers and learned that the couple have separated, the husband is unemployed, and they may be getting a divorce. Since foreclosure will cost us several hundred dollars, do you think we should wait another month or two to begin foreclosure?

A: No. Don't let your borrowers get further behind on your mortgage payments. Have you checked with the first mortgage lender? I'll bet payments aren't being made on the first loan, either.

Since you have already warned the borrowers, get busy and begin foreclosure. Filing the papers will either have the effect of getting the borrowers to shape up by making the payments, they will try to salvage their equity by selling the house or they will bury their heads in the sand and do nothing.

If the home goes to foreclosure sale, you will either get paid off from the successful bid or, if no bidders show up, you will get the house back to sell again for another profit. Please consult your attorney for further details.

Sale of Inherited Property Tax Bonanza

Q: My wife recently inherited her father's house. I estimate it is worth around $225,000. As he bought it many years ago when it was brand new, we think his cost was around $10,000 but we aren't sure. If my wife sells the house how will she figure the profit tax?

A: I have good news. Your wife's basis in the inherited house is its market value on the day her father died. Presuming that is $225,000, she would only owe tax on any net amount she receives over $225,000. For example, if she sells it for a $230,000 net sales price, she would only owe tax on her $5,000 profit.

How Home Seller Can Figure Tax Benefit

Q: I am eligible for that "over 55 rule" $125,000 home sale tax break you often discuss. But my problem is my profit will be about $200,000. I want to buy a smaller house but hate to pay the IRS tax. Is there any way I can avoid tax in my situation?

A: Of course. Although you didn't give the details on your home, let me illustrate.

Suppose your home is worth $300,000 and its adjusted-cost basis is $100,000. If you sell, you will have a $200,000 profit. However, since you are eligible for the $125,000 once-per-lifetime over 55 home sale tax exemption, you can combine this rule of IRC 121 with the "roll-over residence replacement rule" of IRC 1034, which is available to all home sellers.

Subtracting your $125,000 exemption from the $300,000 net sales price in this example leaves a $175,000 "revised adjusted sales price." Since you had a $200,000 profit in this hypothetical example, to defer tax on the remaining $75,000 profit all you need to do is buy a replacement principal residence costing at least $175,000 within 24 months before or after the sale. Please consult your tax adviser for further details.

He Says Renting Home Better Than Owning

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