Here is an excerpt from Chapter 14 of Owning U.S. Property – The Canadian Way, by David A. Altro.
Click here to read Part 1, where David A. Altro explains the differences between buying property in the U.S. vs Canada, title insurance and buying resale vs. buying from a builder
What is the flip? Well, some people might think it is a hairdo – but in the context of this book, we are discussing the buyer’s right to assign the contract for sale and purchase to a third party prior to closing with the seller/builder.
Generally, a builder’s contract will not permit the assignment to a third party prior to closing unless negotiated in the initial contract and a commission is given to the developer. When the market was hot builders would not allow a flip as that put the contract purchaser in competition with the builder.
Here’s an example of the flip: Suzana is the contract purchaser with the builder, and she flips it to Alex and Maggie prior to closing. The builder gets only one unit sold; that is, to Alex and Maggie. However, if the buyer is not allowed to assign the contract, then Suzana has to close and Alex and Maggie will buy directly from the builder.
Of course, Susana could sell to Alex and Maggie after the closing, but she would incur all the closing costs, which will reduce her profits. Consequently, if we are representing Suzana we need to know her motive for the purchase and whether this is an issue that has to be dealt with in the contract for for sale and purchase.
In today’s market, the flip is rather hypothetical. It is unlikely that there might be an increase in the value of the property within the one to two year period from the day when Suzana signs a contract until the date for the closing upon completion of the condo.
THE SHORT SALE
The short sale is a product of the downturn in the real estate market. It has nothing to do with the stock market nor with the prohibition against short sales in the stock market that was decreed by President Bush in September 2008.
Clients of mine from Toronto, Rick and Jorge, flew down to West Palm Beach and negotiated an accepted offer on an $800,000 three bedroom, two bathroom condo in Boynton Beach, Florida. The sellers paid $1,200,000 for the property a few years ago and, shortly after the purchase, refinanced it to pay for the renovations. Presently the outstanding balance of the mortgage is $1,200,000. The sellers are in for a total of their purchase price of $1,200,000 plus $300,000 of renovations.
In order to close this deal for Rick and Jorge at $800,000, the sellers will have a short fall of $400,000 just to pay off the existing mortgage loan. However, the sellers are willing to make a deal just to get off those mortgage payments. This is what we call a short sale.
The sellers must negotiate an agreement with their mortgage lender, requesting that the lender accept $800,000 and forgive the rest of the outstanding loan balance of $400,000 because the sellers are short the difference.
Technically, the seller’s mortgage lender sends their appraisal out to determine whether or not the $800,000 offer is, in fact, the fair market value. Also, the bank analyzes the credit worthiness and ability of the sellers to repay the loan.
Such procedures may take months, during which time the buyer does not know whether he has a firm and binding deal since the seller’s acceptance is contingent upon their mortgage lender’s approval. (Only about 20% of such proposed short sales are accepted by the lenders).
Upon approval by the lender, the deal goes hard and the buyer’s attorney can start the title examination and analysis to determine whether or not there are liens on the property other then the lender’s mortgage. In such cases, it is common to find that the condo fees are in arrears as well as the real estate taxes.
These issues do not cause any great problems for the buyer. He is protected from all liens, bad taxes and condo fees so long as buyer’s attorney does his job.
WALKING AWAY FROM THE DEAL
If you are a buyer, you may want the option to cancel the deal at any time prior to the closing. Certainly, the seller will not unilaterally give you this right. However, look at the default clause carefully.
Where the default clause states that should the buyer default, the seller’s sole recourse is the retention of the buyer’s deposit, then you can walk away from the deal without incurring a lawsuit or seizure of your other assets.
In today’s market, many contract purchasers of new condominiums have taken this route. From the time of signing of the contract two or three years ago until today, values have dropped in an amount greater than the amount of the deposit.
Currently in Florida, there are many speculators who purchased from builders prior to construction. Now they may try to cancel or walk away from the deal. You should contact realtors, builders and banks to pick up these kinds of bargains.
SELL WITH FULL WARRANTY OR “AS IS”?
When you sell a condo, most of the structural issues are covered by the condominium association such as roof, walls, garages or swimming pools. That leaves the electrical, mould, plumbing problems, water damage, etc. or non-conforming improvements.
If you are selling a single-family home, there is no condo association and therefore all of the foregoing issues are in play.
Let’s look at an example. In a standard sale, what if the roof leaks four weeks after the closing due to a heavy rainfall? The repairman opens the ceiling and finds lots of mold. This probably means that it was a pre- existing problem. You, as the seller, will be responsible.
In order to avoid this kind of post-closing recourse against you as seller for a pre-existing defect, you should try to sell on a “AS IS” basis. Your buyer will not like this and it may make it more difficult to make the sale. That is a business decision for you to make.
If you are selling “As Is,” you advise your realtor and the contract to pur- chase would include the “AS IS” language (addendum) and also buyer’s right of inspection within a reasonable delay. If there are defects he can choose to either accept the property with the problems or repairs needed or walk away and get his deposit back.
If he agrees to take the property, there is no recourse against you for any defect or problems that show up after the closing that were pre-existing unless you have acted in bad faith.