Issues With Mortgage Contingency Clauses in Purchase and Sales Agreements

During the drafting and negotiation of the purchase and sale agreement concerning any real estate transaction in Massachusetts, it is important to understand how your mortgage contingency clause may come into play if you are trying to sell your current residence and purchase a new residence.  Often real estate lawyers in Massachusetts are requesting a provision that does not allow a purchaser of real estate to withdraw from a transaction without penalty if a mortgage commitment contains a condition that an existing residence be sold prior to the purchase.  The clause will often read as follows: "The BUYER understands and agrees that rejections for mortgage financing on the basis of the unsold status of his/her present home will not be a reason to terminate Agreement pursuant to the mortgage contingency."  This provision can create substantial issues for a purchaser as the deadline to close rapidly approaches. 

It may be that a lender will not issue at mortgage commitment due to the fact the buyers have not sold their present residence.  In this instance, under the terms of above clause, the buyers will not be able to terminate the agreement pursuant to the mortgage contingency under this scenario. It must be for an entirely different reason other than failure to sell a present residence.  

Although a lender may issue a mortgage commitment, it may contain a condition that the buyers must close the sale of their existing home prior to loan approval or consummation of the purchase of the new property.  This will create a timing issue with the transaction; now the buyers are acting in two different roles (as buyers and sellers), and relying on two separate lenders to finance two separate transactions.  This situation involves a high amount of stress on the homeowners as well as puts deposits at risk, and may involve a temporary move to a hotel until the completion of the purchase.  

To avoid the severity of this clause, it should be disclosed as early as possible (preferably in the offer to purchase) to the sellers that you currently own a property that is presently for sale, and request a prior sale contingency. The timing of the sale of your residence and new purchase can also be adjusted, and you may have to consider a transitional period between your two homes.  If you are concerned that your offer will be rejected with a prior sale contingency, you should speak with a qualified real estate lawyer about carefully crafting the mortgage contingency provisions in your purchase and sale agreement.  

Before You Overbid Listing Price and Waive Inspections on that New Home...

It is a little known secret that the residential real estate market in Eastern Massachusetts, particularly the Greater Boston area, is a Sellers' market.  There is a shortage of turn key homes at affordable prices and, at the same time, mortgage interest rates have been climbing slowly.  The prices of residential homes, particularly in the "starter home" category, in the $300,000 - $400,000 range continue to rise.  And with a healthy economy in Massachusetts, and a vibrant job market, the demand for real estate also continues to rise steadily.  

Our Lynnfield real estate lawyers have made numerous observations concerning potential home buyer's decisions while making a new offer to purchase a single family home or condominium. In an effort to make a more compelling offer to purchase that will be accepted by the sellers of the home, buyers are electing to waive inspections and are offering prices that exceed the listing price. Our real estate attorneys, who typically begin representation during the purchase and sale agreement, have reviewed numerous offers whereby buyers demonstrated that they have made aggressive efforts to secure the right to purchase a home. But at what cost?

Before you overbid the listing price on a residential property in Massachusetts, it is important to consider the possible results of your overbid.  If you are borrowing from a mortgage lender, that company will conduct an appraisal of the property to ensure that there is sufficient equity in the property to secure the lender's mortgage.  Lenders will also want to see a lower loan to value ratio (LTV) that averages 80.00% (Check with your mortgage broker for specific requirements).  In other words, the amount that you are borrowing should be 20% less than the purchase price.

If you are overbidding the purchase price of a home, and do not have sufficient cash on hand to achieve an average 80.00% LTV ratio, you may: 1. Not receive a mortgage commitment, or be denied financing that may put your deposit at risk depending on the language and timing the mortgage contingency clause in your purchase and sale agreement.  2. Receive a higher interest rate from your lender, which means that your overall cost of borrowing the funds will increase and so will your monthly payment. 3. You may have to purchase private mortgage insurance (PMI), which will increase your monthly payment and the overall cost of borrowing; and/or 4. You will be scrambling to pull together additional cash proceeds so that you may close the transaction.  These are less an ideal scenarios, and it is recommended that you remain in close contact with your mortgage broker and real estate lawyer when you are considering an overbid on a property.  

Our real estate lawyers have also noticed that many potential purchasers of real estate are waiving inspections.  In other words, the inspection contingency clause contained in the offer to purchase has been stricken and waived.  When in effect. this clause makes the transaction contingent on the buyer's satisfactory inspection of the property, which is usually conducted by a certified home inspector.  These inspections can reveal potentially expensive and critical defects in the structural, electrical, plumbing, mechanical, heating and air conditioning systems, as well as other features of the property.  It is not recommended to waive property inspections (even with new construction) and this appears to be an imprudent concession by a potential buyer who is making one of the largest financial investments during their lifetime.  

If you are a potential buyer or buyer of real estate and require assistance with your offer to purchase or purchase and sales agreement, please contact one of our real estate attorneys at 781-463-6063.  We provide all real estate legal services throughout Eastern Massachusetts. 

Inheriting Tenants at a Residential Property

Our real estate lawyers at the Law Office of Stefan Cencarik, PLLC located in Lynnfield, Massachusetts are addressing the potential issues that may arise when a new property owner inherits tenants. In other words, what types of liability issues may a purchaser / incoming landlord take on when acquiring real estate that is rented to residential tenants? 

The first question that should be asked is what type of contractual relationship exists between the outgoing landlord and the residential tenants. Are the tenants at will? Does a written lease agreement state a certain term of months of years for the tenancy? Any real estate lawyer representing you in the purchase of the property will need to know the type of tenancy and need to review copies of all lease agreements.  This is so that your counsel may determine whether the outgoing landlord and tenants are meeting their obligations; determine what rights and responsibilities each party have; as well as determine the material components of the leasing arrangement such as monthly rent, term, security deposits, maintenance responsibility and others.  

The second question that should be asked concerns the financial affairs of the outgoing lessor and tenant-lessee relationship. Your Greater Boston real estate lawyer will need to understand the rent payment history; present amount of rent; method of payment; amount of security deposit; location and type of holding account for the security deposit; and others. This is in addition to any expenses required for tenant unit maintenance and repair issues. 

Finally, your real estate attorney will need to understand whether there are any civil or insurance claims, or other State or local administrative or regulatory actions, demands, or issues associated with the tenants.  In most cases, these types of problems are rare, however, it is not uncommon for landlords to be subject to claims by tenants for negligence (such as slip and fall on the exterior premises); negligence or breach of the warranty of habitability (concerning the condition of the property); or a landlords' failure to comply with zoning or other fair housing laws.

The reason that a buyer of a tenant occupied property must review these issues is that residential landlords in Massachusetts are subject to a tremendous amount of regulations and liability. There are statutes and regulations concerning fair housing, sanitary codes, security deposits, rent deposits, and others. Additionally, Massachusetts General Laws ch. 93A, regulating unfair and deceptive trade practices, also applies to residential landlords, and violation of the regulations concerning residential properties constitute per se deceptive and unfair trade practices.  The penalties for a G.L. ch. 93A violation include up to triple damages and reimbursement of legal fees and costs associated with prosecution of the claim.  

If you are buying real estate in Massachusetts that contains tenants, you should consult with a real estate lawyer that specializes in residential and commercial transactions, and has deep knowledge of the due diligence process.  This expertise is crucial so that you purchase an investment without fear of liability and to ensure that you are making a prudent financial decision.  The Law Office of Stefan Cencarik, PLLC provides commercial and residential real estate services and is able to serve as your real estate lawyer in Lynnfield and the Greater Boston area.  

Real Estate Ownership Divorce: The Right to Partition

How does a property owner divide or force the sale of real estate? All joint owners of real estate, except for property held by spouses as "tenants by the entirety," have the right to sever their ownership interest, request physical division of the land and/or force liquidation of the property.  In Massachusetts, M.G.L. ch. 241 s. 1 permits owners of real estate who own an undivided interest in the property to request that the Massachusetts Land Court or Probate & Family Court order the partition the property.  In other words, property ownership in Massachusetts is not intended to ensnare and force unwilling participants in continued joint ownership arrangements. 

The partition statute has few exceptions and provides joint owners of real estate a "way out" of a ownership arrangement.  This may be a useful tool to property owners who no longer wish to be part of an informal business partnership; separated partners and co-habitants; individuals who have inherited property from deceased relatives; or joint property owners who are not "pulling their weight" in relation to maintenance, insurance, property taxes, and upkeep.  In these instances, a property owner may file a petition for partition, which is an extreme remedy after informal efforts have failed to amicably divide or separate the ownership interests.  

In most partition cases that involve property in the well developed areas of Eastern Massachusetts, some type of building (single or multi-family houses, or condominium) and land, in the cases of houses, will be involved.  In some cases, if undeveloped land is subject to a partition action it is possible to request that a Court fairly divide the land between the owners, and then each owner will be free to sell, develop, transfer, encumber, and otherwise take any action that a owner in full possession may do. In other cases, for example, that involve a single family home that is occupied by one or more of the owners, it is likely that a partition action will result in a court order to sell the property on the retail real estate market. A real estate broker will need to be retained; the property will be marketed and sold to the highest offeror; and the proceeds will be divided according to the Court's order. There is an option to hold a public auction for the property, however, this is unlikely to maximize the sale price on the open retail market. Or in some cases, property owners often enter into a buyout arrangement where one owner will purchase the interest of the other in the context of a private sale. 

The partition of real estate has some drawbacks in terms of the financial cost of litigation as well as the infighting over the division of financial proceeds that may result.  The sale of the property must also provide for the payment of all liens of records, including mortgages, executions, property and income tax liens, and other of record. This will, of course, reduce the amount of net proceeds after the sale in addition to reductions for real estate broker commission, legal fees, tax stamps, recording fees, and other closing costs.  Despite these costs, many property owners may wish to seek a partition if there is no other way out of the joint ownership arrangement. 

The Law Office of Stefan Cencarik, PLLC of Lynnfield, Massachusetts maintains a comprehensive real estate practice from representation of buyers and sellers of residential and commercial property; resolution and litigation of issues with real estate; representation of commercial landlords and tenants; and condominium associations.   If you have any questions about these matters,  please feel free to contact one of our Greater Boston real estate lawyers at 781-463-6063.  We provide a free initial consultation, and are responsive to the deadlines and timetables of any new matter.