The battlefield is not the only place where expensive mistakes can be made. The consequences can no ifs ands or buts 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.
Non-Warrentable Condominiums.
These are condos where more than 40 percent of the units in the condo scheme are owned by population who do not live in them. We call these population "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- practically 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 all the time know what the investor/ owner ratio will be before you sign the buy contract. Don't let it sneak up on you. What happens if you buy a condo that has a low investor ratio and 5 years later it has gone practically wholly investor owned? You will not likely refinance, and you may have severe mystery selling. Ouch!
Assigned buy Contract
This is where you add the words "or assigns" on the buyer line in the real estate buy contract. It means that you can freely sell or assign the buy contract. Few lenders in the country will lend on it because of the branch of Housing and Urban development regulations against illegal flipping. Flipping is a trick where bad guys sign a buy covenant with that term and then sell the covenant before they own the house. Sometimes these contracts are signed by unwitting sellers who could be in financial straights, only to have their covenant peddled from assignee to assignee before it comes to rest with man who pays full value for the house. Who gets the money? Not the seller, and therein lies the rub. The consequent is a surprisingly intolerant bar against assignment language in buy 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 gift 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 hyper drive 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 qoute 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 buy if he or she can be proven to have knowingly uttered something false in the contracting process. If a zero contingency covenant becomes important in the race of a positive extremely provocative house, go find other 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 whether one is unnecessary. The inspection is where you find the cracks in the joists, gushing water on a rainy day, the private storage tank for fuel, and anyone else that a trained eye can see. Make positive that you have a trained, licensed, and insured engineer achieve 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 assurance if your house is damaged or lost, and it could mean that your house could be in a justice building auction for failure to pay taxes, all without your knowledge. At least once a year check with your lender, your assurance carrier, and your property taxing authority to make positive all of the numbers are in sync.
In conclusion, these are some of the bear traps that population 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.
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