Property Conditions and Disclosures - Part 5 - Chapters 36-38

Question 1

Understand the different disclosure requirements for carryback mortgages on the sale of a one-to-four unit residential property and other types of property

Answer 1

A Financial Disclosure Statement addressing a carryback mortgage, also known as a Carryback Disclosure Statement is attached to the purchase agreement as an addendum in the carryback sale of a 124 unit residential property. The addendum contains numerous statements on the financial, legal and risk of loss aspects of the carryback mortgage. If the statement is not included as an addendum to the purchase agreement, then a Statutory Further Approval Contingency allows for a later cancellation of the transaction.

In addition to preparing a carry back disclosure statement, the agent makes separate disclosures regarding conditions of the property which might also affect decisions of the buyer or the seller in the sales transaction. Also, both agents have a duty to disclose their knowledge about the tax aspects of the carryback transaction to their client.

The use of a masked security device, such as a land sales contract, lease option or unexecuted purchase agreement with interim occupancy, also requires a written carry back disclosure statement before the buyer takes possession of the property.

Question 2

Identify who is responsible for preparing an delivering the disclosures

Answer 2

When both the buyer and seller are represented by different Brokers, the carryback disclosure statement is prepared by the broker or agent who prepared the buyer’s offer.

Occasionally, neither the buyer’s or the seller’s agent prepares and includes the disclosure statement as an addendum to the offers or counter-offers. Here, as a minimum requirement, the buyer’s agent is responsible for preparing the disclosure statement and submitting it to both the buyer and seller for review and approval prior to closing. Otherwise, the statutory contingency with the right to cancel due to the failure of an upfront disclosure is not eliminated.

Question 3

Recognize the need for disclosures to both the buyer and the seller of the financial, legal and risk of loss mitigation aspects of a carryback mortgage

Answer 3

If a broker or their agent fails to provide the mandated carry-back disclosures, they are liable to the buyer for the buyers losses resulting from the non-disclosure.

A buyer’s ability to meet the terms and conditions of a carryback mortgage is of financial importance to a seller who is carrying back a note on the sale. The seller’s agent has an affirmative duty to obtain written financial statements from the buyer and review them with the seller.

Question 4

affirmative duty

Answer 4

AFFIRMATIVE DUTY is an agent’s obligation to voluntarily undertake an advisory activity when in a fiduciary relationship.

Question 5

further approval contingency provision

Answer 5

A FURTHER APPROVAL CONTINGENCY PROVISION is a provision in an agreement calling for the further approval of an event or activity by the seller, buyer or third-party as a condition for further performance or the cancellation of a transaction by a person benefiting from the provision. If a carryback disclosure statement is not attached to the purchase agreement as an addendum then a statutory further approval contingency provision allows for later cancellation of the transaction.

Question 6

installment sale

Answer 6

An INSTALLMENT SALE is financing provided by a seller who extends credit to the buyer for future periodic payments of a portion of the price paid for Real Estate, also known as carry-back financing.

On the sale of a 124 unit residential property, any installment sale arrangements created to accommodate the buyers deferred payment of the purchase price requires a written carry back disclosure statement if the carry back arrangements include:

• interest or other finance charges
• five or more installments running Beyond one year
• an installment land sales contract
• a purchase lease option or lease auction sale
• a trust deed note given to adjust equities in an exchange of properties or
• an all-inclusive trust deed note.

Question 7

masked security device

Answer 7

A MASKED SECURITY DEVICE is an alternative documentation for a carryback sale substituting for a note and Trust deed in an attempt to avoid due on enforcement, Regulation Z, reassessment for property taxes, profit reporting and the buyers right of reinstatement or Redemption on default.

Even the use of a masked security device requires a written carry back disclosure statement before the buyer takes possession of the property. Examples of a masked security device requiring carry-back disclosure include:

• a land sales contract
• a lease option or
• an unexecuted purchase agreement with interim occupancy.

Question 8

straight note

Answer 8

A STRAIGHT NOTE is a note calling for payment of the entire amount of principal and accrued interest in a single lump-sum when the principal is due.

Carry-back disclosure statements are optional in carry-back transactions creating STRAIGHT NOTES which do not:

• bear interest or
• include finance charges

However, carry-back disclosures for straight notes need to be prepared and reviewed with the client as a matter of good brokerage practice. The risk and issues for the buyer and seller under a straight note are similar and the duty of the client is the same.

Question 9

Advise a seller of the anticipated costs, credits and net proceeds they will likely incur on the sale of their property

Answer 9

A seller’s agent prepares a Good Faith Estimate (GFE) of sellers net sales proceeds to inform the seller about what they will likely incur on the sale of their property. A reasonable estimate of the likely net sales proceeds on any sale is first prepared on a SELLERS NET SHEET at the listing stage. It is again prepared when reviewing offers or updating the net sheet figures to reflect any changes in pricing.

If the information - such as sales expenses, closing costs or the net proceeds of a sale - is known to the seller, the seller’s agent has no obligation to disclose it. However, if the information can affect a decision to be made by the seller and the information is not fully known to the seller but is known or more readily available to the seller’s agent, the costs needs to be disclosed to the seller to meet the agents obligations under their special agency duties owed the client.

Question 10

Prepare a Good Faith Estimate of a Seller’s Net Sales Proceeds and deliver it to a seller when listing a property or reviewing a purchase agreement offer

Answer 10

Brokerage events triggering an agent’s preparation of the net sheet and review of its contents with the seller include:

• soliciting or entering a seller’s listing agreement
• submitting a buyers purchase agreement offer
• entering into a counter offer
• entering into an exchange agreement offer or acceptance.

It is best practice to prepare and review a net sheet with a seller, regardless of whether the seller requests or even declined to review a net sheet.

Question 11

equity

Answer 11

EQUITY is the value of an owner’s interest in real estate over and above the liens against it. The sole reason an owner employs an agent is to:

• convert the equity in their property into cash (or)
• by locating a buyer ready, willing and able to pay the highest possible price.

Question 12

material fact

Answer 12

A MATERIAL FACT is information about a listed property which may affect the properties value or alter a client’s decision to purchase or sell the property and, thus, needs to be disclosed.

Question 13

net sales proceeds

Answer 13

NET SALES PROCEEDS is the sellers receipts on closing a sale of their property after all costs of the sale have been deducted from the gross proceeds.

Question 14

seller’s net sheet

Answer 14

A SELLERS NET SHEET is a document prepared by a seller’s agent to disclose the financial consequences of a sale when setting the listing price and on acceptance of a buyer’s price in a purchase offer.

For a seller’s agent, some risk accompanies disclosures regarding net sales figures. The information may cause a prospective client to decide not to sell, or cause a seller of listed property to reject an offer and counter at a price needed by the seller but unacceptable to a buyer. It is for these seller pricing decisions that the net sheet information is a material fact requiring an affirmative disclosure by the seller’s agent of the figures which comprise the sellers net sheet and the sellers bottom line.

THUS, a net sheet review with an owner is part of every LISTING PRESENTATION for the sale of property.

Question 15

Prepare a Good Faith Estimate of the expenditures a buyer is likely to experience on acquiring a property with purchase-assist mortgage funding

Answer 15

To document the cash a prospective buyer can bring together from all their available sources to fund the purchase of a property, the buyer’s agent uses a worksheet, called a BUYERS COST SHEET. The worksheet helps the agent identify and itemize the estimated in good faith costs of the acquisition and financing, as well as the buyer sources of funding. The events triggering the buyer’s agents preparation of a cost sheet and a review of the cost with a prospective buyer include:

• entering into a buyer’s listing agreement
• pre-qualifying for a maximum mortgage amount
• entering into a purchase agreement offer or accepting a counter-offer.

Question 16

Demonstrate for a buyer the qualifications needed to become a homeowner

Answer 16

Arranging purchase assist funding is nearly always a requisite to establishing what price and cost of acquisition and individual is able to pay. Charges related to mortgage origination greatly exceed the cost of all other services required to buy or carry property, except for broker transactional fees (which the seller usually pays out of funds received from the buyer).

The maximum price a prospective buyer is able to offer for a property is determined by the amount of available funds from all sources which remains after deducting the acquisition cost. It is this residual amount of funds available for payment of a property’s price which determines the value of a property to the buyer, never the sellers listing price. Sellers and their agents tend to ignore this pricing reality as interest rates rise, but take full advantage of the pricing rule when rates fall.

Question 17

Determine a buyers real estate purchasing power by evaluating their income, assets and mortgage qualifications

Answer 17

Before a cost sheet review with the buyer can go beyond identifying the various sources of cash available to the buyer, the agent needs to arrange a conference for the prospective buyer with a representative of a lender. The objective of the conference with a lender is to determine the maximum gross dollar amount of purchase assist funding the buyer will be pre-approved to borrow and the lender (good faith) cost estimate of the dollar amount of all costs the buyer will incur to originate the mortgage.

Agents can also strategically help buyers get more value for their money by reducing or transferring some of the purchase and acquisition cost with such measures as:

• itemized deductions for finance charges and interest
• homeowner classes for lender discounts
• carry-back financing Arrangements
• waiting until a listing expires to submit an offer in the hope that the seller will accept a reduced price.

An agent’s rule of thumb for estimating borrowings: the amount of mortgage money a qualified buyer can borrow is equal to the principal ( present value) at the current mortgage interest rate that 31% of the buyers income will fully amortized over 30 years of monthly payments.

Question 18

Understand the supply and demand aspects of working with sellers and buyers under differing economic conditions in a business cycle.

Answer 18

During every real estate business cycle a time comes When Buyers collectively refuse or become unable to pay higher prices. Gone are the backup buyers and forgotten are the previously ever-present multi offer auctions surrounding nearly every fresh listing of a property.

Thus begins a multi-year decline of real estate prices. The drop in prices is usually brought about by the end of a cyclical real estate bubble, evidenced by excessive asset inflation, low mortgage rates and momentum speculators.

It is during this evolving buyer’s market of descending prices and ever more anxious sellers that real estate agents have difficulty attracting buyers, whether as clients or as prospective buyers of properties. For agents, a clientele of buyers becomes financially more rewarding during the transition into a buyer’s market than a pile of property listings.

However buyers are reticent about buying during this corrective phase of real estate business cycle. With its soft prices and plentiful supply of inventory for cautious buyers to consider, this period of price correction will eventually reflect sales to listing ratios indicating less than 25% of the existing listing are selling each month – with a bottom of less than 10% sold during the period of 2008 to Mid 2009.

Agents generally face a decline in overall sales activity until prices stabilize and begin to rise. In the interim, the less ingenious and most disconnected agents will fail to maintain a livelihood in real estate sales.

To combat an under sold real estate market, Sellers and their agents need to be more forthcoming with property information when placing a property on the market, rather than deceptively stalling until they have a buyer in escrow at an agreed price.

Question 19

buyers cost sheet

Answer 19

A BUYER’S COST SHEET is a worksheet used when estimating the total expenditures for acquiring a property and the amount of funds needed to close, including the source of the funds. The worksheet helps the agent identify and itemize the estimated in good faith cost of acquisition and financing, as well as the buyer sources of funding. The buyer’s agent then reviews the completed form with the prospective buyer.

Question 20

carryback financing

Answer 20

CARRYBACK FINANCING is a form of credit extended to a buyer by a seller for payment of a portion of the purchase price, evidence by an installment note secured by a trust deed lien on a property sold.

Question 21

listing agreement

Answer 21

A LISTING AGREEMENT is a written employment agreement used by Brokers and agents when an owner buyer tenant or lender retains a broker to render Real Estate transactional Services as the agent of the client.

Question 22

loan-to-value ratio (LTV)

Answer 22

A LOAN TO VALUE RATIO (LTV) is a ratio stated in the outstanding mortgage balance as a percentage of the mortgage properties fair market value.

NOTE: A carryback seller is concerned with their LTV ratio of the purchase price.

A buyer is primarily concerned with paying no more than the fair market value (FMV) for a property. However a seller intending to carry back a mortgage, needs to be primarily concerned with their loan-to-value ratio (LTV) and the buyer’s ability to pay. Whatever the price may be, the carryback seller becomes the financier on the close of escrow, A lender once removed.

Typically a seller seeks the highest sales price negotiable for their real estate. However, a seller who carries back a mortgage needs to make sure the buyers down payment is a large enough percentage of the purchase price to insure the buyer has adequate equity in the real estate. An adequate loan-to-value ratio allows the seller to fully recover their entire carry back Mortgage Debt from the value of the property in the event the buyer goes into default and the seller needs to foreclose. Any lesser amount of down payment exposes the carry-back seller to additional risk of loss.

Question 23

operating expenses

Answer 23

OPERATING EXPENSES is the total annual cost incurred to maintain and operate a property for 1 year.

Question 24

purchase-assist funding

Answer 24

PURCHASE ASSIST FUNDING is the use by a buyer of proceeds from a mortgage to fund a portion of the price paid to acquire real estate.