I'm less than a year into real estate and hope I didn't just cause my mom to lose 20k. I am the agent representing her in both transactions. Situation explained below. Looking for guidance please. She wanted to downsize and had a large line of credit on her current home and used that to buy the smaller home. New home is under contract and after finding a small roof leak in current home, she is scared that the current home will never sell, so she wants to back out of the contract on the new home and take a loss of 20k.
Value of her Current Home: around 390k
Current debt: 60k line of credit
Been on the market for a week and we have had 2 showings and one tomorrow. We had it listed at 415k and after two showings suggested to lower it. It's now at 400k. A lot of the sites like zillow haven't updated the price in several days.
House under contract:
Originally listed for 220k. After 2 weeks it dropped to 200k and I suggested an aggressive offer of 180k with 20k deposit since she was very confident in the home and we both knew it was a great price.
Sale price: 180k
Cosmetic repairs needed but not urgent: 30-40k
Closing in 2 weeks.
Earnest money of 20k.
There Is a 1 bed apt above garage that could be rented out for 550-650/month
Costs to hold both houses:
LOC interest: $843/mo.
Her main reason for selling is to reduce her monthly costs. After selling her current house her monthly savings would be around $650. If she has held both houses for 3 months, it would take 6.7 months to recoup the costs and save her 32k over the never 5 years.
Her Financial Position:
Plans to work for 15-20 more years.
Monthly income: $2300/mo.
Retirement account: 50k
The issue is that the house she owns now that is currently on the MLS has a leak in either the roof or siding(not sure yet). Her biggest fear is the holding costs of having both houses and the possibility of future unexpected costs that could arrise (like the roof that just happened) and her running out of cash.
She wants to back out of the contract on the new house. Lose the 20k earnest money deposit. Take out 20k from her retirement, pay 2k in penalties for taking it out. Fix the roof problem. (Roof would cost less than 10k) List house again. After that goes under contract she would find another house to buy.
I'm looking for suggestions. I really don't want her to lose out on 20k and be back to the start again. I think its wiser to go ahead with the house and if she has to take out of the retirement if cash is running low.
I've thought of asking the sellers of the new house to push back closing to get a more time to solve the problem.
If she has 30k in cash why not just fix the roof, take the house, sell her current house and move on. Maybe i'm not following correctly, but tell the current owners on the house to fix the roof and be done with it.
Have her fix the roof. It will cost a lot less than $20K. She's probably just panicked at the reality of selling, buying and moving.
For the new house, $30-40K for cosmetic repairs?
That would be the worst case.
New driveway: 6k
Roof : 12k if metal, a lot cheaper if just asphalt.
Change half bath to full. 6k.
After this there isnt much.
@Tim Johnson I thought it was that simple. I think she is just freaking out with anxiety and fear, and not thinking logically. Which is understood due to the situation. It's not something to literally give 20k away for. Thanks for you input!
@Nathan Boyer what's the ARV of the new house? 180k plus 40k (eventually) is 220k all In.
Don’t just give up 20k to the seller of the new home. Fix the roof (likely relatively inexpensive) and then sell the old house.
In the future I recommend doing things a little differently:
1. Don’t go under contract with new house until old house is at least under contract.
2. If you put down large earnest money deposits make the contract contingent on inspection so you can back out if need be. Ideally you wouldn’t back out, but you’ll want that option.
3. Put down smaller earnest money deposits. 5k probably would have been plenty in this case.
@caleb Heimsoth thank you for the input! The ARV should be between 220-240k
@Nathan Boyer narrows down that range to 5-10k. If it’s 220k even at 180k this new house isn’t much of a deal, if you’re looking at it from an investor perspective. If you just want a house then it’s probably fine
Get a contract on her existing house and negotiate the repairs after the buyer has it inspected.
She’s gotta calm down
Don’t walk away from $20k. Stick to your guns and make it work
Don't back out and lose the 20k.. thats crazy..
From a realtor standpoint, don't ever have anyone put down $20k earnest money if at all possible.. Its just a bad bad idea.. Crazy things can happen, and you know damn well they'll happen when you have a client with a 20k earnest money deposit down.. Doesnt sound like there were multiple offers if the seller of the purchase house dropped their shorts 20k to 180.. So again there's no need to have that high of earnest money.. Have her stop panicking and follow through..
maybe I’m wrong but judging by her income , her savings her age and her situation ..I don’t feel she was in a position to do this arrangement in the first place
@Nathan Boyer , a few q's:
-When the offer was written on the new house, was there a contingency on your Mom selling her house first? Sounds like 'no', which is a problem if she is concerned about the holding costs of both houses.
-Can your mom file an insurance claim for the leak on the current house?
-Can your mom do her own escrow, i.e. get the lender to remove Taxes & Insurance from monthly payments on the new house? It'll spare her monthly budget in the short term, presuming she's a diligent saver and can pay those items later on.
-I don't understand the logic of backing out of the new house, losing $20k, in order to make a roof repair on the current house. Plus, spending $30k-40k on cosmetic upgrades sounds like a lot for a 55yr old layperson/non-investor. Are you sure she just doesn't want the new house?
-If she doesn't want the new house, have you asked the sellers if they'd be willing to accept a smaller earnest money payment if she backs out? You never know - just tug at their heartstrings, and take the brief hit on your reputation.
-If they won't accept a smaller earnest money payment, can you flip it? Or could you find an investor or wholesaler to sell the new house to and do a double-close?
-If your mom moves forward with buying the new house, how much financial assistance can you provide your Mom? Can you cover the carrying costs of the new house until the current house sells? It sounds like you should offer some kind of financial help in this situation.
Good luck. It's a good learning moment, and I hope any losses are minimized.
Yeah it wouldn't be an investment deal. She plans to live in it for the next 5-10 years and I plan to stay there for at least 2-4 more years.
There was one other offer on the place but I agree we probably could have gotten the deal with a 10k deposit or even 5k. My mistake there.
@Brit F. She definitely wants the house and I know once everything settled she will be happy. On April 5th we gain access to the new house and my plan was to get the 1 bedroom apt rented out asap to give her income for the holding costs. Other than that I could provide some financial assistance to lighten the burden. As for the repairs on the new house. It's in good condition but the driveway is currently gravel and she would like that paved and the roof although isnt leaking, she would want that replaced. The other major think would be converting a half bath to a full. The rest would be minor paint and some flooring updates. Most of the stuff I can do, she can do, and we know someone who can do it. But when we move in there is nothing that is urgent. It will be nice to be able to move belongings, and pets from the old house to the new house, which will make selling the old one easier.
I will look into the escrow idea and see if that would be beneficial. And if the worse case happens I will try to negotiate a lower earnest money deposit.
Today's update is that we are going to move forward with the new house and be more aggressive with the price of the old house. From the numbers you can see that she has a ton of equity in the current house and after everything has settled she will have a house worth 220-240k that is completely paid off, and has an apartment that can be rented out.
Thanks for your input!
I would suggest a home improvement loan to repair the roof on her current home. Try a local credit union for this. She can avoid the penalties that are associated with pulling from retirement. If the roof is leaking it may have issues with financing. You don’t want to keep dropping the price of the house, as it will cost her even more and she will end up having to fix the roof anyone’s, if they are using financing.
The second suggestion is - if she doesn’t want to fix it, than to have renovation financing ready and available to the person wanting to purchase the house so they know they have options to purchase.
Another option is to offer a seller paid escrow holdback to repair the roof. This would allow the buyer to use conventional financing.
At least in Chicago no one really loses earnest money (within reason). You can always pull some bs that the loan can't close off that contingency, etc. Even if they tried to take her earnest money refuse to sign the earnest release form and there is now a cloud on the title making it difficult for seller to legally sell property to someone else.
Better option though if she likes the property just fix the roof should be able to get it fixed for much less then $20k if you shop around and then you will have a new roof for many worry free years.
^What Henry said. Conduct the inspections first and then, you could pull out. It seems like she's getting a decent deal on a primary with the smaller home. Why is she freaking out over a small roof leak? Are you sure that's the real reason? Her loc is only $60k on a $390k home, so there is more room to up that balance if that's truly needed to repair the roof. $20k of earnest money is pretty hardcore.
Figure out the problem before freaking out. A roof leak does not necessarily mean replacing a roof. It could just be something relatively insignificant. I had a leak on a 3 year old roof once. It was fixed in 3 hours. Get a roofer out to look at it. In my area they will give you quotes for free. Just understand the problem fully before making any big moves.
@John Bannister it is leaking from the framing above the windows so I suspect it is something with the window flashing or gutters. We are having an expect check it out and he thinks it's a minor issue as well. Thanks!
It is a decent deal for a primary. And her equity position is great. Once her emotions settled down she was able to sit down and run some numbers and realize it wasnt the end of the world. She was literally happy to give up 20k because it would relieve some stress. The hardest part of this whole ordeal is learning how to explain to someone their irrational thoughts based on emotions and not facts. She's in a good position so like everyone is saying, she just needs to follow through. When it's all settled she will be well off. Thanks for the comment!
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