Rethink bridge loan to retirement

Some say potential for disaster is too high to justify

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Dec. 29, 2010

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Some say potential for disaster is too high to justify

Benny Kass
Inman News™

DEAR BENNY: My wife and I are selling our house and moving to a retirement community, which also has assisted living facilities. We have an offer coming this next week. This is the only offer we have had in the three months the house has been on the market. We have put a contract on an apartment in the retirement facility.

Presuming we can reach agreement with our buyer and sign the contract and get a settlement date, the retirement facility wants us to take out a bridge loan for the buy-in fee (about $300,000). Our concern is whether anything could go wrong before settlement. We feel we would be more comfortable waiting until we have the cash in hand.

Are we being overly fearful? We are told that it is a normal procedure to take out the bridge loan, as the earnest deposit guarantees that the settlement will go through. Is this true? We trust our seller's agent but feel the buyer's agent is dragging her feet. Should we have a real estate lawyer too? If so, how do we find one? --John

DEAR JOHN: I suggest that you get a real estate attorney to assist you. If you don't know of any, you can call the local bar association in you area. Usually, those associations have referral arrangements.

You asked if anything can go wrong before settlement. The short answer is yes. While most settlements go smoothly, some can be a real disaster. For example: The buyer may have what we call "buyer's remorse" and want to walk away from the deal. That's why when I represent sellers I insist on a large earnest money deposit to put pressure on the buyer not to want to cancel the contract.

Additionally, the buyer may find problems in your house and either want you to pay a lot of money to correct those issues or walk from the contract.

Another possible glitch: In today's economy, the appraisal that the buyer's lender may come in too low, or the buyer may not be able to get the necessary financing.

Yes, a bridge loan is common, but there is a risk that you will end up having to pay two loans: your current mortgage as well as the bridge loan.

I would give serious thought about going the bridge loan route.

DEAR BENNY: My question involves renting back after selling your home. My son and his wife have found a buyer for their townhouse in this tight market, and they and the buyers are willing to close the deal within six weeks.

The problem is that the new owners cannot get out of a rental lease until April. Someone told my son that there is a rent-back limit, and that if he and his wife rent back for longer than 60 days, the property is considered a rental. Are you familiar with the law on this topic? We have looked online but can't find an answer. --Barbara

DEAR BARBARA: You are referring to what we call here in the East a "post-settlement occupancy." It is a common occurrence. Usually, it works the other way, in that the seller needs a few days (or months) in which to get ready to move out of the house.

The seller agrees to put up a security deposit, which is negotiated between the parties. Typically, that deposit comes from the sales proceeds, which the settlement attorney (title or escrow company) will hold in escrow. It is not released until the seller vacates and the buyer can inspect the property to make sure that it is in the same condition as when the contract was signed.

Additionally, the seller agrees to pay the buyer PITI. That stands for "principal, interest, taxes and insurance." Since the buyer has taken title, and usually obtained a mortgage loan in order to go to closing, the seller agrees to reimburse the buyer the amount of money the buyer has to pay on the mortgage.

To avoid the situation becoming a landlord-tenant relationship, the typical post-settlement occupancy agreement makes it clear, in writing, that no such relationship is created.

But in your case, I would not be at all concerned. You son will remain in the property for a few months. If the buyer does not insist on getting a post-occupancy agreement signed, why should your son care if he ultimately is considered a tenant? Usually, state laws favor tenants. It would be the buyer who should be concerned, because he does not want to create any landlord-tenant arrangement.

DEAR BENNY: I've been living in my apartment for 17 years and am having problems with my next-door neighbor who moved into my building four months ago. She is harassing me because I am using cleaning materials and cosmetics (deodorant and eau de toilette) that affect her. She claims that she has a medical condition and cannot tolerate some odors.

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