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“Law is art…” stated my business law professor on the first day of class some 25+ years ago. He went on to explain how everyone thinks law is black and white but in reality each case is different. A recent court case is proving my business law professor very correct.


The case in question was in regards to a landlord-tenant dispute, but it has implications for all of real estate law. The rental contract stated very clearly that tenant was to obtain renter’s insurance. The tenants complied with all other aspects of the contract except that one. The landlord had declared them in default and was trying to evict them. All parties agreed that the contract was valid and that the tenant was in breach. However, the tenant’s attorney made the argument that this breach wasn’t “material” to the landlord. Renter’s insurance provides coverage to the TENANT if their belongings are damaged. Not having it didn’t pose any reasonable risk to the landlord. So the judge ruled in favor of the tenant and they got to stay.


The lesson here is that one should be careful of playing “Gotcha!” because a judge may look at all the supporting facts, not just the black and white contract. For example, let’s say you are selling your home and an offer comes in, but another buyer says they may write an offer. You stall for several days but the 2nd offer doesn’t show up, so you sign the 1st offer. Soon after the 2nd offer shows up and it’s better than the 1st one. You then notice that you accepted the 1st offer 5 minutes after it had expired. So is the 1st contract valid? If you try to switch to 2nd buyer, you may wind up in court and 1st buyer MAY be able to force you to sell to them.


I heard a radio ad recently by a company claiming you can get your credit score for free on their website. I found the ad highly misleading because they aren’t telling you the whole story. This is like when someone asks you to hand them a “Klennex” or to “Xerox” something for them. Those are brand names, but we know what they meant, a facial tissue or a copy, as it were. I think that 99% of the people that hear that radio ad think they will get their actual OFFICIAL credit score. This is called a “FICO” score and is a trademarked name. See the below definition from www.myfico.com:


“’FICO®’ scores are the credit scores most lenders use to determine your credit risk and the interest rate you will be charged. You have three FICO® scores, one for each of the three credit bureaus – Experian, TransUnion and Equifax. Each score is based on information the credit bureau keeps on file about you.”


The company behind the radio ad I mentioned will give you something called a “VantageScore” that is supposed to be close to average of your three FICO scores, but it’s not the ACTUAL FICO score. (I’ve seen many complaints online that the VantageScore is often much lower than the average of the 3 FICOs, so beware.) To get your real FICO scores, you have to pay for them at www.MyFico.com.


You may have heard that by law the credit report companies have to give you your scores every year for free. They have to give you your credit REPORT for free every year, but not your FICOs. That website is www.AnnualCreditReport.com.


If you’ve applied for any kind of loan recently, you can ask your lender what your FICO scores are, or ask them for a copy of the credit report.


Last week I wrote about the problem with credits for closing costs when the lender won’t allow credits to apply against some closing costs. Or when the buyer’s costs don’t add up to what was negotiated between buyer and seller. This can be a big “oops!” moment for everyone involved. For example, take a home listed at $500,000. The buyer thinks the home is worth $500,000, but needs a big credit for closing costs. So they offer $515,000 and ask the seller to pay $15,000 of their closing costs.


The problem arises if the closing costs (or the max amount that the lender will allow credits to apply to) add up to only $10,000. What happens to the extra $5,000? This used to be a big gray area because the contract didn’t address it. Well, now it does. The latest contract now states that if the closing costs (or the amount allowed by the lender) is LESS than the actual costs, then the credit shall be reduced to match. In plain English this means the seller pockets the difference.


So the lesson here is that if you are going to ask for a small amount of credits, say $3,000 or less, you are probably pretty safe that your closing costs will be at least that much. But if you are going to ask for a large credit of $5,000, $6,000 or higher, you need to really confirm with your lender and title company what your fees are going to be, and find out if the lender will allow the credit to apply to all your costs. Or add a clause to the contract that states that if the costs are less than the credit then the purchase price will then be adjusted down accordingly.


In a regular real estate transaction there are certain costs that the seller usually pays (commission, county transfer tax, natural hazards report, etc.) and then costs that the buyer usually pays (escrow, title insurance, inspections, etc.). However, some buyers ask the seller to pay some of their closing costs. Sometimes this is a negotiating gambit, as in they are just trying to get a “better deal.” But most of the time the buyer is short of cash to complete the transaction when you add up the down payment plus the closing costs. In this case the buyer will bump the sales price up and then ask for a credit back for that amount. This is a way for the buyer to obtain a larger loan, and therefore the cash they need to bring to the closing table is less.


There are many pitfalls to this approach. The biggest one is that the property needs to appraise for the higher amount. The next one is the seller may not like paying real estate commission based on that inflated number. Another issue is that some lenders only let credits apply to some of the closing costs. They may be OK with the credit going towards what are called “non-recurring closing costs” such as escrow fees, title insurance, inspections. However, they often don’t allow credits for “recurring closing costs” such as property tax and insurance premiums that are being paid up front to set up the impound accounts. I’ve also seen lenders refuse to allow credits to apply towards the up-front mortgage insurance premium, which can be a big chunk of some buyer’s closing costs.


But what happens when buyer and seller agree to a certain amount of credits towards closing costs, but then the buyer’s actual costs are less than that, or the lender won’t allow a credit that high? See next week’s article.

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