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Construction Loan

The Problem

Today's horror story comes from Joe (not his real name) who was going to build a house. Joe contacted a builder who seemed to have a good reputation. To save money Joe was going to secure his own construction loan. The builder would draw down on the construction loan as the house was being completed. Everything went fine until Joe started noticing that the builder was never on the job site and that subcontractors would come in some days and on other days there was no sign of them. Delay after delay occurred, and then one day Joe was served notice that the builder had filed for bankruptcy. A visit to the bank showed the builder had drawn the construction loan down more than the stage of construction would warrant. This home was valued at $400 thousand.

Here's what happened? The builder was a very good friend of the appraiser responsible for inspecting the construction and reporting back to the bank. In this way, the appraiser was responsible for the amount of money the builder could withdraw. Since the builder was his friend, the appraiser took his word for the percentage completed rather than inspecting the job himself. As it turns out the builder actually pulled down 35 percent more than he had completed. Now think about this. We have a $400 thousand house with a $300 thousand construction loan. The builder had completed only 25 percent of the job but had received 60 percent of the money. To complete the house Joe would need to $200 thousand out of his own pocket, and listen to this. The builder is in bankruptcy so Joe's house is tied up in litigation. It may take months to untangle this mess.

 

Lesson Learned

How could Joe have avoided this situation? First, never get your own construction loan. Let the builder do it. If the builder is not strong enough to obtain his or her own construction loan you don't need to use that builder. If for some reason you do get your own construction loan, request that the appraiser notify you when he's going out to the site to verify the degree of completion. Then ask him lots of questions. Make sure the percentage of draw equals the average rate of construction. Second, check out the builder very carefully. Get references and call each one. Ask for buyers who used the builder two years ago and one year ago. Also get a reference for someone who is currently using the builder. Ask these questions: Was your building job completed on time? Were there any surprises? Did the builder respond to your problems in a timely manner?

The main point here, and I can't stress this enough, is don't get your own construction loan.

 

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Renter Sells Owner's House

The Problem

John's house had been on the market for three months and he hadn't gotten a single offer to purchase. Finally one day Henry drove up and offered John a long-term rental agreement. Henry was a traveling salesman and needed to move to this town to be centrally located within his sales area. Henry was very nicely dressed, drove a respectable car and talked very professionally. Because Henry was on the road so much of the time, he wanted to simplify the move for his family by paying John a security deposit and six months' advance rent. He also wanted to sign a three-year rental agreement. Needless to say John was excited. He didn't really want to sell and a three-year rental agreement from such a professional was a dream come true. Henry signed the agreement, advanced the money and John headed to the bank. That is when the real estate horror story began.

As soon as Henry gained control of the house, he placed a for-sale ad in the paper, advertising the home for an unbelievably low price. In fact the price was so low Henry received hundreds of calls. Henry scheduled dozens of showings. Each time, he would give the person a real sob story about how he had lost his wife and family in an accident the previous year. Henry told everyone that he was being forced to give up thousands of dollars of equity in order to pay bills resulting from the accident. He then convinced the buyer to give him a $2,000 earnest money deposit to hold the house. The buyer's greedy nature told him he would never find another deal like this and he gladly forked over the $2,000. In fact, 30 buyers put up $2,000 each. With $60,000 in cash, Henry split, leaving behind 30 contracts for sale on John's house. Can you image the horrible situation John faced when the buyers' attorneys tracked him down? What do you do? I'm sure the title companies are having fun with this one. How could you stop this from happening to you?

 

Lesson Learned

If someone wants to advance you a large up-front deposit and pay the rent in advance, be very suspicious. Ask for three credit references and check them. Get referrals from the renter's previous landlord and verify that he is moving in immediately. Make sure the water and utility accounts are transferred into his name. Ride by your property often and inspect it. If you see a lot of unusual activity, investigate. Just remember that if something sounds too good to be true, it almost always is.

 

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They Took What?

The Problem

Henry and Marcia had an unfortunate experience the first time they bought a house. Not only were Henry and Marcia inexperienced, their agent was too. The couple was excited about their first house and closed on the morning of December 12th. As soon as the final papers were signed, Henry and Marcia took some friends over to see the house and discovered disaster.

The sellers' relatives, who were doing the moving, had stripped the entire house of anything they could unscrew or pry off including light bulbs, electrical fixtures (even the plastic covers on the wall switches), curtain rod fixtures, cabinet knobs and all the drawers in the garage work bench. In addition, the seller had siphoned all of the oil out of the fuel tank after the gauge had been read for the closing adjustment. The sellers had replaced the new appliances with older models that didn't work. The carpet had several large holes in it and the area underneath the sellers' couch had been completely cut out. Several areas of carpet in the bedrooms had large bleach spots. Many of the windows had broken seals and would need to be replaced.

The total cost to repair the damage was almost $8,000. This $8,000 mistake occurred because Henry and Marcia did not have a home inspection and had not performed a final walk-through inspection. Also, the sellers had moved out of state, so guess how much luck the couple had in recovering the cost of repairs.

 

Lesson Learned

Do the final inspection as close to closing time as possible. Turn on all the appliances and make sure they work. Run the furnace and air conditioner. Check ALL of the stove burners and the oven. Run the water (and make sure the hot water is hot), flush the toilets, try the lights, check the basement and make sure it isn't full of water. Take a hair dryer and plug it into each outlet to make sure there is power. Inspect the carpet, especially the areas that were formerly covered by furniture. One additional note, find out where the electric garage door openers are. Half the time they are in the glove compartment of a car that's on its way to North Dakota.

 

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The Ugly Workshop

The Problem

John Thomas (not the real name) purchased a home. Several months after moving in, he decided he wanted a workshop out back where he could pursue his hobby of building furniture. John started building a 20- by 30-foot workshop and had completed it within a couple of months.

Shortly afterward, John received a letter stating that he had built his shop without getting a review of the building plans by the neighborhood association. The letter further stated that his building was not suitable and was to be torn down. John was upset but just ignored the letter, thinking it was the work of a few disgruntled neighbors. Later John received a legal summons and complaint served by the sheriff's department. John would now have to go to court to explain and argue his case.

John showed up in court and pleaded his case to the judge. The judge was polite but read John the specific language in the restrictions that prohibited John from building a workshop without the written consent and approval of the association. John's workshop did not blend in with the homes. The judge ordered John to tear down his workshop.

This was a very costly lesson for John. The workshop had cost him thousands of dollars and he would now need to store his expensive power tools and go back to the committee for approval for another, more pleasing workshop. His entire family now harbors bad feelings for the neighborhood association and they are considering moving simply because John was not aware of the neighborhood restrictions.

 

Lesson Learned

John should have ad his agent or lawyer obtain a complete set of restrictions and covenants for the subdivision and he should have read them very carefully. If he had done so, he would have known that he needed to take his building plans to the neighborhood committee for review. If you ever find yourself in a similar situation, get approval in writing and follow your plans to the letter. While they may be inconvenient at times, neighborhood restrictions are actually a good thing because they help preserve the value of homes in the neighborhood. Don't become a John Thomas. Research and review your restrictions and make sure to get a building permit once the board approves your plans.

 

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Money Trees

The Problem

The Turners purchased a home in a very nice subdivision on a heavily wooded lot. The family did not like trees but the house was beautiful and perfect for their needs. About 45 days after closing and moving into the house, the Turners decided to cut down all the trees and landscape and sod the yard. They called in a tree company within a few hours 43 trees had been cut and removed from the yard. Late that afternoon the developer was in the neighborhood checking on a new construction project. When he saw what the Turners had done he was livid. He stopped and informed the Turners in no uncertain terms that the subdivision restrictions prohibited the cutting of any trees unless they were diseased or dead or were a threat to a house. The restrictions further stated that if the homeowner cut down any trees unnecessarily the owner would replace them with trees of similar size. I don't know if you have checked on the price of mature trees and the planting of them but it is very expensive. The Turners had to spend over 45 thousand dollars to replace what they hated. Now how could this have been avoided?

 

Lesson Learned

First of all, if you're in a regulated subdivision there will be restrictions - some you may like and some you probably will not like. However, the restrictions are in place to protect the value of the property in your neighborhood. Do not close on your house without reading your restrictions. Make your contract subject to your review and approval of the restrictions. I have even seen restrictions with dog clauses allowing only one dog per family. Read the restrictions very carefully to avoid a similar situation.

 

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Boundary Dispute

The Problem

Mr. Jones and Mr. Williams are locked in a heated dispute over the exact location of their common property boundary. Mr. Jones bought 4 acres of land several years ago. Because the property he purchased had been in his family for more than a century, he did not think he needed title insurance. He had a conventional survey performed to establish his property boundaries. This survey was performed based on a 50-year-old fence line on the far side of the property adjoining Mr. Jones's. A year ago, Mr. Williams purchased that neighboring property. Mr. Williams did purchase title insurance, and he had a satellite survey performed. The satellite survey disregarded the established fence line. According to the new survey, Mr. Williams's property line starts several feet from the fence line, so of course his opposite boundary extends several feet onto Mr. Jones's property.

Here's what happened. Many decades ago, Mr. Jones's ancestors purchased 100 acres of land that included Mr. Jones's land, Mr. Williams's land and the other parcel adjoining Mr. Williams. At that time the surveyor made a mistake and the buyers only got about 99 acres. When the land was broken up, the descendants of the original owners still thought they had 100 acres. So they sold Mr. Jones his four acres. Someone else had already bought the 3 acres next to Mr. Jones, and like him, they had based their property line on the old fence line. Well, Mr. Williams came in and bought the remaining 93 acres. A few months later, he bought the 3 acres next to Mr. Jones. That's when the discrepancy was discovered. So now there is an approximately one-acre area of land that is contested. The only access Mr. Jones has to his property is a driveway that, of course, is located within the contested area. To complicate matters, Mr. Williams, brought his workmen out one day while the Jones's weren't home and dug a pond, which extended into the contested area. In the process, he ran over Mr. Jones's sewer system with his tractor, causing a terrible sewage leak that created a smelly, horrible cesspool in Mr. Jones's yard. Soon afterwards, Mr. Williams sued Mr. Jones to gain title to the one acre.

This court battle has been going on for about one year. Of course Mr. Jones doesn't have title insurance so he's paying all of his legal fees out of his own pocket. To date, he's paid about $8,000, a sum far larger than the market value of his property.

This case is still in the courts and who knows how it will turn out. But whether Mr. Jones wins or loses, he's still going to lose because the battle cost him so much money, not to mention stress.

 

Lesson Learned

The lesson here is simple. Buy title insurance whether you think you need it or not. Mr. Jones was so sure he wasn't going to need it - in fact that may have been the most costly assumption of his life.

 

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The Bat House

 

The Problem

An older couple, we'll call them John and Mary Jones, purchased a house in the Southeastern area. They didn't know nor were they advised by their agent to have a home inspection, even though the house they were buying was over 30 years old. The couple did not even know they had the right to a final walk-through inspection. Apparently, their agent had better things to do than to help these clients.

After they closed on the house and moved in, Mary was emptying the water in the kitchen sink one day and it started backing up. The next day, the washing machine overflowed. John took a look under the house and found several leaks, so the Jones's called a plumber. The plumber came out, and as he was tapping on a drain, the entire bathroom floor fell in.

Later, the dryer door was not closing properly so the couple called a local repair company. The person they spoke to told them that they had been to the house before and had told the previous owner that parts were no longer made for that particular dryer.

The big problem started when the air conditioning wouldn't work properly. The service person discovered that there wasn't a filter in the unit, which caused it to malfunction. The repairman decided to go into the attic to investigate further and discovered thousands of bats that were covering the eves, preventing proper ventilation in the attic. But here's the nasty part: five 55-gallon containers of bat guano - yes, that's what you think it is - had to be removed from the attic. The guano had penetrated the insulation and wood in the attic and as a result, Mary developed a rare disease associated with being exposed to bat guano, which destroyed her peripheral vision.

The Jones's sued everyone involved, but some sharp defense lawyers caused them to have to settle for much less than the actual damages. The couple ended up moving out of the house - still making the payments - and living in a house donated by their church.

This is a very sad story that could have been avoided if the Jones's had had access to a little more information about choosing the right Realtor.

 

Lesson Learned

What could the Jones done to avoid such a horrible situation? 1) Have a professional Home Inspection making the contract subject to this inspection. 2) Have a CL100 Termite Letter completed prior to closing by a company the Jones family selected. 3) Have a heat and air letter completed prior to closing using their own company. 4) Completed a final walk through checking all items in the home the day before closing. 5) Demanded a written property disclosure from the seller. 6) Visit the neighbors around the property to see if the neighbors knew anything about the house or conditions. It was found in this case that the neighbors had knowledge of the bats. When buying investigate, investigate, investigate.

 

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The Backward House

The Problem

Generally speaking, homes should be bought and sold empty. The seller should be out prior to closing and the buyer should be able to examine the property, then pay for it, then move right in. That's not always possible for a variety of reasons and it's not unusual for some minor adjustments to be made. There's a right way to do that, of course. It involves a written agreement setting forth exactly who has to do what and when. People who are buying and selling don't tend to think in terms of disasters (that's the lawyer's job...they get paid to be pessimists) and they will, with the best of intentions, get themselves into incredible situations.

In this case, John and Mary were buying a house in a Western  County. The sellers were having a new house built and, as always with new constructions, things were running behind schedule. The builder (who also happened to be the listing real estate agent) was at closing and swore repeatedly that the new house would be ready within four weeks. The buyers weren't in a big hurry to move and their mortgage commitment was close to expiring so they agreed (over the attorney's objections) to let the sellers stay in the house for four weeks after closing.

The attorney prepared an occupancy agreement in which the sellers promised to vacate in four weeks, to pay the buyers' mortgage and taxes, and to be responsible for any losses suffered by the buyers if the terms of the agreement were not met. Everybody was happy (and thought the attorney was a crank for having a negative attitude). Closing took place and the sellers received full payment for the house.

Four weeks later, the new house still wasn't ready and the sellers flatly refused to move out. By this time the buyers (and their new baby) were living in the guest room at the wife's mother's house, their belongings were in storage and the dog was in a kennel. The sellers refused to talk to the buyers or to let them inside the house and referred all inquiries to their attorney. The builder/agent wouldn't answer the telephone or return calls.

After talking to the seller's attorney and the town building inspector it became clear that the situation had turned into a total disaster. The builder had managed to reverse the house plans. The working plans had been prepared from transparent Mylar plastic surveys and someone had copied the print from the wrong side resulting in a mirror image of the house in the working drawings being given to the contractors. The foundation had been put in and the house nearly completed before the building inspector caught the error and determined that the house violated the building setback lines. It was too close to the side yard line. The inspector refused to issue a final approval and construction came to an abrupt halt.

The buyers filed an eviction in the local court asking that the sellers be forced to vacate and to pay the agreed upon rent and penalties under the occupancy agreement. Litigation is time consuming and expensive though. It takes at least two months to force a tenant out of a rental property even if they don't contest the action, and the sellers contested by filing motions and spurious claims to delay matters. Things dragged on for another six months before the builder finally fixed the mess and completed the house so that the sellers could move into it.

By the time the buyers got to move into their home, they had lived in one room for seven months and the total back rent and litigation charges ran over $8,000, which the sellers refused to pay. We would have collected the money eventually but it meant protracted litigation and additional costs. This being the unusual case where the listing agent and the builder were the same person, I resolved the money problem by filing a complaint with the State Real Estate Commission against the agent/builder and the licensed broker who employed him. Rather than jeopardize their licenses in the hearing process, they paid all the back charges and fees.

 

Lesson Learned

Letting buyers move into the house early can be a problem in two ways. If the deal falls apart the buyers have nowhere to live and it's a project to get them back out. Also, no matter how many times you tell them it's an existing home and that they're purchasing it "as-is" you're still going to have problems at closing. Buyers who live in the house prior to closing will invariably show up with a three-page list of piddly problems that they expect the seller to pay for. As a seller, you should never let buyers into the house unless accompanied by you or by the real estate agent. NEVER let them move in and live there (or move their belongings in) before closing without getting some serious legal advice.

Being a nice person is all well and good but sometimes it pays to be the bad guy. Say "no," Tell them your lawyer is a crank and he won't let you do it. They have very thick skins.

And never under any circumstances buy the house and allow the seller to remain in the house. If you follow this advice you'll never have to read about yourself in one of these real estate horror stories.

 

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The Wet Floor

The Problem

Meet Susan and Bill Morris. They wrote a contract for a house in a nice subdivision. Everything went well, from the loan approval process on through the closing. The next day the movers accompanied Susan and Bill to their new house. As soon as they opened the front door, they noticed a musty smell and upon entering the kitchen they discovered the source of the odor.

The sellers of the property had not properly capped the icemaker line that attached to the refrigerator and water had leaked onto the hardwood floors in the kitchen, dining room and living room. All the boards had curled and large gaps had developed between the hardwood boards. Susan and Bill called in a contractor to give them an estimate on repairs. His answer was $9,462.

The anxious new owners are still trying to sort this one out. Should the sellers' insurance take care of this problem? Or the buyers'? Regardless, the couple had to decide whether to move in now or wait until the repairs were completed. If they waited, they would still have to pay the movers and reschedule. They had already sold their old house and their buyers were moving in the next day. Susan and Bill were devastated. What a nightmare and this could have been avoided so easily.

 

Lesson Learned

Susan and Bill could have avoided this situation by doing a final walk-through inspection a couple of hours before the closing. You mustn't do the inspection a week before or even a day before closing. It's vital that you do it the day of closing. Your agent should accompany you and bring along a checklist that will help you remember everything. Some of the tasks you should perform are: turn on all water faucets, flush all commodes, turn on all showers, turn on all appliances, check the heating and cooling system. Take a hair dryer and plug it into each wall outlet to make sure it works. Never finalize a sale until you have completed a through walk-through. If you find any problems, you can resolve them before you're stuck with it.

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The lists were reproduced with permission of "Jerry Fowler"