Pitfalls of Long Term Between Home Purchase Contract and Closing

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FreddyC
Posts: 72
Joined: Mon Jul 06, 2015 7:25 pm

Pitfalls of Long Term Between Home Purchase Contract and Closing

Post by FreddyC »

Hello all,

Looking to buy a house from the owner, where we each would have attorneys, but no brokers.

The home owner asked that we agree to contract now, but then wait for approx. 6 months to closing. This is to the seller's benefit for his capital gains tax considerations. It is a seller's market, so I want to make my offer as attractive as possible, so am willing to be flexible. A longer period before closing also gives me a healthy cushion of time to sell my current house, as well as increase the size of the emergency fund to reflect the larger future mortgage payments.

One of my big concerns is the variability of interest rates -- right now there are favorable rates that I could lock if we were agreeing to a more standard period of time between contract/closing. Other than putting in a loan contingency so that I can withdraw from the contract if we don't obtain financing, is there any other consideration on this front to be aware of? How can I be protected (if at all) if I can obtain financing but just not on as favorable terms? Is this a factor to consider in terms of pricing the contract or is there a different way to reflect this?

Are there any other concerns I should be aware of in having such a large gap in time?

Thanks!
NightFall
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Joined: Wed Mar 12, 2014 4:38 pm

Re: Pitfalls of Long Term Between Home Purchase Contract and Closing

Post by NightFall »

I suppose it’s possible for the state of the house to change during that time period. Maybe more repairs needed or something. Interest rate risk is a potential issue for you. The other downside is that you don’t have a house that you were going to purchase for 6 months, but that doesn’t sound like a problem for you.

There is a potential negative for the seller as well. Housing prices could increase (they could decrease too) during that time period. So that could be to your benefit (or detriment).
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hand
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Re: Pitfalls of Long Term Between Home Purchase Contract and Closing

Post by hand »

It seems like there would be lots of flavors of execution risk:
What if the seller dies?
What if prices go up by double digits, would the seller be willing and able to renege?
What if prices go up, and seller feels obligated to close - but not to maintain the house or clean it out?
What if something terrible happens to you and you are unable to close, what do you lose?
What if the house burns down?

The more I think this through, the more it is likely you want a contracted *right* to purchase in a specified condition, likely with specified penalties rather than an agreement to purchase at a specific date. Thinking of these possibilities and protecting you is where your lawyer should be adding value.
humblecoder
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Re: Pitfalls of Long Term Between Home Purchase Contract and Closing

Post by humblecoder »

I am going to be my usual blunt self...

Why aren't you asking your lawyer this question? You hired a lawyer for a reason. Use them.

If the lawyer you hired is worth his/her salt, then he/she should have some experience with any potential pitfalls of this arrangement and how best to mitigate those pitfalls contractually.

If your lawyer gives you a blank stare, get another one.
Topic Author
FreddyC
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Joined: Mon Jul 06, 2015 7:25 pm

Re: Pitfalls of Long Term Between Home Purchase Contract and Closing

Post by FreddyC »

I appreciate the input. There are a lot of factors beyond can this be done or how can this be done, so I appreciate the different takes. The more I think about it, the less desirable this seems - just adds a lot of risk that is not readily quantifiable. Put another way, I think there are contracting provisions that can address/resolve each of the different what ifs that have been raised, but getting to where those all line up and appropriately alter either other terms or the ultimate price is going to be too tricky.
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aburntoutcase
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Re: Pitfalls of Long Term Between Home Purchase Contract and Closing

Post by aburntoutcase »

He is trying to lock in today's inflated real estate prices and force you to take the financing cost risk in a rising rates environment. If you accept to these terms that makes you a chump unless you get him to substantially lower the selling price. You are contributing at least half the "value" here and whatever his tax savings are, you should get credit for half of that by a reduction in the sale price. I would want even more because of other risks with time. Bottom-line I would not accept this state of affairs.
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