When it comes to a real estate contract, be sure you understand what you’re signing

As featured in The Washington Post

The contract I just signed to purchase a house contained the following language: “If the buyer defaults, the earnest money will be forfeited to the seller. This is to be considered liquidated damages and not as a penalty.” Can you please explain what this means? Beth

Shame on you, Beth, for signing a contract without fully understanding what it means. It could have required that your car and your current pension plans be given to the seller if you did not go to closing. Just kidding, but stranger things have happened when people sign something they don’t understand.

In your case, should you not be able to finalize the deal, you may have to forfeit or lose the earnest money you posted when you initially signed the sales contract. But the law is clear that if the amount you are forfeiting is not consistent with what the seller may have lost because you did not go to closing — but instead is really a penalty — the law will not allow you to lose your deposit.

So lawyers put in the language you question to protect the sellers.

However, that does not mean you will lose your deposit, if you can prove that the money is disproportionate to the actual loss that your seller may face.

Oversimplified, the damages will be accepted as “liquidated” if the seller cannot really anticipate what the losses will be should you default. Accordingly, it is typical for that language to appear in real estate contracts.

So, for my buyer readers, try to post as little of a deposit as possible; and for my seller clients, try to get as large a deposit as possible.

Hopefully, you will eventually split the difference. And of course, this is completely academic if the buyer closes the deal.

My husband and I plan to buy an investment property and want to make sure our other assets are protected. What is the best way for us to take title? Emily

I cannot provide specific legal advice. However, in general, there are three ways in which title can be held.

First, you can take title individually, in the names of you and your husband. That provides the least protection. Even if you have more than adequate insurance — including umbrella coverage — there is always the possibility that your other assets can be grabbed. For example, a court judgment exceeds the insurance limits; or the insurance carrier declines coverage for reasons spelled out in the insurance policy.

Next, you can take title in the name of a corporation. Talk with your financial advisers about this approach; from my experience, there is too much paper work and corporate filings required to make this a favorable option.

Next, you can take title in the name of a limited liability company (LLC). Although I don’t normally make recommendations, this is what I generally suggest to my investor clients. The LLC provides the same protection as if it were a corporation but with less complications and less paperwork. Oversimplified, it is called a “pass through” entity; the LLC files an information tax return but the profits or losses are “passed through” and you include those numbers on your individual tax returns.

Every project is different; review these alternative but discuss with your financial and legal advisers. The recent tax proposals submitted to Congress by President Trump seem to favor pass-through legal entities, and as we all know, Congress has the final say.

I am a teacher, and I live in a co-op. I paid $200,000 cash for my apartment in 2003. In 2008, I took out an HELOC loan on my equity. I now owe $75, 000 on it. When I signed the papers, I was told that if I did not sell my home before principal and interest payment kick in I would just need to apply for refinancing. I did that a few months ago while rates were low and everything was set within a week. My FICO score hovers at 800. At the last minute, I was called by the bank to say “sorry, we no longer finance co-ops as we did when you got yours.”

I cannot find an instance where my co-op had a problem with a bank. In checking around, I have not been able to find any local banks who finance co-ops, especially for such a low amount.

Any suggestions? I do not want to sell my house and renting is astronomical.  — Kim

Assuming your cooperative apartment did not dramatically go down in value since you bought it some 14 years ago, you clearly have considerable equity. I know that not every lender is prepared — or even understands — how cooperative funding works, but clearly there are lenders out there that can assist.

First, is there a teacher’s credit union near you? From my experience, many credit unions will make you a loan based primarily on your credit standing. They need to take the ownership certificate (often called “shareloan certificate”) as security, but that is something that any local real estate attorney can easily assist in doing.

Another source of lending is the National Cooperative Bank ( www.ncb.coop ). Although its main office is in Arlington, Va., it can make loans all over the United States.

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