Helping Your Kids Qualify for a Mortgage?

Mitchell Joyce https://creativecommons.org/licenses/by-nc/2.0/

Mitchell Joyce https://creativecommons.org/licenses/by-nc/2.0/

The Wall Street Journal quoted me in Helping Your Kids Qualify for a Mortgage? What to Know Before Cosigning on the Dotted Line. It reads, in part,

With rising interest rates and slowing real-estate sales, homeownership remains out of reach for many would-be buyers. According to the National Association of Home Builders, in the second quarter of 2022, housing affordability fell to its lowest point since the 2007-09 recession.

The NAHB/Wells Fargo Housing Opportunity Index found that just 42.8% of new and existing homes sold between the beginning of April and the end of June were affordable to families earning the U.S. median income of $90,000. This is a sharp drop from the 56.9% of homes sold in the first quarter that were affordable to median-income earners.One option to improve affordability, especially for those who lack good credit: Have mom and dad cosign the mortgage. Many parents are willing to do so, according to data prepared for The Wall Street Journal by LendingTree Inc., an online loan marketplace, which reported that 57% of parents would be willing to cosign their child’s mortgage and 7% have done so in the past.

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There is a difference between cosigning and guaranteeing. According to David Reiss, a professor at Brooklyn Law School who specializes in real estate, a parent acting as a co-borrower has the same responsibilities under the loan as their child. They are liable for the payments as they come due and can be sued by the lender for nonpayment if the loan becomes delinquent. But a parent acting as a guarantor has a different legal relationship with both the lender and the child. A parent guarantor would be responsible for the loan only if the child first defaults.

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The “Bump” Clause

The Wall Street Journal quoted me in In Cooling Housing Markets, ‘Bump Clauses’ Help Seal Win-Win Deals. It opens,

What to do when a home-seller gets an offer but holds out hope for something better?

Enter the bump clause.

A bump clause lets sellers enter into a contract with a buyer while still continuing to market the property. If the sellers get a better deal, they can “bump” the original buyer.

It’s most commonly used when a buyer’s offer has some contingency, usually that they need to sell their current home first. It can help coax the sellers into contract by offering them the ability to seek alternate buyers who don’t have a home-sale contingency or who are offering higher prices.

The clause tends to become more popular in markets that are “transitional,” where once-hot home sales are cooling but sellers haven’t yet adjusted their expectations. The tactic can be “a savvy technique” to help the sellers feel they could still get a better offer, says David Reiss, a Brooklyn Law School professor who specializes in real estate.

If the sellers do get another written offer they want to take, they must notify the original buyer. The buyer then typically has a few days to tell the seller they’ve sold their house, or that they’ve decided to waive the contingency. If not, the original contract terminates. The original buyer gets back the money they put down, and the sellers enter into contract with the new buyer.

The sellers can only keep marketing the property until the buyers satisfy or waive the contingency. So once the buyers notify the seller they’ve sold their existing home, the seller’s right to market the property ends.

Rebekah Carver, a real-estate broker with Douglas Elliman Real Estate in Brooklyn, N.Y., says Brooklyn has been a hot market for a long time, and bump clauses haven’t been common. But now she’s representing buyers on a deal where the seller had resisted signing a contract with a home-sale contingency, even though the property had been on the market for about six months. Ms. Carver offered the bump clause to try to put the seller’s mind at ease.

In general, the bump clause can “give the seller some sense of security and comfort,” says Ms. Carver. The bump clause can be proposed by either the buyer’s or seller’s side, but is often offered by the buyer’s agent as a way to get the seller to accept a contingency.

Robin Sheridan, a real-estate broker with Realogics Sotheby’s International Realty in Seattle, says that when she is representing a seller facing a home-sale contingency, Ms. Sheridan often does her own due diligence. “I want to be certain the other property is one that will sell quickly,” she says. “I vet the buyers via their lender and ensure all their ducks are in a row to navigate the two nearly consecutive transactions. Knowing the bump clause is a possibility is comforting to a seller, but most of my clients remain firmly committed to the contract in hand.”

Here are some things to consider with bump clauses.

For sellers:

• Use it as leverage. Since the house is already under contract, a seller can use the clause as a negotiating tactic with any other buyers that show interest. The seller can try to get the other buyers to outbid the current price or negotiate a contract without contingencies.

• Don’t get greedy. If the seller receives a second offer, he may be tempted to “bump” the first buyer and sell to the second. But sellers should make sure the second offer is at least as strong as the first, which means looking deeper than price and contingencies. The new buyers may have poor credit, for example, and be less likely to obtain a mortgage. “It’s a bird in the hand,” says Mr. Reiss. “If they walk away and are stuck negotiating with a second offer that’s weak, they could end up with nothing.”

The Little-Known Escalation Clause

The Wall Street Journal quoted me in Escalation Clauses: A Little-Known Bidding-War Strategy. It opens,

For home buyers locked in a heated bidding war, there is one weapon that may help ensure victory: an escalation clause.

It’s an addendum to a real-estate contract, typically when the offer is made, in which a prospective buyer says, “I will pay X dollars for this house, but if another buyer submits a verifiable bid that’s higher, I will raise my offer in increments of Y dollars to a maximum price of Z.”

These clauses are particularly useful in a competitive real-estate market where homes typically get multiple bids. If a bidding war erupts on a home, the escalation clause will automatically raise the buyer’s offer on the house by the predetermined increment, up to the maximum amount the buyer authorizes. It eliminates the back and forth of offer and counteroffer and helps the buyer avoid paying too much for a house by getting caught up in the frenzy of a bidding war. But they can be risky for buyers who use them.

“A buyer can think of an escalation clause as a ‘have your cake and eat it, too’ clause,” says David Reiss, a Brooklyn Law School professor who specializes in real estate. “But in real estate, as with cake, it is hard to have it all.”

One concern is that the buyer is tipping his hand to the seller by using an escalation clause, Prof. Reiss says.

By indicating the maximum amount he will pay for the house, a buyer is revealing important information—that he’s willing to pay more. For example: Seller lists the house for $1 million. The buyer bids $950,000 with an escalation up to $975,000. The seller can counteroffer at $975,000, knowing that the buyer can both afford it at that price and is willing to pay it.

“Sellers get more money than they ever thought they would have,” says Carrie DeBuys, a real-estate agent with Realogics Sotheby’s Realty in Seattle. In her market, it isn’t uncommon for a seller to receive “10, 15 or 20 offers on a property.”

On the flip side, an escalation clause may not be in the seller’s best interest, explains Prof. Reiss.

Say a house is listed for $1 million, and there are three bidders. Buyer A offers $950,000. Buyer B offers $975,000 with an escalation clause that could go up to $1 million in $5,000 increments. Buyer C offers $980,000. In this scenario, the seller would get $985,000 from Buyer B after the initial offer escalates over Buyer C’s offer. But, had the seller not relied on the escalation clause and instead asked the bidders for their best and final offer, he might have sold the house for $1 million. “We know that the buyer was willing and able to go up that high,” Mr. Reiss says. “Thus, the seller is likely getting $15,000 less in the escalation-clause scenario.”