IS YOUR OPTION CONTRACT WORTH THE PAPER IT IS WRITTEN ON?

When I was a child, the Quaker Oats Company promoted the sale of its Puffed Wheat breakfast cereal by including a Deed for a square inch of land in the Klondike in each box. As a proud land owner at the age of 6, I thought about building a house on the top of a pole firmly planted in my inch of land in the Yukon Territory. However, I recently learned that all of us kids lost their land in the Klondike in 1965 for the non-payment of $37.20 in property taxes by Quaker Oats.

As the California Court of Appeal has just reminded us, sometimes a real estate contract is not worth the paper that it is written on. In Patel v. Liebermensch, the Court of Appeal held that an option contract to purchase real estate is unenforceable unless it contains all of the essential terms of a contract to purchase real property. In Patel, the buyer was not entitled to specific performance of the option contract because the parties had not agreed to the length of the escrow. The Court of Appeal concluded that the trial court had no basis for supplying additional terms that the parties had not agreed to. [Note, the Court of Appeal was reversed by the CA Supreme Court on 12/22/2008; see, January 2, 2009 post.]

The Patel case is a reminder that an option contract must be drafted with the same level of specificity as a purchase contract itself, and all of the essential terms must be included. If you are interested in finding a Los Angeles area real estate lawyer to help you with an option contract or another type of real estate contract, feel free to contact the author of this Blog. If you are interested in buying land in the Klondike, I suggest you consult with a real estate broker in Dawson City or Whitehorse.

BETWEEN A ROCK & A HARD PLACE -- Using A Short Sale to Avoid Foreclosure

In my December 28, 2006 post, I discussed some of the anticipated problems from the "boom" in subprime mortgages and other creative lending practices during recent years. I entitled the post, "'Creative' Financing -- The Slippery Slope in 2007."

It didn't take a crystal ball last December to predict the fall-out from adjustable rate home loans that facilitated the purchase of homes for unprecedented prices with lax underwriting and no money down. It was also apparent this would problem would create weighty issues in California real estate law during 2007 and beyond.

With the prices of homes declining in many areas, some borrowers are between a rock and a hard place. How does the owner of a home with no equity get out from under the loan without suffering a foreclosure and the resulting damage to his or her credit rating?

One strategy is a "short sale." A short sale requires the seller to first negotiate with the lender to reduce the balance of the loan subject to the sale of the property to a third party. For example, let's say the seller bought the house for $550,000 with a non-recourse loan of $500,000; the house is now worth $450,000; the seller persuades the lender to reduce the balance of the loan to $450,000 and sells the house for $454,000, with $450,000 going to the lender and the $4,000 used to pay a portion of the closing costs. The lender doesn't have to deal with the house as an "REO" (real estate owned by the lender); and the seller avoids the negative impact of a foreclosure and is no longer obligated to the lender after the sale is completed.

But there may be negative tax consequences to a short sale. Under the current tax law, the seller may have to recognize "phantom income" from the "cancellation of debt" in the amount of the loan reduction ($50,000). Any reader who wants to employ this strategy should consult with an accountant about the tax consequences of a short sale and to determine if an exemption from the payment of income tax on the cancellation of debt is available.

P.S. On August 31, 2007, President Bush proposed legislation to temporarily eliminate the recognition of income when the lender forgives a portion of the debt. Stay tuned! The Congress may move the boulder that is one of the impediments to short sale.