I am a buyer in a real estate transaction for a condo in California. I have been in escrow for the past 45 days but have been unable to obtain a loan due to the fact that the condo is on leased land which is due to expire in close to 30 years and the bank does not want to take the risk. There was a finance contingency. A 15 year loan would not be satisfactory to me and I may not even qualify for it. Can I cancel and get my earnest deposit back, thanks.
California says the condo is, I guess technically, not considered real estate because of the less than 30 year lease term. This may be a large exit door for you.
Although I’ve run into this problem in Hawaii with clients, never in California. A practical solution is to find out if it’s possible to have the lease extended past 30 years. That worked for me many years ago. If the land owner will do this you’ll probably be able to obtain your loan.
Otherwise, this gets into a legal judgment call. Does the contingency specifically say you’re to obtain a 30 year loan? Or did you leave that section blank? If the terms of the loan are not mentioned you are in a gray area, and might be better of consulting a real estate attorney.
In the end, this may be much like a trick question on a test in school. My first comment will probably be your out. A five minute consultation with an attorney should solve this for you, and put a smile on your face.
Kris Berg says:
I’ll take a different approach and answer the direct question – Can I cancel and get my earnest money back? The answer is… it depends. The Residential Purchase Agreement we use in California specifies dates for buyer contingencies being removed; one of these contingencies of course is the loan contingency. Our default contract language specifies 17 days within which the buyer can satisfy themselves as to their ability to secure financing. This timeframe can be changed in the initial offer or in subsequent counter offers. It is important to remember, however, that we use the “active” method of contingency removal, which means that regardless of contractual timeframes, until the buyer actively removes the contingency in writing, the contingency is alive and well. So consult your agent or consult your contract. If the financing contingency has been removed, your earnest money is at risk, as cancellation would represent a breach. However, if your financing contingency is still in place, and as Jeff said, your contract spelled out that you would be pursuing 30-year financing, you very well be able to take your money and go home. Further, if any active contingency remains, you can cancel regardless of how your loan contingency is written. This all assumes, of course, a resale purchase using the standard California Association of Realtors purchase offer form. If the condo is new construction, you have likely signed the builder’s own contracts which may be very different, so you would need to review the specific contingency provisions of those.
Now on to the subject of a condominium being on leased land. I confess, I had to speak to my favorite mortgage broker on that one. The projects in and around San Diego county, at least, have not been much of an issue with financing it seems, since they are fairly new and the lease expirations aren’t as looming as in your circumstance. The mortgage broker I spoke with said he is seeing more of these leased land situations, on Tribal lands for instance, and while not all lenders are willing to lend on these homes, he has not encountered an instance where he couldn’t find suitable financing somewhere. Again, the difference is that the leases have longer periods of time remaining.
Having said all of this, I agree with Jeff that a real estate attorney could give you some pretty hasty clarity.
December 4, 2006 — 4:38 pm
Doug Quance says:
I would further add that I hope there is a good reason for pursuing a condo on leased land… when I’m sure there are other options available in the area.
If you think obtaining financing is tough now… how about in a few more years when it’s time to sell? And considering how many lenders resell their paper shortly after funding a mortgage, it sounds like the lender(s) in this example are concerned that they might not be able to resell the loan.
Me, personally… I think I would be looking for an exit strategy.
December 5, 2006 — 6:44 am
Jeff Brown says:
Homes on leased land has worked well in a few areas for decades, but in general the public would just as soon own the land.
You’re right about the lender’s reservations. Since the lease has less than 30 years to run, the secondary market will not consider the security to be real estate.
December 5, 2006 — 9:51 am