COUPLE HEARS SOUR NOTES ON FINANCES

“If I Were You” is a regular feature in which a Chicago-area couple or individual discusses money management problems with a panel of financial advisers.  The identities of those seeking advice have been changed.

By Janet Key

KATE AND JOHN Miller, two young recently married musicians, will enter the “real world” in earnest this December when John finishes his master’s degree in music education.  KATE summed up their position succinctly:

“Since we were both music majors in college, neither of us learned much in school about using credit, investments or budgets to our best advantage – and we’d rather not have to learn by [making] too many mistakes,” she wrote.

Since writing, the Millers took advantage of two once-in-a-lifetime opportunities:  The chance to buy John’s grandmother’s house substantially below market value and the opportunity to attend an international performing musicians’ conference in France.  On one hand, they’re delighted, but on the other, they’re even more concerned about their financial future.

TO HELP THEM sort things out, The Tribune assembled a panel of financial advisers, including Thomas J. Parliment, a vice president and economist for the United States League of Savings Associations; William J. Feehan, assistant vice president and senior loan officer of the Beverly Bank, and John Peter Curielli, an attorney specializing in real estate.

The Panel was particularly interested in reviewing purchase of the house – both the terms and conditions of the contract sale and its effect on their budget.

John explained they paid $20,000 for the house, approximately $6,000 less than its market value.  The $3,000 down payment was borrowed from Kate’s parents, to be paid back this summer with part of the proceeds from a $5,000 student loan.  The rest carries a 10 percent mortgage, payable over 17 years at $175 a month.

“AS LONG AS IT’S in the family, you avoid many of the pitfalls with contract sales,” said Curielli.  “You won’t have a problem [if you default on the payments], because your grandmother’s not going to kick you out.  Your only problem is if your grandmother dies.”

But John said the contract has both his father’s and grandmother’s names on it, so that the arrangement would be undisturbed if his grandmother died before the contract was completed.

Curielli pointed out that, by keeping the contract in the family and setting it up the way they had, the Millers had avoided most common problems with contract sales.

“If these were normal times and banks were making [home] loans, I would never advise anyone to do an installment contract – there are just too many risks,” he told the Millers.  “For example, if you default on a payment, you can lose whatever you’ve put into the house as liquidated damages because you don’t have the title.”

ONE OF THE greatest problems with contract sales is the so-called “due on sale” clause found in most conventional mortgages, said Curielli.  Unable to find buyers who can secure mortgages [currently in the 16 to 17 percent range, when they can be found at all], many sell their house or condominium on contract, in effect contracting with the buyer to make the mortgage payments for a specified period of time until financing can be secured.

“When the bank finds out you’ve entered a sales contract, the ‘due on sale’ clause gives it the right to call the full amount of the mortgage,” said Curielli.  “At that point, you have to either pay the full amount of the mortgage or face a foreclosure.”

The problem can be avoided by having a lawyer review the existing mortgage for the clause or by the far riskier method of not recording the installment contract.

“BUT WHAT IF the seller is dishonest and sells the house again and again?”  asked Curielli.  “It has happened, and the buyer has no protection if the papers haven’t been recorded.”

Curielli said he prefers having all the documents in a contract sale put in an escrow account for safekeeping.

“The deed, the affidavit of title, and other papers made out to buyer should be held either by some responsible person or [an entity like] Chicago Title & Trust Co.,” he said.  “Otherwise, if the installment seller dies, you could become embroiled in probate court [when the will is settled] trying to get the deed to your property.”

He added that people buying condominiums on contract should also include the written consent of the condominium board in their escrow account.

PARLIMENT POINTED out that even though the Miller’s new house is not likely soon to need any major repairs – it has a new roof, a new chimney and has been kept in good repair – the couple’s budget has no “sponge room.”

“You’re budgeted down to the penny,” he said.

Feehan also voiced concern over the tight budget, noting that not only are some of the expenses unrealistically low, but that they would have to begin paying $225 a month on two student loans when John graduates in December.  He was particularly concerned that the Millers had no medical insurance.  

“THAT COULD SINK your whole system,” he said.  “That $3,000 loan from your parents is the only leeway you have, the only thing that could take backseat if something happened.”

But the Millers plan to pay off that loan with part of the proceeds from a $5,000 government-backed student loan [at 9 percent] – a practice that may well be illegal and could cause the loan to be called.  The Millers are using part of another student loan to pay for their trip to Europe.

“But once John leaves school, your potential income increases and, hopefully, your benefits,” said Feehan, urging the Millers to look particularly hard at obtaining medical benefits.

“You had a great opportunity and you took it,” said Parliment of their decision to buy the house.  “You made a good decision, but you’re skating on a thin edge [with your budget] in terms of breathing space.  The first thing you’ve got to do is build breathing space.”

EVEN BEFORE THAT, however, the Millers must pay income taxes on what they earned in 1981.  Because both are self-employed, there is no withholding for income taxes and Social Security contributions.  The panel urged them to begin filing quarterly estimates of their earnings with the IRS.