Real Estate Mailbag

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Real Estate Mailbag

By Robert J. Bruss
Saturday, May 7, 2005; F18

Q DEAR BOB: My wife and I are planning a trip soon and don't have time to prepare a living trust through a lawyer. Instead, we bought a living-trust kit to prepare our own. We have three beneficiaries and plan to list in the will our home in Idaho, plus another home under construction in California. We plan to have our document notarized before we leave on our trip. If we should both die on the trip, we have instructed the trustee, our daughter, to sell the homes and distribute the net proceeds to her daughter and her brother, as detailed in the living trust. Can our beneficiaries be our trustees? Will listing our major assets in this living trust and having the document notarized be sufficient? -- Glenn M.

ADEAR GLENN: Your description indicates you have created a worthless living trust. You must transfer the titles to your major assets, such as those two homes, from yourselves to yourselves as trustees of your joint living trust. This is known as funding the trust. If you both die on your trip, your beneficiaries will have to probate your estates in Idaho and California, where you are building another house, unless the state probate exemption for a small estate applies.

I hope you and your wife have up-to-date wills to be probated in court if you die, because your empty living trust won't avoid probate costs and delays. Your living-trust beneficiaries can also be named as the alternate or successor trustees of your living trust to take over after you and your wife pass on.

DEAR BOB: I have been a real estate agent for 18 years and I used to recommend my sellers provide one-year home warranty policies to their buyers. This was a great sales inducement for buyers, but a few years ago most of the home warranty companies started refusing to pay valid claims for residence components that failed shortly after home purchase, such as furnaces, air conditioners, appliances and water heaters. The main warranty company excuses for not paying are pre-existing conditions and seller's failure to maintain the equipment. I have learned there is almost no state insurance regulation of these home warranty companies. I no longer recommend these home warranty policies because they pay claims so rarely. -- Shirley R.

DEAR SHIRLEY: Thank you for your insight. You hear from your buyers and sellers about the many home warranty claims that the insurers deny. Personally, I have had no problem obtaining payments on one-year home warranty policy claims. All I had to pay was the $50 per-claim service fee. However, I haven't had a claim in the last few years and I understand the warranty companies have recently become much more hostile toward claimants.

DEAR BOB: Almost 20 years ago, my wife and I bought our second home. We and our three children have enjoyed many happy times there, but we find our use declines year by year. Last year we had a burglary, which made us think that maybe it's time to sell. Local real estate agents tell us they can easily sell "in a heartbeat" for a price that will give us about $300,000 profit. However, your recent article said there is no easy way to avoid tax on a vacation-home sale. If we rent the vacation home to tenants, how long must they rent before we can qualify for an Internal Revenue Code 1031 tax-deferred exchange? -- Ryan R.

DEAR RYAN: I recently asked your question of an IRS official in Washington, whose "official reply" was: "The IRS does not wish to provide guidance on your question." He said questions such as yours about tax-deferred exchanges are frequently asked of the IRS, but there is no minimum rental time specified in IRC 1031 or the regulations to qualify a property for a tax-deferred exchange. Consult a tax adviser for details.

DEAR BOB: What is your opinion about the new option-payment mortgages, where the homeowner can pay either interest only, a 30-year fully amortized monthly payment, or any amount in between? -- Bryan T.

DEAR BRYAN: The answer depends on how long you expect to own your house. If you plan to stay forever, I suggest paying the fully amortized monthly payment. However, if you expect to sell your home within a few years, then the interest-only option is beneficial because your monthly payment is at the minimum level and it is fully tax-deductible interest.

Watch out for a few of these new mortgages that sound attractive but have "negative amortization." That means the monthly minimum payment remains fixed for a specified time, such as six months or a year, but the interest rate changes monthly. The result of a "negative am" mortgage can be that the unpaid interest is added to the mortgage principal so you owe more than you originally borrowed.

DEAR BOB: In your recent column you advised a borrower to get pre-approved for a home loan before shopping for a home and then "keep looking for a better mortgage deal." As a mortgage broker, I put a lot of time into working with prospective home buyers to find them the best mortgage program for their pre-approval. Once this work is done, it is easy for another broker or lender to trim their profit margin and underbid to buy the business. Borrowers should do their loan shopping up front and then stick with their mortgage broker or lender unless they have a good reason to switch.

-- Jim W.

DEAR JIM: Let's face facts. When people decide to buy a home, we agree their first step should be to get pre-approved in writing for a mortgage. Then they know the maximum mortgage available and the price range of a house or condo they can afford.

At this point, most prospective home buyers are happy to get pre-approved. They are not yet in a mood to shop for the best mortgage terms. After they are pre-approved in writing by an actual lender (often arranged by a mortgage broker such as yourself), when they have a signed home purchase contract, then the buyer has time to shop for better terms or a lower interest rate.

Suppose a home buyer for whom you arranged a mortgage pre-approval comes to you and says, "Lender XYZ offers me a better interest rate one-fourth percent lower than your lender's interest rate." What is your reply? It should either be: "Here is the best I can do" or "Good luck with that other lender."

For example, I recently obtained a good, written, 60-day locked-in mortgage refinance commitment. It hasn't closed yet. But when I was in my local bank, I asked a loan officer if he could do better. He congratulated me and said I had a good deal. It's just normal for borrowers to keep shopping. Don't feel offended.

DEAR BOB: What is a predatory mortgage lender? Last year I had to refinance my home loan to pay off some debts and to pay for home repairs. Because I have a low credit score of 590, I had to borrow from a high-interest-rate finance company at 9 percent interest plus high loan fees. Was I a victim of a predatory lender? -- Mamie W.

DEAR MAMIE: There is no simple definition of a predatory lender who takes advantage of the borrower's situation, such as a low credit score, unreliable income and risky ability to repay. A few states now have predatory lending laws with specific standards. In other states, the usury laws are the only guidelines. But most states have exemptions for institutional lenders.

There are few court decisions that define "unconscionable" mortgage terms, but this is on a state-by-state basis.

DEAR BOB: We have an escrow impound account with our home mortgage. The mortgage company is supposed to pay our property taxes from that account. In 2004, our mortgage was sold from one loan servicer to another. During the transfer, either lender forgot to pay our property taxes on time. When we received a delinquent notice from the tax collector, I phoned our new mortgage company, who put the blame on the old mortgage company. Our property taxes were eventually paid from our escrow account, but the new mortgage company took the $243 late fee penalty from our escrow impound account. What should we do? -- Nathan W.

DEAR NATHAN: Now you know why I always recommend home loan borrowers avoid letting their mortgage lender create an escrow account to pay property taxes and fire insurance.

Private mortgage insurance, VA and FHA home loans require such escrow accounts. Other conventional home loan borrowers should discipline themselves to pay their property taxes and fire insurance premiums directly. Clearly, either your old or new mortgage loan servicer is responsible for failure to pay your property taxes on time. Unfortunately, your situation occurs too frequently.

If I were in your situation, I would write a polite letter sent by certified or even registered mail, return receipt requested, demanding a refund check within 10 days for that $243 late fee that was wrongfully deducted from your escrow impound account. However, don't expect to receive any check for the lender's failure to pay the late fee, which was not your fault. Then you can decide if it is worth your time to sue the current lender in local small claims court for the $243 late fee, plus court costs. Because the loan servicer doesn't want to risk receiving a default judgment for non-appearance, you will then probably receive your $243 check.

DEAR BOB: My wife and I have been fortunate. We bought our home more than 25 years ago and it has been our best investment. However, if we sell our four-bedroom home in today's hot market, our net profit will be about $700,000. That is well over the $500,000 tax exemption you often discuss. Is there any way to avoid tax on that extra $200,000? -- Dan H.

DEAR DAN: The only way to avoid tax on all of your home sale profit is to rent your house to tenants and then make an IRC 1031 tax-deferred exchange for a "like kind" investment or business property of equal or greater cost and equity.

Unless you want to acquire rental or business property in such an exchange, if I were in your situation, I would claim the $500,000 principal-residence-sale tax exemption of Internal Revenue Code 121 and pay capital gains tax on the remaining $200,000 profit. Currently, the federal capital gains tax rate of only 15 percent is a bargain at $30,000, plus any state tax, for your situation. Consult a tax adviser for details.

DEAR BOB: I am considering attending a seminar about buying foreclosure homes at bargain prices for big profits. Is this legitimate? Can big profits really be earned purchasing foreclosed houses? -- Eddy C.

DEAR EDDY: Although I am not a professional foreclosure property buyer, I have earned handsome profits buying a few foreclosed properties. If you want to spend full-time buying foreclosures, you can earn large profits. There are risks, such as title problems, misrepresentations, and unpleasant emotional situations dealing with borrowers who are losing their properties.

DEAR BOB: Two months ago a city sewer backed up into our home while we were away. After the backup filled our two first-floor bathtubs, it overflowed and ruined our hardwood floors and carpets. Our total repair and replacement costs were more than $10,000. The city said the backup was not its fault. We ask: If it wasn't their fault, who caused it? Our homeowners insurance company refused to pay, pointing to the exclusion clause in our policy for sewer backups. Do we have any recourse against the city? I talked with our family lawyer, but she said it isn't worth her time to sue the city because her fees will probably be more than any recovery for negligence.

-- Kathy R.

DEAR KATHY: Your attorney is probably correct. Cities usually deny liability for sewer backup damage. Obtaining any recovery for resulting damage is extremely difficult unless you can clearly prove negligence for city sewer maintenance. Where I live, the city has gone so far as to require homeowners by city ordinance to install back-flow valves in sewer lines to prevent damage.

I would like to be more positive, but your chances of recovering damages from the city for their negligence allowing the sewer to plug-up and damage your home are not good.

DEAR BOB: My husband died almost 10 years ago and his name is the only one on the title to our home. His will said I inherited all his assets; we had no children. Now I want to sell my home, but the title insurance company says it can't insure title for my buyer until my husband's estate goes through probate court. A lawyer said this will take at least six months. Is there any way I can sell my home sooner? -- Claudia T.

DEAR CLAUDIA: You should have cleared the home's title many years ago to transfer title into your name. Because the title is still in the name of your late husband, unless your situation qualifies for a state probate exemption, a probate court proceeding will probably be necessary before you can transfer title to the home. Consult a probate lawyer for details.

DEAR BOB: For 23 years I lived with my lover in his home. We never married because he had two children from his first and only marriage. He died in 2004, but didn't leave a will. Do I have any right to inherit his house or other assets? -- Denise R.

DEAR DENISE: Unless you can prove a common-law marriage, which is not allowed in all states, you probably have no legal claim to his assets. After he died without a written will, that meant his estate passed according to the state law of intestate succession to his closest living relatives, his two children.

Unfortunately for you, state laws of intestate succession do not provide for long-term lovers such as you. Your situation shows why others in circumstances such as yours should resolve their arrangements before a death or illness creates unexpected results. Consult a lawyer for details.

DEAR BOB: I am almost completely blind and have a seeing-eye dog. Although the apartment building where I reside does not allow pets, the landlord allows my dog an exemption as a service animal. However, several tenants have recently complained that my dog barks loudly and disturbs them, especially at night. The landlord says if I don't keep my dog quiet, he will have to evict me for breach of the covenant of quiet enjoyment for his other tenants. The building is poorly constructed, with almost no sound proofing between apartments. What should I do? -- Henry H.

DEAR HENRY: The obvious solution is to train your dog not to bark except when necessary. I realize that is probably difficult or maybe impossible.

Your landlord has a responsibility to his other tenants to prevent you from disturbing their quiet enjoyment of their apartments. If a tenant moves out because of your dog's barking, that strengthens the landlord's reasons for asking you to move. The Americans with Disabilities Act requires property owners to make "reasonable accommodation" for handicapped persons. Your landlord has done that.

If you refuse or can't keep your service dog quiet so he doesn't disturb the other residents, the landlord might have legal grounds to ask you to move or even evict you if the dog's barking is costing the landlord lost rent revenue.

DEAR BOB: My late mother's will left her assets to me, her only offspring. Her real estate is heavily mortgaged, in a distant state, and I don't want any of her assets. Neither do I want to get mixed up with probate of her estate. The lawyer who drew up her will says I must accept her assets. There are no other relatives of whom I am aware. How do I get out of this bad situation? -- Eric T.

DEAR ERIC: An heir can renounce an inheritance. You cannot be forced to accept your late mother's assets left to you in her will. Just notify the lawyer in writing of your wishes, preferably in a notarized letter so there is no question of your sincerity. If no other relatives of your late mother can be located, her assets will revert to the state government where she resided.

DEAR BOB: I recently bought a townhouse condo where I own the land beneath my unit. The homeowners association must maintain the common areas, including the landscaping outside my townhouse. About five feet away from my unit is a big old tree with roots that show on the surface and are likely below the surface, too. I noticed a crack in my foundation, probably caused by the tree roots. Can I require the homeowners association to remove the tree that is damaging my townhouse? -- Jon T.

DEAR JON: The answer is probably yes. The reason is the homeowner's association is responsible for maintenance of the common area where that nasty tree is located.

If the association refuses to cut down that tree, or at least cut its roots pressing against your townhouse foundation, it may become necessary to bring legal action against the association. Considering the reasonable cost of solving the problem, it is difficult to understand why the homeowner's association would refuse to solve the problem.

Readers with questions should write Robert J. Bruss at 251 Park Road, Burlingame, Calif. 94010, or contact him via his Web page,http://www.bobbruss.com.