Dealing With Deadbeat Agents

By Robert J. Bruss
Saturday, October 7, 2006

Q: DEAR BOB: What recourse does a home seller have against a deadbeat real estate agent? Knowing we are in a buyer's market, I signed a listing with a high-profile agent professing to have great marketing skills and a fabulous sales record. What I wound up with was an agent who put up the for-sale sign, listed my home on the multiple listing service and then disappeared. No communication, no updates about marketing and no showings. Can I cancel the listing contract with no penalty and list with another more competent agent? -- Suzanne Z.

A: DEAR SUZANNE: It sounds as if you listed your home with an agent who takes lots of listings, knowing only some of them will sell. Before giving up on your listing agent, call him to discuss the situation. Ask why he didn't have a broker's tour for local agents. Ask what specific advertising he is doing for your home. Ask when he will be holding weekend open houses. Ask what he is doing on the Internet to sell your home. Ask if there is anything you can do to help him shape up and sell your home.

Be persistent but polite. Tell the agent you are disappointed and you expect him to phone you at least once every week to report on progress. If he refuses to cooperate, tell him you want your listing canceled immediately in writing so you can list with a more effective agent.

Another alternative before canceling the listing is to speak with his office brokerage manager. Explain why you are unhappy. That manager should suggest either switching the listing to a better agent within the same firm or canceling your listing.

Before you re-list with another agent, interview at least three successful agents who sell homes like yours in your vicinity.

DEAR BOB: I own a rental property with an adjustable-rate mortgage. The mortgage balance is about $74,000 and the property is worth about $714,000. My ARM is getting close to its next interest-rate adjustment in November. The lender urges me to refinance with a fixed-rate mortgage for 10 years. I am 76, retired and I think refinancing is risky and expensive. The rental income will more than pay an interest-rate adjustment, which is tied to the 11th District Cost of Funds Index. What should I do? -- Diana C.

DEAR DIANA: If I were you, I wouldn't do anything. It sounds as if you have an excellent mortgage with a low balance compared with your property value. The 11th District Cost of Funds Index moves slowly. Unless you have a need to refinance to take out tax-free cash from your huge equity, I see no reason to refinance even after your ARM adjusts.

DEAR BOB: I put my apartment units up for sale. A buyer made a purchase offer, which I accepted. He paid $2,000 good-faith money. But I changed my mind and want to stop the sale. What penalties will I incur? -- Larry Y.

DEAR LARRY: It sounds as if you have seller's remorse. If I were the buyer's real estate lawyer and the buyer still wanted to buy your apartments, if you refused to deliver the deed as agreed in the contract, I would advise my client to file a specific performance lawsuit against you and record a lis pendens against the title.

Unless you have a valid legal reason to default, the court will issue an injunction ordering you to deliver the deed under the terms of the sales contract.

Before you refuse to perform under the contract, I suggest you contact the buyer and the real estate agent to have a friendly conversation about being released from the sales contract. The agent has a stake in this situation and might sue you for lost sales commission. For more details, retain a real estate lawyer.

DEAR BOB: I am considering getting a senior-citizen reverse mortgage on my home, but what happens after I die? Who makes the decisions concerning the sale of my home, such as selecting the real estate agent, asking price and repairs to be made? Who makes the decision to accept an offer or make a counteroffer? What if my son does not accept an offer and the house sits empty? What action can the reverse-mortgage holder take? -- Frank M.

DEAR FRANK: Presuming your son is your sole heir, if he doesn't cooperate with the lender to pay off the reverse-mortgage balance after your death, the reverse-mortgage lender can hold a foreclosure sale. Then the lender gets paid the mortgage balance, and any foreclosure-sale excess cash goes to your heir. However, if your heir wishes to keep the house, he can obtain a new mortgage to pay off the reverse-mortgage balance and then own the house subject to the new mortgage.

DEAR BOB: Our neighbor recently sold her property and carried back a $20,000 mortgage on the $120,000 sale. When the neighbor moved out of state, we assumed that mortgage and installment note. We thought that if the borrower defaulted, we could foreclose and the property would become ours. But a friend told us a public auction is required and we would have to outbid any other bidders to retain the property. Is this correct? The payments are now four months in arrears. -- Susan M.

DEAR SUSAN: Don't worry. As the foreclosing lender, you can submit a "credit bid" for the amount that is owed to you, including attorney or trustee's fees and other expenses of foreclosure. With the monthly payments four months in arrears, it's time for you to consult a lawyer to start the foreclosure. A public auction is required. If a bidder shows up and bids $1 more than the amount owed to you, including costs, then you receive that cash and walk away happy. If no bidders show up, you get title to the property subject to any first mortgage, hopefully for a profit.

DEAR BOB: My nephew is interested in acquiring, renting and perhaps selling residential properties. What are some good books for beginner real estate investors? -- Ed K.

DEAR ED: Two recent good books for your nephew are "Real Estate Investing for the Utterly Confused" by Lisa Moren (McGraw-Hill, 2006) and "Buy Even Lower" by Scott Frank and Andy Heller (Kaplan, 2006) -- written by two successful investors.

DEAR BOB: I have owned and lived in my home about six years. I want to build a single-family house on my large corner lot. Can I live in the new house for two years without paying capital gains tax and, if I rent my old house, am I still exempt from capital gains tax when I decide to sell? -- Julianne S.

DEAR JULIANNE: If I understand your question correctly, you plan to move into the new house to be built and then rent your current residence for a few years before selling it. Until a property is sold, no tax consequence occurs.

To qualify for the Internal Revenue Code 121 principal-residence-sale tax exemption up to $250,000 (up to $500,000 for a qualified married couple filing a joint tax return), you must have owned and occupied the home at least 24 of the last 60 months before its sale. That means you can rent your old home up to 36 months before losing your IRC 121 principal-residence-sale tax exemption. Consult a tax adviser for details.

DEAR BOB: A friend owns a vacation home at Lake of the Ozarks in Missouri. She said if she sells, she has 45 days to buy another piece of property, perhaps a condo in Florida, before she owes tax on her profit. Is this correct? -- Sue E.

DEAR SUE: Your friend is mistaken and she should consult a tax adviser. Unless she is selling a rental property, which can qualify for an Internal Revenue Code 1031 tax-deferred exchange, she will owe capital gains tax on her sale profit. There are no special tax breaks for the sale of a nonrental vacation property.

DEAR BOB: You often discuss partition lawsuits where one co-owner wants to sell but the other co-owner doesn't. Does a judge have to grant permission for the partition lawsuit to force the sale of a property? If so, when one co-owner wants to buy out the other co-owner, might the judge deny a partition sale and allow the purchase by the co-owner? -- Mark S.

DEAR MARK: Judges don't have to grant a partition lawsuit brought by a property co-owner, but they usually do, even when a majority of the co-owners don't want to sell. Of course, a judge can grant a continuance for one co-owner to buy out another co-owner. Anything can happen in court.

DEAR BOB: What are your views on investing in commercial real estate, compared with residential properties? I read about the ease of renting commercial properties where the leases last for many years, instead of a year for apartments and rental houses. Would commercial properties be too complicated for a new investor? -- Karen C.

DEAR KAREN: I recommend rental houses because they are so easy to buy, finance, manage and profitably resell. Having owned commercial and apartment properties, I find single-family rental-house investing to be easier and more profitable.

However, a contrary view is contained in the superb new book "Confessions of a Real Estate Entrepreneur" by James A. Randel (McGraw-Hill, 2006).

DEAR BOB: I own rental properties in Las Vegas and have been calculating my depreciation tax expense by using the property tax assessor's tax ratio between land and building value. My problem is that the depreciable building value is low at only 36 percent to 50 percent. I think I should be taking a bigger depreciation write-off. I've heard of investors using an 80-to-20-percent ratio of building to land. What should I use? -- Julie T.

DEAR JULIE: The exact answer depends on the type of property. For example, if you own a rental condominium, your building-to-land ratio will probably be about 98 percent to 2 percent.

The local property tax assessor's ratio of building to land means nothing. He still gets the same market value and property tax no matter what the ratio. All that matters to him is the total property value for tax assessment purposes. When the IRS audited me on this issue several years ago, I showed the IRS agent my property insurance agent's replacement cost estimate for the structures. The IRS readily accepted the insured replacement cost for allocating depreciation, with the remainder of my property purchase cost going to the nondepreciable land value.

Since then, I have talked with tax advisers and other investors who use the same method of taking the insurance replacement cost to justifiably arrive at the depreciable value of the structure.

DEAR BOB: I am a real estate agent about to make a purchase offer on a property with a contingency. Can you outline how to make this appealing to the property seller? -- Dede C.

DEAR DEDE: You ask a difficult question. In the current buyer's market for homes in most cities, most sellers are glad to receive any purchase offer. If the seller doesn't accept your buyer's offer, be sure the seller counteroffers to keep negotiations moving. Don't leave until you have a written counteroffer.

Make the contingency clause reasonable, such as a contingency for the buyer's approval of a professional inspector's report within five business days. Provide a similar reasonable time for a mortgage appraisal within a short time. In most cities, inspectors and appraisals aren't too busy to meet short deadlines.

However, if the contingency clause involves the sale of the buyer's current home, show the seller the home is listed for sale with a reputable local realty agent. Include a 48-hour release clause in the purchase offer in case the seller receives a better no-contingency purchase offer from another buyer.

DEAR BOB: I own a rental condo in Florida that is rented on a one-year lease and I live out of state. What is the best way to protect myself from liability in the event of an accident on the property? I have considered transferring title to a limited liability company. I am concerned that will require special insurance and additional transfer costs. Would buying additional liability insurance be better? -- Jeff M.

DEAR JEFF: Be sure you have adequate rental owner's liability insurance for at least $300,000. If your net worth exceeds $1 million, ask your insurance agent about an excess liability umbrella policy for $2 million or $3 million. It's cheap, usually just a few hundred dollars per year.

However, be sure your basic rental owner's insurance and the umbrella policy are with the same insurer so there is no conflict between insurers if a large negligence liability loss occurs in your condo. Also, your umbrella liability policy will protect you against other losses, such as your negligence in a serious auto accident.

DEAR BOB: I like your idea of using a lease-option to sell houses and condos in a tough market. As a real estate agent, I have a question. Do you set the option purchase price when the lease-option is signed or when the option is exercised? If the option price is set up-front, it seems to me that hurts the seller if home prices go up. -- Sylvia R.

DEAR SYLVIA: As a buyer and seller of rental houses and for my personal use, I have been using lease-options at least 25 years. I have always set the option purchase price at the time of entering into the lease-option contract.

However, as a seller I sign only one-year lease-options. At the end of each year, if my tenant isn't ready to exercise his purchase option, I then have the right to "adjust" the rent and the option purchase price.

If market values and rents haven't increased substantially, I leave the terms unchanged. However, when rents and market values escalate, then I raise the rent and the option purchase price annually.

But as a lease-option buyer, I try to negotiate the longest possible term. The best I've ever done was a 15-year lease-option with no change of rent or option purchase price. I exercised my purchase option in the 13th year at the option price negotiated with the seller 13 years earlier.

DEAR BOB: My daughter wants to buy a house with a co-worker. Do you know of a contract form to cover the possible contingencies, such as what to do if one is unable to pay her half of the mortgage payment and expenses? What do you advise regarding the best way to hold title? -- Vincent C.

DEAR VINCENT: Your daughter should consult a lawyer to discuss her concerns. There is no standard form to cover all the possible contingencies for the situation you describe. Unless it is a long-term relationship with a "significant other" or extremely good friend, I do not recommend co-ownership with a friend. The possible problems are endless. It's easy to buy a property together, but it can be extremely difficult to split ownership fairly if that becomes necessary.

DEAR BOB: What is your opinion of a "negative-equity home loan?" I am 68 and am looking for a retirement home, but I am concerned about keeping my monthly payments as low as possible. I won't have much cash left after the sale of my current home. -- Helene P.

DEAR HELENE: I am not familiar with a "negative-equity home loan." If you meant a "negative-amortization home loan," my best advice is to stay away. A negative-amortization home loan can result in your monthly payment being lower than the interest earned by the lender. Any unpaid interest is added to your mortgage balance with the unpleasant result of you owing more than you borrowed.

After selling your current home, if you can pay at least a 50 percent cash down payment on your retirement home, you may be eligible for a Fannie Mae reverse mortgage for home purchase. No monthly payments are required. To find a reputable local reverse mortgage representative, go to http://www.reversemortgage.org/ .

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

2006Inman News Service