It's All in the Clause

By Robert J. Bruss
Saturday, April 28, 2007

Bruss is away. These questions are taken from previous columns.

Q: DEAR BOB: We are buying an older home in a great neighborhood with outstanding public schools. As you often suggest, we insisted on a professional inspection contingency clause in our purchase offer. We also accompanied the inspector to discuss the problems he discovered. Two defects the seller did not disclose are that the roof is leaking water into the attic and that the foundation is sinking slightly in one corner, probably because of poor drainage, which can be corrected. But the roof will cost at least $12,000 to replace. How can we get the seller to pay for the repairs?-- Josh R.

A: DEAR JOSH: Although the seller made a good-faith effort to disclose known defects, perhaps he was not aware of the roof leaks and the foundation problem.

The best approach is to reopen negotiations and ask the seller to give you a "repair credit" for the leaky roof and the foundation repairs. This is better than asking the seller to install a new roof and fix the foundation because most sellers will hire the cheapest contractors who might not do a quality job.

A repair credit usually doesn't affect your mortgage eligibility amount or the appraised market value. If your seller refuses to give you a repair credit, you can always walk away.

In today's slowing home sales market, you can be sure the listing agent will help with negotiations. But don't be unreasonable. It's a good deal for both parties if the seller agrees to credit you with half the cost of a new roof.

DEAR BOB: My wife and I own a two-thirds interest in a nice house with a pool. The other third belongs to the occupant, who is not taking care of the property, is on food stamps, and is not likely to repay us or buy us out. How can we sell our interest in this house without a partition lawsuit? Private investors suggest paying him off to get him out. They offered us only a fraction of full-market value. -- John L.

DEAR JOHN: You were very lucky to find anyone who would buy a two-thirds interest in a house. Without a partition lawsuit, you can't force the occupant to sell.

I suggest that you remind the other owner that if he sells, he will receive one-third of the net sales proceeds.

If I were an investor interested in that property, I would make you a lowball offer. After taking title to your two-thirds interest, I would bring a partition lawsuit to force the sale of the property at full market value, thus making a profit.

DEAR BOB: We had a contract to sell our house. The buyer was supposed to pay a deposit into a trust account with the realty office representing the buyer. We expected to close with no problem. But a few days after the scheduled closing date, the buyer's agent told us the buyer is a "fraud" and passed forged checks for the deposit and the down payment. The agent cannot locate the buyer. Does the buyer's agency have any obligation to us to pay the deposit, which was supposed to be in a trust account? -- Charles S.

DEAR CHARLES: That dishonest buyer's agent should be reported to both the state real estate commissioner (for possible license revocation) and the local Realtors association (for discipline) due to breach of fiduciary duty to you.

There is no valid excuse for not promptly telling you the buyer's good-faith earnest money deposit check bounced.

However, I would not bother suing the buyer's agent because proving your loss might be difficult and costly. I suggest you move on. However, your listing agent should have been monitoring the situation, so perhaps he or she should share the blame, too.

DEAR BOB: I am thinking of selling my home to one of those "we buy houses" companies. It claims to buy as-is. It asks the seller to inform it of any repairs needed, but it also says that if the seller does not inform it of any necessary repairs, the company presumes repairs are necessary anyway. This firm offered me a very low price. If I accept, it performs a "due diligence" inspection before the contract is final. Do the facts that the company assumes repairs are necessary and that it highly discount the sales price change the seller's legal liability for repairs? -- Mark P.

DEAR MARK: Most states now have laws and court decisions requiring home sellers to disclose known defects of the residence in writing. Making an as-is home sale is not a method to avoid liability for undisclosed defects of which you are aware.

If you sell to those professional buyers at a price heavily discounted from market value, you should insist on a written waiver in the sales contract that you have disclosed all known defects and that the buyer has investigated and will not hold you liable for any hidden defects that might become evident later. For details, consult a local real estate lawyer.

DEAR BOB: We recently purchased a beautiful waterfront home in Washington state. This will become our retirement home in three years. We are reluctant to rent it out and are leaning toward having a housesitter live in it until we move in. the person is highly recommended by our new neighbors. However, I read somewhere that if we allow an individual to house-sit, we are granting squatter's rights. Is that correct? The sitter would not pay rent but would pay the monthly expenses. -- Jeanine W.

DEAR JEANINE: Squatter's rights (legally called a tenancy at sufferance) refers to occupancy without the owner's permission. Obviously, your housesitter will occupy with your permission, so you need not worry about squatter's rights.

Be sure to consult your insurance agent in Washington to be certain you have adequate insurance for this unusual situation, including liability coverage in case the housesitter trips on a loose carpet, which could be considered negligence by you.

You need a written agreement with your housesitter so that you can remove him or her at your will. I suggest that you consult a real estate lawyer near the property.

DEAR BOB: We own a house that has been rented to tenants for many years. Now we want to use it as our primary residence and sell it after 24 months. What documents should I have to prove to the Internal Revenue Service this is indeed my primary residence so I can claim the $500,000 exemption of Internal Revenue Code 121? -- Deb S.

DEAR DEB: Just move in. Save your utility bills and other evidence of principal residence occupancy. Be sure to file your income tax returns from your new principal residence and change your car registration, driver's license, bank accounts, etc., to your new address.

You mentioned "we." If your spouse is not on the title, that's all right as long as he also meets the test of occupying the house for 24 of the past 60 months. However, if your co-occupant is not your spouse, he or she must be on the title to claim the $250,000 tax exemption. For more details, consult a tax adviser.

DEAR BOB: My husband and I own a townhouse that we bought as an investment. Now we are considering selling it. If we agree to owner financing and retain title until the loan is paid, can the buyers deduct the mortgage interest and property taxes on their income tax returns? -- Melana W.

DEAR MELANA: Yes. The situation you describe is called a land contract sale, contract for deed, contract of sale, agreement of sale, installment land sale and a zillion other names.

The basic idea is the seller retains the legal title until the buyer makes all or an agreed number of payments to the seller. If there is an existing mortgage, the seller uses part of the buyer's payments to keep payments current on that mortgage.

As the seller, you remain the legal owner. The buyer becomes the equitable owner, entitled to the income tax deductions.

Your big benefit is you can report the sale to the Internal Revenue Service as an installment sale, paying capital gains tax on your profit over the years you receive principal payments from the buyer. You also get to pay ordinary income tax on your interest income received.

However, I do not recommend this type of sale for either real estate buyers or sellers. The potential problem for buyers is that the seller often is unable to deliver marketable title after the buyer faithfully made all the agreed payments to the seller.

The potential problem for land contract sellers, in many states, is the difficulty of getting a defaulting buyer out of the property if the buyer claims an equitable interest in it.

A better alternative is to transfer title to your buyer and carry back a mortgage or deed of trust secured by the property. Then, if your buyer defaults, you can foreclose.

DEAR BOB: Three of us jointly own a home; two want to sell. The third doesn't want to sell, which forces us to pay expensive monthly upkeep on the home. The property taxes have recently skyrocketed. What is the approximate legal fee to bring a partition lawsuit? -- Ken C.

DEAR KEN: Sorry, I have no clue how much a local real estate attorney will charge for a partition lawsuit, especially with a difficult co-owner. Try to negotiate a fixed fee, rather than an hourly fee, which might escalate if the other owner resists.

Shop around. Ask for recommendations from other local real estate investors for names of superb real estate lawyers. You will probably find a variety of fees quoted.

DEAR BOB: My husband and I each own homes from previous marriages. We each have two grown children and need information how to list these homes in our wills. We live in my home and have never added each other's names to our deeds. How do we handle this? -- Sharel B.

DEAR SHAREL: Please consult a local estate-planning lawyer. But before you do so, be sure you know what you want to do with each house after one of you dies.

Do you want each house to go to the surviving spouse? Or to your grown children from your first marriages? Be sure the lawyer you consult understands revocable-living-trust benefits so you can avoid unnecessary probate court costs and delays.

DEAR BOB: About two years ago, we refinanced our home mortgage and obtained a 5.25 percent fixed-rate mortgage. We loved the low monthly payments. Then, about six months ago, my wife inherited enough money to pay off our mortgage in full, which we did. Next, I received an excellent buyout offer from my employer to take early retirement, which I did. But now my former employer has drastically cut my retirement pension and eliminated health care coverage. As I am only 63 and my wife is 57, we are not yet eligible for Medicare. I took early Social Security, but that doesn't help much. We are rapidly eroding our savings, which were drawn down when we paid off our mortgage early. We maxed out our home-equity credit line and can barely afford the payments. What can we do? -- Richard R.

DEAR RICHARD: Your situation shows why I constantly recommend not prepaying a mortgage in full unless you have so much money that you will never need to borrow on your home equity. Obviously, that is not your situation.

Because you have insufficient income to qualify for a new home mortgage, except perhaps from a "loan-to-own" mortgage shark, your only viable alternative is a senior citizen reverse mortgage.

However, there is one little problem. Your wife is too young. To qualify for a reverse mortgage, she would have to quitclaim her half of the house to you.

Because you are only 63, with a long life expectancy, you won't qualify for much monthly lifetime reverse-mortgage income. I wish I could be more positive, but now you know why I do not recommend prepaying mortgages unless you have lots of spare cash.

DEAR BOB: I own our home with my wife. We added our adult son's name to the title so we could qualify for the mortgage. But we take the standard deduction and do not claim the mortgage interest and property tax deductions. My son has his own house. Can he claim our home's mortgage interest and property tax deductions for a second home although he does not pay anything and his name is on the mortgage and the deed? -- Kisan C.

DEAR KISAN: If your son did not pay the mortgage interest and property taxes, he cannot claim those itemized deductions on his personal tax return.

DEAR BOB: If we sell our investment property for $600,000 and net $300,000 after paying the mortgage and expenses, does our replacement property have to cost $300,000 or $600,000 to qualify for tax deferral? We would like to sell our investment property and use the $300,000 cash to buy a single-family rental house to own free and clear. -- Susan L.

DEAR SUSAN: To qualify for an Internal Revenue Code 1031 tax-deferred exchange, you must trade equal or up in both price and equity. That means if you sell your investment property for $600,000, you must acquire a replacement investment property costing at least $600,000 without reducing the mortgage balance.

Buying a single-family rental house for only $300,000 means you will owe tax on approximately $300,000 in capital gains. If you take any cash out of the exchange, that is taxable "boot."

DEAR BOB: In a recent column, you said, "Now you know why I never recommend negative-amortization ARMs." Does that mean you changed your advice? I recall that many of your columns recommended the COFI (cost of funds index) adjustable-rate mortgages, which have negative amortization. -- Tom C.

DEAR TOM: ARMs that use the COFI do not always have negative amortization where the borrower's monthly payment increases more slowly than the interest index increases. The result can be that the unpaid interest is added to the mortgage balance, thus creating negative amortization.

I have never recommended negative-amortization ARMs. I have had several COFI adjustable-rate mortgages that didn't have negative amortization.

The key question to ask is how often the ARM monthly payment and the index change. If the index rate can change faster than the borrower's monthly payment changes, negative amortization can result.

Negative-amortization ARMs can be a very bad deal, especially when the home buyer made a low- or zero-cash down payment.

DEAR BOB: I read in your column that two principal-residence co-owners (who are not spouses) can each qualify for up to $250,000 of tax-free sales profits under Internal Revenue Code 121. Can three owners of one house qualify? Would $250,000 be available to each co-owner, or is $500,000 the maximum exemption per home sale? Is there any limit to the number of co-owners who can qualify for this tax exemption? -- John S.

DEAR JOHN: There is no limit in Internal Revenue Code 121 to the number of $250,000 principal-residence-sale exemptions if each co-owner qualifies.

However, when the co-owners are not husband and wife, then all their names must be on the title at least 24 of the 60 months before the sale, and the property must be the principal residence of each owner for the required 24 of the last 60 months before sale.

An example would be three sisters who own and occupy their principal residence for the required minimum time before selling, thus qualifying for up to $750,000 in tax-free sales profits.

DEAR BOB: I am way over 65 and live in a condo that is worth around $300,000. The life expectancy of males in my family is only 50 years. I am considering a senior citizen reverse mortgage, or I might sell my condo and invest the sales proceeds. Which option do you feel is best for me? -- Wally D.

DEAR WALLY: If you are in reasonably good health for your age and expect to remain in your home for at least five years, I suggest you seriously consider a reverse mortgage.

The reason you should plan to stay in your home at least five years is to amortize the reverse mortgage's upfront fees.

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.

Copyright 2007, Inman News Service