Bob Bruss

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Buying, Selling and Financing
Real Estate
Hosted by Bob Bruss
Monday, Oct. 23, 2000; 1 p.m. EDT

Buying a house -- or even thinking about buying one -- is a complicated process, particularly if you haven't done your homework. What should you look for in a piece of real estate? How do you get the best financing? And how is the process different when selling property?

Bob Bruss has been taking the mystery out of buying, selling and financing real estate for 26 years with his weekly syndicated "Real Estate Mailbag" column. Bruss also writes "Real Estate Notebook," "Real Estate Law and You" and the "Real Estate Book Review" features. In addition, he writes two monthly real estate newsletters and is the author of the books "The Smart Investor's Guide to Real Estate" (Crown, 1985) and "The California Foreclosure Book" (1992).

A native of Minneapolis, Minn., Bruss is a real estate lawyer and broker in California. He holds a business degree from Northwestern University in Evanston, Ill., and a law degree from the University of California's Hastings College of the Law in San Francisco. Bruss has taught real estate law at the College of San Mateo and for the the University of Southern California's College of Continuing Education. He has owned investment properties in California for more than 33 years, gaining experience in renovating old fixer-up houses, which became his hobby.

Need advice about buying, selling or financing real estate?
The transcript follows.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

Ridgefield, N.J.: I don't have money for down payment, but I would like to buy a house. How I can do that?

Bob Bruss: There are now many no and very low down payment home loan programs. If you are a qualified veteran, VA offers nothing down loans. FHA offers 3 to 5 percent down payment plans. Countrywide mortgage, and others offer nothing down programs. Virtually every lender offers Fannie Mae and Freddie Mac 3 percent down-payment plans. Before shopping for a home, get pre-approved for a mortgage so you will know what price range to look. A reputable local mortgage broker can explain the details. Or go direct to a mortgage banker, such as Countrywide. One way or another you can buy a home with virtually zero cash out of your empty pocket!

Reston, Va.: My boyfriend and I with our three children have been living together for one year. He has recently filed bankruptcy and my credit is slow. How can we plan to purchase a home together and what programs would most likely be able to assist us given our situation?

Bob Bruss: Until your husband's bankruptcy is discharged (completed), very few lenders will even talk to him. If you have sufficient income to qualify for a mortgage on your own, even with bad credit, there are "sub prime" lenders who will make a mortgage loan in your name alone. An experienced, reputable local mortgage broker can best explain your choices. But the interest rate will be high, probably around 11 to 13 percent today. However, if you make the loan payments on time for one or two years and clean up your credit, then you can probably refinance to lower your interest rate. I sold a home to a couple like you about three years ago. After a year of on-time payments, they were able to refinance at a much lower interest rate.

McLean, Va.: Bob,

In June of 1999 my wife and I bought a single-family house for our primary residence. In that same month we began renting out our previous residence. Our cost basis for that previous residence was $91,000; the single-family house where we now reside cost us $250,000. Question: What are the tax implications be if we were to sell the rental property for about $80,000 in June of 2002? Is there any justification for selling the rental property either sooner or later than that planned sale date?

Bob Bruss: Just to clarify the question, I presume you moved into your new home in June, 1999 and then converted your former principal residence to a rental then. Also, I'll presume your basis for the rental house is now $91,000 and you can sell it for an $80,000 profit (the question says you can sell it for $80,000 -- that's a loss and there's no tax advantage for selling at a loss!). If you want to sell your rental house and use the $250,000 ($500,000 for a married couple filing jointly) principal residence sale tax exemption, you must have owned and occupied the home two of the last five years before its sale. That means you have three years from the date you moved out (June 1999) to sell it and claim up to $250,000/$500,000 tax-free sale profits. You can use this great tax break of Internal Revenue Code 121 once every 24 months. Isn't Uncle Sam nice?

G'burg, Md.: Help Help! Tax questions. Setup: I buy a house (in another state, if that matters) -- second home, might rent, might move into early next year. Regardless, what can I deduct from taxes? Points? Closing costs? Down payment? Must closing be before Dec. 31 to take advantage of tax breaks for this year?

Thanks, I really appreciate this.

Bob Bruss: If you are buying the second home as either your principal residence or a vacation home (NOT as an investment property), then you can deduct loan fee points paid to obtain an "acquisition mortgage" to help you buy that residence. The down payment, of course, is not tax deductible. It becomes part of your cost basis for the home purchased. Deductible closing costs which you might encounter are pro-rated property taxes and pro-rated mortgage interest. Most other closing costs are not tax deductible. But save all your closing settlement papers so you can add those nondeductible closing expenses to your new home's adjusted cost basis, thus reducing your taxable capital gain when you eventually sell that property.

Hasbrouck Heights, N.J.: If I buy a two-family home that has tenants whose lease has just been renewed, am I obligated to honor it or can I have them move since I need the space?

Bob Bruss: Property buyers must honor existing leases. For example, if your tenant in that duplex just purchased has 10 months remaining on her lease, you cannot change the terms of that lease or cancel it (even if you want to move into that unit). You have to wait out the tenant. Presuming it is not in a rent control town, then you can get the tenant a Notice to Move after her lease expires. Until then, enjoy collecting the rent each month.

McLean, Va.: Hello Bob!!
I love your column that appears in The Washington Post's Saturday Real Estate section; it is a tremendous service and a great education.

I am thinking of one day investing in a rental house with my brother. He has a mortgage on his condo and I will one day have a mortgage on my own place.

How can folks who already have mortgages on their personal residences qualify for loans on investment properties??

Bob Bruss: Thanks for your kind words. THE WASHINGTON POST readers are the best. My column has been in your newspaper about 26 years and the mail volume is still extremely high. Getting to your question, there is no limit to the number of mortgages you can have. Fannie Mae and Freddie Mac recently lifted their limit of four mortgages per investor. Even I couldn't qualify until recently (thankfully, there are many other lenders without limitations). Personally, when buying rental houses I like to finance the purchase by either taking over the existing mortgage (if any) or getting the seller to carry back a first or second mortgage (this is called seller financing). An excellent brand new book for you to read is David Schumacher's "Buy and Hold: 7 Steps to a Real Estate Fortune." Amazon.com has it, as do local bookstores. Getting a new mortgage to rental houses can be difficult, because the rent usually isn't high enough to pay the payments, property taxes, and other expenses. That's why I try to avoid getting a new loan when buying rental property and prefer to take over existing financing or get the seller to finance the sale.

Baltimore, Md.: Hello,

How does one know when it is better to buy than to rent? Living in Northern Virginia, all that I would be able to afford would be a small condo. I don't see my finances changing dramatically enough to be able to afford anything else in this area. Yet everyone tells me not to "waste" money on a condo. Would it really be better to rent and just try to save more to afford a house possibly 7-10 years down the road?

Thank you.

Bob Bruss: If you plan to stay in the Washington area for at least five years, you'll probably be better off buying than renting. Real estate is a long term investment. Buying a one bedroom condo NOW (stay away from studio condos as they are too hard to resell) will get you started building some equity. Why wait? After five to 10 years, you will probably have enough equity from mortgage paydown and market value appreciation to sell the condo and use your equity to buy a small house, if that's what you really want. Trying to save for a home down payment, while wasting money each month on rent payments, is like being on a treadmill that never lets you get off of it.

Fairfax, Va.: Bob, I am planning to buy a new home. Builder is asking for a deposit of at least 5 percent of the total cost and 20 percent of the option at the time of the contract. If in any case I need to cancel the contract, do they pay the interest for that amount? They are asking for at least 8-9 months of time for the completion. What is the good time to look for financing? What should I look for mainly during the shopping for the mortgage? If the mortgage is rejected or if I have any problems, what I should I do? Can I cancel the contract? Do the builders normally pay the down payment back?

Thanks
Sri.

Bob Bruss: Wow! I could write a whole newspaper column to answer your questions. Don't make a deposit if you have any thoughts of cancelling your purchase because getting your deposit refunded can be extremely difficult. You say the builder wants a 5-percent deposit. That's reasonable. But then you say he wants 20 percent of the option at the time of the contract. I don't understand that. Many home builders offer mortgage financing as part of their home purchase package so you can get pre-approved (or at least pre-qualified) for a mortgage now and you'll know if you qualify. Be sure your purchase is contingent on obtaining a mortgage and your deposit will be refunded if you can't qualify for the mortgage you need. If you are making a large deposit payment, and you want to receive interest on that money, put that in your written contract. Be sure to get everything in writing to prevent misunderstandings. As for the best type of mortgage to obtain, shop among several lenders to compare fixed and adjustables. At the moment, 30-year fixed rate mortgages are usually the best deal.

Camp Springs, Md.: What kind of tax breaks can I expect from purchasing my first home a few months ago? Is all of the interest I paid tax deductible this year?

Bob Bruss: Yes, all your home mortgage interest paid in 2000 qualifies as an itemized income tax deduction. Don't forget to deduct your property taxes actually paid to the tax collector (not just deposited into your escrow account). Also, review your closing settlement statement as you might have paid pro-rated property taxes and pro-rated interest at that time. They are also tax deductible. In January 2001, your mortgage lender should mail you a statement of your deductible interest and property taxes (if you have an escrow account). Also, if you paid loan fee points for your home acquisition mortgage, they are deductible in the year paid. Be sure the lender includes that loan fee on the statement.

San Francisco, Calif.: Bob --
Just wanted to say I have been reading your column for 10 years (first in D.C., now in SF), and I have always found it informative, entertaining, and useful.

I'm 22 now, and wondering if I can ever afford a home in the Bay Area -- prices always seem to be out of reach. Should I save my money and move somewhere I can afford? Or make a big stretch and buy a house I can barely afford, in hopes it will appreciate?

Bob Bruss: Every time I've bought a home I've had to stretch my budget. I remember lying awake the first night in my current home worrying I wouldn't be able to make the monthly mortgage payment. But then I realized the mortgage lender wouldn't have loaned me the money if I couldn't afford the payments. You'll probably have the same worries. If you plan to stay in the same area for at least five to 10 years, I recommend buying a small house or maybe a one or two bedroom condo. Start building some equity. Don't waste money on rent.

Fairfax, Va.: We were fortunate enough to buy our home right before the latest increase in housing rates...and in addition we bought below market value since the home was for sale by owner and we had no agent. Long story short our house was purchased for $150K in 1998 and now is valued at about $220K. We know if we sell now, it will be akin to selling high, buying high. How can we best manage this increase in value without losing out in the long run. By the way, we love our home but will probably need to move to a slightly bigger home in about five years.

Bob Bruss: Since you say you don't really want to sell your home now, put that idle equity to use by taking out a home equity loan to use as a down payment on another residence, perhaps where you eventually want to move in a few years. Meanwhile, you can rent it to tenants to get some tax deductions while you build equity on two houses.

Temple Hills, Md.: My husband and I purchased our first home in August of this year with an 8.5-percent interest rate. Will we be able to refinance for a lower interest rate before one year of payments have been made?

Bob Bruss: Presuming your mortgage does not contain a prepayment penalty, you can refinance any time you wish. You don't have to wait a year. However, you probably won't save much by refinancing today. When interest rates plummet, that's the time to refinance with a "no cost" mortgage. The reason you want a "no cost" mortgage without any up-front loan fee points or other big costs (perhaps just an appraisal fee) is loan fee points paid on a home refinance must be amortized over the life of the mortgage and are not 100 percent deductible in the year paid (as they were on your home acquisition mortgage).

Fairfax, Va.: Is it true that no one will bother to talk to you if you have bad credit, or until you take care of your credit problems? Also, how does the rent-to-own program work, if I wanted an older home?

Bob Bruss: There are lots of "sub-prime" mortgage lenders. But watch out. Many are loan sharks who "loan to own." That means they'll make you a mortgage loan they know you can't afford to repay. Then they foreclose and wind up owning your home. The "rent to own" program is really a lease with option to purchase. I've been buying and selling houses for at least 20 years with lease-options and love them. The key to success is getting a substantial rent credit. For example, most of my lease-options rent for $1,500 per month with a $500 per month rent credit toward the option purchase price. If the tenant doesn't buy, they lose their rent credit. It's like a forced savings program. If you go to my Web site at www.bobbruss.com you'll find a lease-option available with more details.

Olympia, Wash.: Converted former owner-occupied to rental 1986 on a 19-year depreciation schedule, owe $14K, should be paid off 2004. Considering selling versus keeping as a rental, unit in a depressed area, after capital gains and income tax might get $25K. What to consider when making decision? Has always been a loss on Schedule E, but now that monthly rent is at $700 might start showing profit, and certainly will show profit after 2004. Retirement is about 20 years away.

Bob Bruss: Unless it's a management headache in a low income area, keep it! After you pay off the mortgage, it will be a nice retirement income money machine (especially if the tenants don't bother you!).

Washington, D.C.: We financed our house with an 80/10/10 and are wondering: What are the advantages and disadvantages of paying the second mortgage off, paying ahead on it, or paying it on the regular schedule? Other than the mortgage on another house we are renting out (successfully so far, knock on wood!), we have no debts.

Bob Bruss: Why rush to pay off your first or second mortgage? If you can afford the payments, unless you have high interest rates, just make the regular payments. However, if that second mortgage has a balloon payment coming up in a few years (most do), make plans at least a year ahead to either refinance or get a home equity loan to pay off the second mortgage.

Arlington, Va.: Bob:

I have similar concerns to the person who submitted earlier. I am 30 years old. I pay $1,000 in rent a month, and I make $125,000 a year. I have no debt, other than a $500 car payment a month. I plan on staying in D.C. for the foreseeable future.

I want to buy, but have nothing for a down payment. I have been thinking of buying a condo in the interim because the homes in the area I want to live are sooo expensive, but am concerned about being able to re-sell when I want a "real" house. Are condos really harder to sell than homes, or is that just a misperception I have?

Thanks!

Bob Bruss: You must be paying a fortune in income taxes since you have virtually no tax deductions. Uncle Sam loves you. No wonder he can pay down the national debt thanks to generous taxpayers like you. If you have good credit, you are a perfect candidate for a no down payment home loan. Many lenders are no offering them. If you can't find one, try Countrywide. I'm not recommending them, but they do offer a nothing down mortgage to borrowers with good income and good credit.

Alexandria, Va.: My wife and I own a condo that we bought for about $250,000 in Old Town, Alexandria, two years ago. The same model is now selling in our complex for around $320,000. Our mortgage is around $1,400, but we could probably rent the condo out for about $2,200. We'd like to move and buy a single-family home, and aren't sure if we should sell the condo now, or hold onto the condo and rent it out. Any advice?

Bob Bruss: Although I own a second home vacation condo, I'm not a big fan of condos because of potential problems, such as assessment increases for repairs. Since you have a large equity and there apparently is a good resale demand in your condo complex, today might be an excellent time to take your tax-free profit and buy a house you like better. Or you could take out a home equity loan on the condo and use that money as a home down payment, keeping the condo as a rental investment if you think it is likely to continue appreciating in market value.

Anywhere, USA: In meeting with a potential real estate broker for the first time, we noticed her promotional materials mention a "one-time" benefit of a capital gains tax free sale of your home, for up to $125,000, as a benefit of buying a home. Didn't this "one-time benefit" get changed a few years back, so anyone of any age can keep up to $500,000 on the sale of any home tax free, as long as you lived in it two years? Does the money have to be reinvested in two years, as her materials state?

Bob Bruss: WoW! That real estate broker is at least three years behind the times. The "over 55 rule" $125,000 home sale tax exemption was repealed in 1997, as was the "rollover residence replacement rule." I don't think I would do business with that out of touch realty broker. You are correct that today's principal residence sellers can claim up to $250,000 per qualified seller (up to $500,000 for a husband and wife filing jointly) tax-free home sale profits with no repurchase requirement. However, the seller must have owned and lived in the residence an "aggregate" two out of the last five years to qualify.

Washington, D.C.: Can you recommend a book (or other publication) that would give me the basic information I need to buy a house? (I'm a first-time buyer.) I read your column faithfully, but I think I need a more comprehensive overview. Thanks.

Bob Bruss: There are lots of great "how to buy a home" books. Ray Brown and Eric Tyson's "Home Buying for Dummies" is excellent. I also like Robert Irwin's new "Power Tips for Buying a House for Less." Another good one is "Tips and Traps When Buying a Condo, Co-op or Townhouse" by Robert Irwin. Any book by Robert Irwin is good. He also recently wrote "Buy Your First Home, Second Edition." If you can't find these books locally, try www.amazon.com.

Rockville, Md.: We just recently cancelled our PMI after paying for it for four years. We had our home reappraised and the value went up significantly, far more than the 20 percent required by the mortgage company. Recently, I have been hearing ads on the radio encouraging people to put as little down as possible and thus incur a PMI payment every month. Don't potential home owners know how difficult it is to get rid of that PMI, which, as I understand it, goes right to the mortgage company, the same people who checked your credit and decided it was safe to lend you the money?

Bob Bruss: Congratulations on fighting your lender and winning the battle to cancel your PMI. As you know from reading the column, the "war stories" on this topic continue to pour in. Although Congress passed a law, effective in July 1999, to ease PMI cancellation, it doesn't apply to PMI before that date. However, PMI enables many people to buy a home with a very low down payment so perhaps we shouldn't be too critical. You're right that PMI home buyers should be warned about the PMI cancellation hassles to expect.

Arlington, Va.: Hi Bob,
My name is on a mortgage (tenants in common with another person) of a home I bought eight years ago. I haven't lived there or made any payments on it since it was purchased. The co-tenant lives there and makes all payments. I want to have my name removed from the mortgage and deed, but the co-tenant refuses to sell and cannot re-finance on his own.

Do I have any options?

Bob Bruss: Not really. Most mortgage lenders will refuse to let a co-signer or co-owner off the loan obligation. You could force a sale of the property by suing your co-owner in a court partition lawsuit. The court can then order the property sold and the proceeds divided among the co-owners. But your co-owner will probably never speak to you again if you do that.

Washington, D.C.: Hi Bob -- Love your column as well!!! I hope I get this in in time.

Here's the situation -- newly engaged couple, trying to save for a wedding, currently renting a one bedroom together ($900 a month), both have good/great credit, and make a comfortable living BUT fiance has high credit card bills, to the tune of around $8,000 (paying $350/month). We desperately want to buy a house, but we're wondering if we can afford something nice in this high priced market. Should we just go for it? Should we maybe look at condos? Everyone tells us, and we know, how wasteful it is to rent.

Thanks so much.

Bob Bruss: Before you shop for a house or condo, shop for a mortgage. Work with a reputable mortgage broker who offers mortgages from many lenders so you will have a choice. After you get pre-approved for a mortgage you like and can afford, then you can start shopping for a home.

Waldorf, Md.: What are some of the best ways to find "handyman special" properties that can be fixed up, and what are some of the finance programs that may be available? Thanx.

Bob Bruss: There really aren't any great mortgage finance programs for buying and fixing "handyman special" houses. FHA has a program and so does Fannie Mae, but they are really designed for owner-occupants who can tolerate lots of hassles. I prefer buying with seller financing (or taking over an existing mortgage) and using my bank credit lines to finance the improvements. After the fix-up work is done, then I either refinance or sell for a profit.

D.C.: We are thinking of buying a condo for our daughter who goes to U. of North Carolina, because it would be cheaper than renting a place for her. Will it be hard to get a loan for a second residence that we won't live in? What should we know about this process?

Bob Bruss: The fact the condo will be owner-occupied is a plus. Perhaps a mortgage broker or a real estate broker near the campus can arrange a mortgage before you start shopping for a condo. The situation you describe is not that unusual but there is no widespread financing specially available for college student condo purchases so shopping for a mortgage first will let you know what's available in financing.

Germantown, Md.: Are the low- and no-money down plans primarily for first time homeowners? We purchased a townhouse 5.5 years ago and would like to get a single family home in the next few years. Although the value has gone up some (it is probably worth about $8,000 more than we owe on the mortgage), we had to take out a second mortgage ($25,000) to make some major repair to the house two years ago. What type of down payment can we expect to put down on the second house?

Bob Bruss: If you're not planning on selling your current townhouse and you have little equity in it, that could be a problem if it won't rent for enough to carry the payments. The low and no down payment mortgages are available to everyone. But first-time home buyers are the biggest users because they don't have much cash for a down payment. However, just a few weeks ago I heard of a Silicon Valley $4 million house which sold to a dot-com buyer for only 10 percent down.

White Plains, Md.: My husband and I have acquired (the deed is in our names) my grandmother's house and the title is lost. What is the procedure on getting the title?

Bob Bruss: I'm a California lawyer and am not familiar with Maryland title laws. IF you were in California, it's a simple matter to convey title in a situation like yours. I suggest you contact a local title insurance firm or a local real estate or title lawyer to learn what is involved in Maryland where the deed is lost.

Charlottesville, Va.: I bought my townhouse in June 1999 with a 30-year FHA loan with practically nothing down. I pay private mortgage insurance every month to the tune of about $35 (factored into my mortgage payment). I'm wondering how long it will take me before I can get rid of that PMI? My loan amount was pretty much on par with the assessed value of the house and I do stick in an extra $20 or more with every mortgage payment.

Bob Bruss: It is virtually impossible to cancel your FHA mortgage insurance. If you talk to the folks at FHA, they will tell you it's up to the FHA lender. However, few if any, FHA lenders will cancel the FHA insurance. Of course, if you refinance with another lender then you will get rid of your FHA insurance and your FHA loan!

Baltimore, Md.: I am looking to buy my first home in the next six months. I am 24, single, and have an income of $45,000 a year.

What are my options with first-time buyer mortgages or incentives? Also, what type of tax savings would I incur?

Thanks

Bob Bruss: You have lots of great home mortgage choices, such as PMI nothing down and low down payment mortgages. Shop for a mortgage first and get pre-approved in writing by the actual lender (NOT just pre-qualified, which means nothing). Every week there are lots of mortgage brokers and mortgage bankers advertising their home loans in THE WASHINGTON POST and on the Internet mortgage Web sites. Shop around to see what is available to you. You will get itemized income tax savings for the mortgage interest, property taxes, and loan fee points you pay to get a home acquisition mortgage.

Bob Bruss: Thanks! It's been fun answering so many great real estate questions in such a short time. Let's do it again sometime.

washingtonpost.com: That was our last question today for Bob Bruss. Thanks so much to Bob, and to everyone who joined us.

This week, washingtonpost.com is featuring a series of discussions with real estate columnists homes as part of the Online Home Buyers Conference. Tune in each day to talk to the experts: