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Buying and Selling Real Estate
Hosted by Bob Bruss
Syndicated Columnist
Friday, June 22, 2001; 1 p.m. EST
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). He was online to answer your questions Friday, June 22.
The transcript follows.
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.
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over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.
Suffolk, Va.: My husband and I are planning to relocate to Northern Virginia this fall and have been looking for new construction houses. Some of the builders require a deposit. What do they use deposit for, is this like an escrow? Considering we're a little tight on cash, are deposits counted on the closing costs or do I have to bring extra money for downpayment and closing costs on top of the deposit I already paid?
Bob Bruss: A good faith or earnest money deposit is required by most home builders to show that you are serious buyer and not a "flake." When you pay the deposit, you should at that time sign the purchase contract which will show the deposit is part of your down payment. Read the contract very carefully. You may want to consult a good real estate attorney. Most home construction contracts I've seen make the deposit nonrefundable, so don't change your mind about buying the house you contract to purchase. Also, during construction, be sure to stop by from time to time to make certain your home is being built according to plans. Please be aware if you make any changes during construction (called "change orders") those changes can be VERY expensive so try to avoid making any changes. Enjoy your new home.
Lorton, Va.: We bought a townhouse eight months ago and are selling it to buy a single family home. We made some money on the sale. We obviously don't qualify for the $250K tax exemption rule since we haven't lived there for two years. But we're using the funds to buy another home, in Woodbridge. Will we be paying capital gains taxes on our sale? Thanks for your help!
Bob Bruss: Sorry. Uncle Sam will be waiting to tax your sale profit. The $250,000 principal residence sale exemption doesn't apply. Nor will using the money to buy a replacement home avoid tax. Just be happy you made a net profit after such a short ownership period.
Armada, Mich.: Is the real estate market right now moving well right now, or are we in a very tight market? I listed my house in April and have only had one couple come through! I need to sell soon as we are having a house built in Florida. My home is listed for $299,999. My realtor assures us we are not too high in price. The home has 2,100 square feet, three bedrooms, two and a half baths, dinning room, large living area with fireplace, sunporch with built-in barbeque pit room, large gunite in-ground pool with built in barbeque on 1,600 square foot deck Gazebo and pond built in all sitting on two beautiful acres surrounded by woods. Also full basement.
Bob Bruss: Spring and summer are the best times of the year to sell a home. It doesn't get any better than this. If a home doesn't sell, presuming it is well-located and in good condition, the primary reason usually is it is overpriced. If your home has been listed for sale with a successful local Realtor since April, with no offers, something is seriously wrong (unless the local economy is poor). Phone some of the other Realtors who showed your house to prospects why their prospects didn't make a purchase offer. Maybe your listing agent is out of touch with the local market prices. Or, maybe she's a "difficult" agent and other agents hate to show her listings unless there is nothing else to show prospects. Something is wrong. Now is the time to find out and correct it. I'll bet the house is overpriced.
Ashburn, Va.: Our house has been on the market since the beginning of April and we still have had no offers. Everyone (including the realtors) say its like a model home and is priced right. What else can we do? We have to sell by October.
L. Ortiz
Bob Bruss: Please see the answer just posted to the similar question from Michigan. Your home is probably overpriced for the area or your listing agent might be known locally as "difficult" for the other agents.
Washington, D.C.: I asked a realtor what a recently listed unit had sold for, and was told that the sale price couldn't be made public until after closing. Is this common, or just the personal preference of the realtor? Does it matter whether I had made an offer or not?
Bob Bruss: The realtor was correct not disclosing the accepted sales price until the sale is recorded when that information becomes public knowledge. There are several reasons, primarily privacy for the seller. If the first deal falls through, the price the seller accepted might influence the amount another seller would offer. No, it doesn't matter if you made a written purchase offer or not. With the seller's permission, some agents will disclose other offer amounts to other bidders, but that is not required.
New York, N.Y.: With the economy slowing down, although at this point did not yet affect real estate, if there's no sign of recovery in Q4 late this year, real state market will be affected, correct? Real estate investments like any investments, are affected by economy, and, although works with approximately one year lag, if recession lasts long enough, real-estate will be surely be affected negatively. In this scenario, what do you think in investing in New York City? Again, by investing I don't mean my first house.
Bob Bruss: Real estate goes in cycles, usually about seven years long. Each city and even each neighborhood reacts differently to the economy and to local conditions. New York City is a very unique real estate market. When the economy lags, that might be a good time to buy real estate. Remember when Donald Trump bought the old Commodore Hotel (now the Grand Hyatt) when everyone was bailing out of New York City buildings? If you want to profit from real estate investing, the best time to buy is usually when the local economy is not doing too well. When the local economy is doing very well, that is not the time to buy real estate because that's when prices are at their peak.
Suburbia, Md.: I work for State, we go overseas a lot. We just bought a house and are looking to be posted out within the next year of so. We will come back, but is it better to sell the house or rent it to someone until we get back in three to five years.
Bob Bruss: If you are certain you are coming back to the same area and if you can find a reliable property manager, I would keep the house and rent it out while you are out of the country. Although I do not recommend long distance rental property ownership, your situation is an exception because you plan to return to reoccupy your home. The key to your success is finding a dependable property manager. Expect to pay a management fee of 10% to 15% of the gross rent, plus a leasing fee when you have a vacancy. Be sure to get a substantial security deposit just in case the tenants damage your home.
Herndon, Va.: Dear Bob,
I am a regular reader and enjoy your column.
My fiancee and I each own a house, and do not want to live together before marriage. We are looking for a new house to live in after our marriage. It would make our lives simpler if we could sell one or both of our current houses after the wedding.
In a recent column, you said that if either member of a couple has taken the $250,000 home-sale exemption, then neither one can take it again for two years. However, IRS Publication 523, "Selling Your Home," seems to indicate on pages 10 and 14 that each spouse can separately take a $250,000 exemption (if they otherwise qualify) on separate houses regardless of what the other spouse has done. The only situation that requires neither spouse to have taken the exemption is if they want to take the $500,000 exemption.
Could you clarify this? Our wedding date is approaching, and it could make a huge difference in our taxes!
Thanks.
Paul
Bob Bruss: I don't have that IRS publication handy so I don't know what it says. But I don't think any tax advisor can give you a definite "yes" or "no" answer. If each of your home sale profits are below $250,000 on each home, you don't even have to report the sales on your tax returns. If you decide to sell both homes this year, perhaps you might want to file separate tax returns for 2001. IRC 121 is unclear on this issue. As I often say "Please consult your tax advisor."
Fairfax County, Va.: Good afternoon! I will be selling my home. These are smallish, "California contemporary" homes which I suspect appeal to a small segment of the buying market. I'm wondering about the "tear down" buyers who have picked up several of the similar properties (1/2-acre lots) and built larger traditional homes. How do you connect with these developers? Also, how do you price a home that is outside of the typical comps -- pine springs is a small neighborhood and only a few houses even go onto the market. Thanks for you help!
Bob Bruss: Before listing your property for sale, please interview at least three successful Realtors who sell homes in your vicinity. They will know which developers are looking for tear-downs. My experience has been these builders won't pay top dollar because they want to buy your property essentially for its land value alone, disregarding the house which they will tear down. By interviewing three success Realtors, who should each give you a CMA (comparative market analysis) you will obtain a very good idea of the value of your property, either for an owner-occupant or a developer.
Washington, D.C.: What is your take on escrowing taxes and insurance if you put 20 percent down on a purchase?
Thanks.
Bob Bruss: If your mortgage lender does not require an escrow account for paying 1/12th of your property taxes and insurance each month, avoid it. I finally got rid of my last escrow account three months ago. They can be a nightmare if the lender overcharges or undercharges. Of course, if you are not highly disciplined enough to pay your own property taxes and insurance on time, then sign up for the lender's escrow account.
Washington, D.C.: We are looking to buy a house in D.C./Virginia and found an agent we like. However, he has showed us a copy of a contract that suggests he will be our agent from now --"until close." Is this market practice? We might want to build in an "out" clause -- can you recommend a reasonable time period before a clause such as this can be exercises or provide some rough language on "cause" for getting out of the agent agreement?
Thanks,
Chancho
Bob Bruss: Most buyer's agents don't require a written contract. The ones that do, try to get as long a term as possible. From your viewpoint as a buyer, you want as short a term as possible, such as 30 to 60 days. I would not sign an open-end buyer's agent contract like the one you describe. An alternative would be to add a clause that either party can cancel WITHOUT CAUSE after 60 days.
Washington, D.C.: What are the disadvantages of going with a no money down program?
Bob Bruss: To obtain 100 percent financing, such as a VA or Fannie Mae mortgage, your monthly payments will be high. Fannie Mae and Freddie Mac home loans over 80 percent usually require PMI (private mortgage insurance) premiums which can be $100 or more per month. However, PMI can be cancelled after the loan-to-value ratio drops below 80 percent. Thousands of home buyers every day buy with nothing down. It's usually better to buy a home now for nothing down than to save several years for a down payment. Most prospective home buyers can't save as fast as home prices go up.
Arlington, Va.: Do you recommend attending a home buying seminar before purchasing your first home?
Bob Bruss: Yes. Many home buying seminars are excellent. Of course, if they are sponsored by a Realtor, the purpose is to get names of prospective home buyers for that agent so we wary about signing up with a buyer's agent you don't know. Don't rush to get locked-in with a buyer's agent. But attending the home buyer's seminar can provide excellent information about available home finance alternatives and conditions in the local market.
Fairfax, Va.: I finished graduate school last year and I'm looking at moving back to my hometown and getting a job there. I'd like to buy a townhouse or condo and I know that if I get the job I want I'll be able to afford it. My question is whether it is to my advantage to wait six to 12 months before purchasing. I know lenders want to see steady employment and staying in the area, but at the same time I don't want to waste too much money on rent. Thanks for your time!
Bob Bruss: After your employment situations stabilizes, start looking for a home to buy. But don't be in a hurry. The best time to buy a home is during the slow season between Thanksgiving and Super Bowl Sunday. That's when only motivated home sellers have their homes listed for sale and there are few buyers (except in winter resort areas, such as Florida, of course). Take your time buying a home.
Washington, D.C.: In your experience, what impact do considerably high levels of student loan debt have on qualifying for mortgages? In this case, assume both spouses have loans, but the loans are limited to professional degrees (i.e., law school as opposed to undergraduate debt), and are being paid on a timely basis, but still have a ways to go.
Thanks.
Bob Bruss: That question can best be answered by an experienced mortgage broker. Before shopping for a home, get pre-approved (not just pre-qualified) in writing by an actual lender. When you fill out the paperwork, the lender will evaluate the effect of those student loans on your ability to take on mortgage payments too.
Frederick, Md.: I have the opportunity to finance my next home with either conventional financing or VA financing. I was wondering if there was an advantage to VA financing. For example, will I be exempt from mortgage insurance?
Bob Bruss: VA home loans do not require mortgage insurance payments by the borrowers. However, depending on how much you want to pay for a home, VA loan limits tend to be too low for some areas. The best thing to do is sit down with an experienced mortgage broker who handles VA mortgages (not all mortgage brokers do) and discuss the pros and cons. Then, before shopping for a home, get pre-approved in writing for the type of mortgage you decide is best for your situation.
Washington, D.C.: Bob -- you're the first thing I read in The Post's real estate section every Saturday.
Can you share your thoughts on selling a home that has improvements which were NOT permitted -- as required -- by the local authority? I'm not talking about electrical, decks, additions, etc. I'm thinking specifically of a too-tall picket fence and wider-than-code driveway cut, things which aren't likely to jeopardize the safety a future buyer.
What are the legal or other issues that might arise at the time of a sale? Would a buyer have the law on her side when insisting on changes-to-comply-with-code before the property is conveyed? Or could a seller say take it or leave it? Aside from case law, what do standard realtor sales contracts have to say on the issue, and might these allow for written waivers?
Bob Bruss: Thanks for the compliment. I presume you are the seller of that home. Of course, the seller should disclose the non-permit fence and driveway. Most buyers will accept such items "as is" and not insist on their correction. Asking the home seller to fix them sounds unreasonable if they are not safety matters.
Great Mills, Md.: A year ago my wife and I entered a lease to buy option contract with a local builder. Part of the monthly payment went to rent and part went to escrow to be used for closing cost. This was such an advantage to us because we were able to occupy a much larger house from the previous one that we were renting. We have since accumulated enough money to cover the closing cost and getting ready to close next month. My question is can I refuse to go to closing until all the discrepancies get fixed? Or Can I write up an addendum to the contract giving the builder specific time (30 days after closing) to make all the necessary repairs? We have brought up the list of discrepancies to the builder before we even moved in last year and up to now no action was taken to correct it. Sad to say but I no longer trust the builder to fix the defects after we go to closing. We really love the house and we want to keep it so not buying it is not a present option. Please advise, we are going to closing July 15, 2001.
Bob Bruss: Congratulations on your successful lease-option. As you probably know, I've done many lease-options as a buyer and as a seller. I think they are great for both parties. As a buyer, you have maximum leverage over the seller before the closing. However, with the closing scheduled in just a few weeks, it might be hard to get the builder to fix the problems. Why not suggest a credit in escrow for the estimated cost of fixing the items? Then you can get someone else to fix them after the sale closes. Perhaps the builder is being uncooperative, hoping you will refuse to close and he will get the house back to sell to someone else for more money.
Washington, D.C.: Bob,
Could you give us the address/Web site for a good place to get a lease agreement for renting out a condo? And what should one look for in a good agreement?
Thanks!
Bob Bruss: I use the excellent real estate forms from Professional Publishing Corp. Their Web site is www.profpub.com. But I don't know if you can download forms off that website. Their order phone is 415-884-2164. You can buy samples of all their superb real estate forms to review.
Fairfax, Va.: I've heard conflicting opinions about buyers pre-approval letters. Our agent said it doesn't hurt to have your preapproval letter show the max you've been approved for even if its a lot more than your willing to pay. But a selling agent at an open house candidly mentioned that a buyer of one of his home made a "stupid mistake" by having his preapproval letter show the max loan amount -- well over the asking price of the house. What do you think?
Bob Bruss: I've never seen a mortgage pre-approval letter from the actual lender which did not contain the maximum loan amount. I think it's best for your buyer's agent to disclose, when presenting your purchase offer to the seller and seller's agent that you have been pre-approved in writing for t he mortgage amount you'll need. That should be sufficient, unless the seller insists on seeing the actual mortgage pre-approval letter or certificate.
Reston, Va.: Hi Bob,
We are in the middle of selling a home and buying a new one. We locked in our mortgage rate at 7.25 percent with a one-time option to float down.
It's so hard to know when exercise that option. Right now rates are a little lower but not enough to make a huge difference in monthly payments.
Do you have any advice for us? Thanks!
Bob Bruss: Sorry. My crystal ball is a bit foggy today for predicting mortgage interest rates. But you might want to shop around. I've heard of fixed rate around 6.75 percent for conforming loans. If you're getting a "jumbo" over $275,000, then around 7 percent is reasonable.
Chevy Chase, Md.: I am pre-approved for an 80-15-5 loan and see that the closing costs and prepaid fees are approaching $8K+. I have heard of ways to "finance" some or all of the closing costs/prepaid items through getting the seller to increase the purchase price by the amount of the estimated closing costs and prepaid fees. The seller agrees to pay for those costs.
Is this a commonly used structure?
Is it practical in the D.C. market where competition is high for houses?
My first assumption is that asking for favors or special structures from a seller is a way to be put on the bottom of the pile when competing for a home.
Thoughts?
Bob Bruss: I think you pretty well answered your question. In a seller's market, buyers can't be too demanding. You've got a good low down payment situation so I wouldn't quibble over $8,000 and risk losing the house.
Washington, D.C.: I filed for Chapter 7 Bankruptcy in August 2000. I am ready to purchase a home. What is the best approach?
Bob Bruss: Before shopping for a home, get pre-approved in writing by an actual lender (NOT just pre-qualified). Since you filed Chapter 7 bankruptcy recently, if you have a good job with good income, surprisingly you are now a good mortgage candidate (although probably not at the lowest interest rate). Your mortgage pre-approval letter is critical in your situation before going home shopping.
Washington, D.C.: Bob,
Do you recommend, that in order for a rental to be worth keeping, that the rent cover the mortgage and all additional fees/taxes? Is there ever a time when this isn't true?
Bob Bruss: Although I don't recommend negative cash flow from a rental house, if that house is appreciating in market value by at least the amount of the negative cash flow, it can be a great investment. Of course, that presumes you can afford to pay the negative cash flow out of your pocket each month.
Selling: I'm thinking of selling my home. Should I start talking with real estate agents before or after I do repairs that I know of, e.g. electrical work to fix an outlet, carpet, etc.?
Love your column. Thanks.
Bob Bruss: Get your home in "red ribbon deal" first class condition before interviewing at least three successful realty agents who sell homes in your vicinity. Do the fix-up work, especially painting, before talking to agents about listing because its current condition influences your home's marketability and pricing.
Austin, Tex.: We are moving to D.C. and know that it is a seven-year assignment. We made the decision to rent our house because we would like to come back here. Our situation may, of course, change over the next seven years and we decide not to occupy the house. We've lived in it for the past three years. What kind of tax implications will it have if we decide to sell it in five years? Thanks!
Bob Bruss: If you have a substantial profit in your old home, remember the $250,000/$500,000 home sale tax exemption of Internal Revenue Code 121. To qualify, you must have owned and occupied your principal residence an "aggregate" two years during the previous five years before the sale. That means if you rent out your old home for more than three years after moving out, you'll forfeit this great tax exemption.
Washington, D.C.: I have always been interested in buying real estate for business purposes. I feel this can help me keep a line of money coming in. Are there any conferences or programs out there that can help me with this, for people who do not have lots of money?
Bob Bruss: A good new book for you to read is "Buy, Rent and Sell" by Robert Irwin (McGraw-Hill, New York, 2001) available at better bookstores, public libraries and www.amazon.com.
washingtonpost.com:
That was our last question today. Thanks so much to Bob Bruss, and to everyone who joined us.
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