DEAR BOB: I just finished reading the depressing book, "The Coming Real Estate Crash," by John England and Gray Cardff. As I'm sure you've read it, please tell me if you agree. I'm asking because I would like to buy a condominium or a small house. My parents, who have a "depression mentality," have advised me not to buy because they think we're going to have a big depression and they feel a single woman, age 27, has no business buying her own home. Mary Jane G., Washington.
DEAR MARY JANE: I have refrained from reviewing the book you mention because I feel if I can't say something good about a book I'd rather not say anything. The book's theory of home sale price decreases is based on old data that is irrelevant to today's real-estate market. The writers have little or no real estate experience, and they appear not to understand the dynamics of the field. In summary, I think the conclusions reached by the authors are wrong.
Many single people buy condos and houses for investment security, income tax savings benefits and inflation hedge reasons. In fact, the single market is a major one for home sellers. With today's amortized mortgages, there is little chance of a repeat of the Great Depression in real estate (which was caused by bankers refusing to renew five-year standing mortgages).
By the way, due to high mortgage interest rates, you'll find many bargins in today's home sale market. These bargins are usually the homes being financed by their sellers. Work with a good real estate agent to find a home that the seller is willing to finance so you can minimize your mortgage cost.
DEAR BOB: About a year ago I clipped your article on reverse annuity home mortgages. At that time you said only Broadview Savings in Cleveland and Deering Savings in Portland, Maine, offered them. I would like such a mortgage, as I need more income to live on, so I recently phoned six local mortgage lenders. They said they have never heard of reverse annuity mortgages. Where can I get one? Dan F., Suitland.
DEAR DAN: Other than the lenders you named, I know of none offering such loans. There is a large, unmet need for these mortgages. Such arrangements pay homeowners a fixed monthly amount, such as $100 or $200, up to an agreed total, such as $20,000. No repayment of principal or interest is required until the homeowner dies or sells the house.
Most mortgage lenders are short of funds now, so they aren't anxious to develop reverse mortgages. However, such loans could be good business builders for lenders anxious to attract savings from elderly people who might someday want to borrow on a reverse mortgage from that savings association. Lenders are missing profit and public relations opportunities by not offering reverse annuity mortgages.
DEAR BOB: As a Realtor, I find your excellent articles "must reading." However, in a recent column you said that VA and FHA home loans require owner occupancy. Did you know that FHA 203B mortgages are available for non-owner occupied residential property but only up to 85 percent of the amount of an owner-occupant could borrow? Terry B., Rockville.
DEAR TERRY: Thanks for the additional information. Unfortunately, the FHA home loan program has such tough lending rules, low loan limits, approval delays, high loan fee costs for sellers and other disadvantages that it is the rare home sale that qualifies for an FHA mortgage. Overhaul of the FHA home loan program is long overdue.
DEAR BOB: Our home is listed for sale. In our neighborhood, it is common for buyers to use VA or FHA mortgages. Our agent brought us a purchase offer that was at our full asking price. While we were pleased with it, the offer involved a VA mortgage. The agent explained that if we accept the offer we must pay the buyer's loan fee of about 8 percent. On a $70,000 loan, that's $5,600. It sounds to me like some sort of rip-off. Why should I pay the buyer's loan fee? Or is this commonly done? Mrs. T.A., Vienna, Va.
DEAR MRS. T.A.: Yes, VA and FHA loan fees are a consumer rip-off. The cause is the federal government's setting of VA and FHA mortgage interest rates that are below what lenders can get on conventional home mortgages. To make up the difference, lenders charge loan discount fees. h
The law prohibits FHA and VA buyers from paying their own loan fees. So the seller either pays or doesn't make the sale. Unless you can pass along the $5,600 to the buyer in the form of a higher sales price, you lose that amount by selling to a VA or FHA buyer.
DEAR BOB: We hold a $9,000 second mortgage that we put up as security for a bank loan of $5,000. Will we owe any tax on the $5,000 received from the bank? Charles V., Upper Marlboro.
DEAR CHARLES: No. Loan proceeds are not taxable. But you will continue to owe tax as you receive interest and the taxable portion of the principal payments. However, the interest you pay to the bank will offset this as a deduction. Your tax advisor can explain further the advantage of mortgage hypothecation.
DEAR BOB: What is the best time of the year to buy a home? I've heard spring is the best time, but it seems to me that is when the buyer competition for good homes would be keenest. We want to buy when prices are lowest. I think we can afford a small house now, but with prices going up fast I'm not so sure how much longer we can afford to wait. Nick L., Washington.
DEAR NICK: In most areas, December is the best month to buy a home. But it's the worst month to sell. The main reason is that many potential home buyers disappear between Thanksgiving and New Year's because they are busy with other activities. A secondary reason is that the weather in December is often bad in many areas. The result is buyer competition for the good homes is practically nil.
On the other hand, the worst month to sell a home is usually December. Buyers are few and far between. Sellers become very worried that a buyer won't be found for their homes. The result is that sellers tend to lower their price expectations in December, especially on rainy or snowy days.
The time of the year when home prices tend to be at their peak is spring. Numerically, the most homes are for sale in March through June in most communities. Good spring weather brings buyers out in droves. As a result, competition for the good homes picks up and sellers tend to get the best prices in the spring months. of course, these seasonal patterns vary in resort areas such as Florida, Arizona and southern California.
DEAR BOB: I am a worried real estate agent. My fear is that the high mortgage interest rates will dry up the market for home sales and I will wind up not making any money. So far I've managed to keep up my sales volume using "creative finance" ideas such as wrap-around mortgages, land contracts of sale, and lease-options. How long do you think these high interest rates will last? Should I look for another job? Lottie M., Chevy Chase.
DEAR LOTTIE: I share your concern. A year ago, average home mortgage interest rates were about 10 percent. Today, they are about 12 percent, and as high as 15 percent in California. In some communities, home mortgage money isn't available at any price due to low usury limits.
Many realty agents are doing as you are. They use creative finance techniques so their buyers can buy with the benefit of the existing mortgage already on the home, often with the help of seller secondary fnancing. The good agents will survive and prosper during the "credit crunch," which may last another six months or so. Unitl then, I don't expect home prices to drop, but volume probably will. When mortgage interest rates decline, be ready for buyer demand to soar. So will home prices, as there will only be a limited supply of homes for sale then.
To take the shock out of high mortgage interest rates, consider the borrower's after-tax cost. For example, suppose a home buyer gets a new mortgage at 13 percent interest. If he or she is in a 30 percent income tax bracket, the tax savings for the interest deduction are about 30 percent of 13 percent which is 3.9 percent, giving an after-tax cost of about 9.1 percent. That's a genuine bargain in today's inflationary economy.
DEAR BOB: I am retiring in a few months and am considering buying a small farm. I sent away for the catalogs of some of the nationwide realty firms specializing in these properties. All the listings sound so good. Without spending a fortune on travel expenses to visit the various offerings, how can I buy one? Can I make an offer subject to inspection? James K., Oxon Hill.
DEAR JAMES: Never buy any property without first personally inspecting it. Since you will be living on your farm, you can't possibly learn its condition, as well as its pros and cons, without a personal inspection. Plan to spend a few days in the area of your contemplated purchase checking out several properties. If you don't, you'll regret it.
DEAR BOB: I enjoyed your recent article on tax-deferred property trades. But you said such exchanges only apply to business or investment property. Is there any way I can trade my home, in which I have about $90,000 equity, for an apartment house? Henry G., Falls Church.
Dear HENRY: Yes. But you'll have to first convert your home into investment property. This is done by moving out and renting it to tenants. You can then trade it for "like kind" investment or business property of greater value, such as apartments, offices, stores, or even vacant land, and defer paying the tax on your profit.
But a direct, tax-deferred trade of your personal residence for investment or business property can't qualify for a "like kind" tax-deferred exchange using Internal Revenue Code section 1031. That's why you must first convert your home into investment or business property before trading it. Ask your tax adviser to explain further. b
DEAR BOB: I own some Florida lots which, I'm convinced, are worthless. For three years I've tried to sell them myself and I've had them listed with real estate brokers too. Is it true that if I abandon them to the county for back property taxes, I can take an income tax loss for my investment? Aaron V., Falls Church.
Dear aaron: Yes. Internal Revenue Code section 165c permits such loss deductions on your tax returns. Consult your tax advisers so you don't abandon your property the wrong way and incur a tax liability.