DEAR BOB: Last January you told us to first sell our old home before we bought a new one. We followed that advice and listed our home for sale with a good agent. But it still hasn't sold. My husband is already at work at his new job in Dallas, but I'm stuck here until the house is sold. Our realty agent says mortgage money costs may drop by summer, but I'm not sure we can wait much longer. Any ideas? -- Corla A.
DEAR CORLA: You are smart to wait until your old home is sold before buying a new one. Apparently you haven't been following my articles lately about seller financing. Due to the high cost of mortgage money, all cash home sales are few and far between. So the alternatives are either (a) seller helps finance the sale (b) no sale.
There are lots of potential home buyers who have cash down payments of 10 to 20 percentr of the home's purchase price. But most of these prospects can't qualify for a new mortgage at today's high interest rates. So if you'll help finance the purchase, with the buyer taking over your old mortgage, you'll get your home sold. Work with a good realty agent who understands today's innovative finance ideas.
Just as you're going to have to help finance your buyer's purchase, insist that your seller finance your purchase when you buy your next home in Dallas. The payments you receive from your buyer can help make the payments on your next home.
DEAR BOB: Several months ago you explained how to use a lease option to get a home sold. Please explain again; we unexpectedly need to sell our home. -- Dan G.
DEAR DAN: There are two types of lease options. The short-term lease option allows a home buyer to move into the house now, usually by paying a modest "consideration for the option" of $1 to $10,000, with monthly rent partially or fully applicable toward the home's purchase price. Short-term least options are for one to three-years with the sales price and terms fixed in the option.
A long-term lease option of 30 years or longer is used to avoid a mortgage lender's due-on-sale clause. The title remains in the seller's name, but the buyer gets the other ownership benefits, such as tax deductions for mortgage interest and property taxes. It is almost impossible for a lender to prove the lease option sale and enforce the mortgage's due-on-sale clause. Even the fire insurance policy remains in the seller's name. Always have a real estate attorney draw up a long-term option.
Further details are in my new report "The Benefits of Short- and Long-Term Real Estate Lease Options." To obtain your copy send a $2 check payable to "Newspaperbooks" for Report 80111 to The Washington Post, P.O. Box 259, Norwood, N.J. 07648.
DEAR BOB: My CPA told me I should buy a home to reduce my 1981 income taxes. He says it's foolish for anyone earning over $20,000 per year, as I do, to rent. I'm now very tax-conscious after paying a big 1980 income tax and wonder if there is any way to make my home down payment tax deductible? -- Betty Ann O.
DEAR BETTY ANN: Yes. If your seller will help finance your purchase, your down payment can be structured to be tax deductible to you. But then it will be taxed as ordinary income to the seller, so he may not be thrilled to accept your offer.
Just provide in your purchase offer for 100 percent seller financing with your initial monthly interest payments to the seller to be paid at the closing. y
For example, suppose you're buying a $75,000 condo and the seller is financiny your purchase on a $75,000 wrap-around mortgage at 12 percent interest. If you buy in May, your "down payment" might be eight months interest payments of $6,000. Then the $6,000 is deductible interest for you (but taxable interest to the seller).
Prepaid interest beyond the current tax year is not tax deductible. To sweeten the offer for the seller, consider raising the interest rate (if there's no usury problem in the state where you are buying.) Ask your tax advisor for details.
DEAR BOB: We've been considering buying a new home but are shocked at the high asking prices. When we find one we want to buy, how can we be sure we aren't offering more than fair market value? -- Dr. D. H.
DEAR DR. D. H.: Before you make your purchase offer, insist that your realty agent prepare a written "comparative market analysis" showing recent sales prices and terms of similar neighborhood homes.
By adding or subtracting value for the amenities and drawbacks of the home you want to buy, you'll make a realistic purchase offer. By the way, that market analysis will be a good sales tool for the agent ot help convince the seller to accept your purchase offer.
DEAR BOB: We presently rent a house in a neighborhood where there are many "for sale" signs on homes. Some of these signs have been up many months. We have looked at some of these houses, but our income isn't sufficient to qualify for a new mortgage. You're always saying to forget the mortgage lender and buy with "seller financing." How can we find such homes for sale here? -- Jeff C.
DEAR JEFF: When looking at homes for sale, ask two key questions of the realty agent: (1) Does this house have any material defects? (2) What financing are you offering?
Just between us, the agent often doesn't know the answers. Even after you get a satisfactory answer to the first question, protect yourself. When you make a written purchase offer include the phrase, "Seller knows of no material defects in this property." This way if defects appear shortly after purchase, the seller must pay to have them fixed.
Often the agent has never asked the seller the second question. To find out the answer, have the agent include the seller finance terms you want when he writes up the offer.
Often the seller has no idea that he's going to finance your purchase until he sees your offer on the table. Then he realizes (1) the monthly income from your payments will be welcome and (2) seller financing may be the only way to get the house sold.
DEAR BOB: We have been negotiating with a couple to buy some land we own. The price has been agreed upon but not the terms. The buyers sent us a $1,000 earnest-money deposit check which we haven't cashed since we have no written contract. Last week we got a letter from the buyer's lawyer threatening us with "specific performance" and a "lis pendens" if we don't show up at his office to sign the papers. Isn't this illegal? -- Morris T.
DEAR MORRIS: Yes. Highly unethical too. The general rule is that a real estate sales contract must be in writing to be legally enforceable. Your holding the uncashed $1,000 deposit is hardly a sufficent written contract. See your lawyer. He will probably recommend returning that $1,000 check to make it clear that there is no legally binding sales contract.
DEAR BOB: I am just getting started as a real estate agent selling income property. People I talk with often refer to the term "mortgage constant," but I'm too embarrassed to ask what it is. Please explain. -- Mitch A.
DEAR MITCH: Mortgage constants are an easy way to compare different mortgage terms. For example, mortgage constants make it easy to compare a 30-year mortgage at 12 percent interest with a 25-year mortgage at 11 percent interest.
A mortgage constant is the sum of 12 monthly payments expressed as a percent of the initial mortgage ballance. For example, a monthly payment of $10.29 is required to pay off a $1,000 loan in 30 years at 12 percent interest. Twelve times $10.29 is $123.48. $123.48 is 12.35 percent of $1,000. So the annual mortgage constant on this loan is 12.35.
Compare this with a 25-year $1,000 loan at 11 percent, payable $9.80 per month, with a 11.76 constant. Even though this loan has a shorter term, its constant is lower, so most buyers would prefer it over the other loan.
DEAR BOB: On my 1979 income tax returns I took a $1,700 bad-debt deduction for lost rent when my tenant skipped out. The IRS disallowed this because, the auditor said, I never paid tax on the $1,700. Is this correct? -- John A.
DEAR JOHN: Yes. If you didn't report the $1,700 as rental income, you can't deduct it as a bad debt when you couldn't collect it. Ask your tax advisor to explain further.