DEAR BOB: It's frustrating trying to buy a home today, as you know. $1But a friend suggested we search for run-down houses in need of a fix-up. She says these houses usually offer seller financing and are good buys. So we told our realty agent to show Evan G., Washington.

DEAR EVAN: Yes. Buying a fix-up house isn't easy, as you found out, but it can be very profitable and affordable. Another advantage is that there isn't much competition from other buyers for run-down houses, so you're in a strong negotiating position with the seller as to price and financing terms.

But be careful. Some houses are in such bad condition that they are beyond redemption and should be torn down. Unless you are a construction expert, make your purchase offer for a fix-up house contingent upon satisfactory inspection by a professional inspector or building contractor.

Fix-up houses are not only affordable, but they offer the best profit opportunities in real estate today. But be prepared for lots of work, time and frustration as you change your ugly duckling into a beautiful swan.

DEAR BOB: My wife and I have up to $20,000 in our money market fund that we could invest in real estate. My idea is to buy one or two modest houses or condos as investments. I realize that I may have to put in extra cash to meet the negative cash flow. Our goal is to build up profits by the time we retire from our jobs in about 12 years. Is this a reasonable idea? Wayne O'B.

DEAR WAYNE: It's not only a reasonable idea, it's a very smart retirement plan. Investing in sound real estate, such as rental houses, is the best way to keep up with inflation while enjoying a tax shelter for some of your ordinary taxable income. I can think of no better realty investment than rental houses.

DEAR BOB: I have several question on that $100,000 "old folks" tax exemption; you often discuss. (1) Since I am well over age 55 and have owned and lived in my home for over the required three years, does my $100,000 tax exemption apply to profits both from my current home's sale and to deferred profits from past home sales too? (2) Is there any way I can claim this $100,000 exemption without selling my home so my heirs aren't stuck with a big tax bill? -- Jess E., Chevey Chase

Dear jess: (1) Yes, the "over-55 rule" $100,000 home sale tax exemption applies to both profits from the sale of your current home as well as deferred profits from sales of previous homes.

In other words, when you were younger you used the "residence replacement rule" of Internal Revenue Code section 1034 to defer profits taxes when selling one home and buying a more expensive replacement. Now that you're older, the "over-55 rule" exemption can apply to these deferred profit taxes.

(2) No. There is no need to claim your one-per-lifetime $100,000 home sale tax exemption if you're not selling your principal residence. If you die before selling, your heirs receive the home at its market value on the date of your death. The deferred profit tax is forgiven upon death.

Your heirs would pay profits tax, at the low long-term captial gains tax rate, only on any sales profit exceeding the date-of-death value. To illustrate, suppose your home is worth $125,000 on the date of your death, and your child inherits it. His basis will be $125,000. If he later sells the house for $130,000, he pays tax on only his $5,000 capital gain. Ask your tax advisor to explain further.

DEAR BOB: My wife and I are getting a "friendly divorce" after three years of marriage. Our major asset is a town house condominium that cost us $34,000 and is now worth at least $90,000. The mortgage balance is about $27,000. We have agreed to sell it and split the profit equally as part of our divorce settlement. How will our sales profit be taxed? -- Jamie T., Alexandria DEAR JAMIE: Your sales profit is $56,000 ($90,000 minus $34,000), less sales costs such as real estate sales commission. The mortgage balance is irrelevant.

If you are equal co-owners, the sales profit is split equally and taxed as a long-term capital gain if you owned the town house more than 12 months. Only 40 percent of long-term capital gains are taxable; the other 60 percent is tax-free.

However, either you or your ex-wife, or both of you, can defer your share of the profits tax if you buy a replacement principal residence costing at least as much as your share of the gross sales price. Assuming you split the $90,000 sales price equally, that means purchase within 18 months before or after the sale of a replacement residence costing $45,000 or more qualifies for tax deferral on that spouse's profit share. Ask your tax advisor for full details.

DEAR BOB: I like your creative ideas about using long-term options to accomplish a property sale without the mortgage lender calling the loan under the due-on-sale clause. But who makes the mortgage payments to the lender? The buyer or the seller? Also, how is the fire insurance policy handled? -- Susan A.

DEAR SUSAN: Either the buyer or seller can make the monthly payment to the mortgage lender. A good arrangement is to have the seller make the payment buy deliver the payment card or other receipt to the buyer each month to show that the payment was made.

Using a long-term lease option, the fire insurance policy remains in the seller's name because he retains legal title to the property. Thus it is virtually impossible for the lender to learn of the sale and attempt enforcement of the due-on-sale clause to call the loan or raise the interest rate.