DEAR BOB: We would like to buy a larger house, but we've heard that the sale of old homes takes many months. Is it better to buy the new house before selling the old one? -- Bruce H., Alexandria.
DEAR BRUCE: It's better to sell your old home first, but every rule has its exception.
If you want to tie up that new house, offer to lease it with an option to buy later, perhaps in six or 12 months over the new house, and you've then got plenty of time to sell your old one.
For example, when I bought my present home I paid a $10,000 nonrefundable "consideration for the option." The seller gave me a six-month lease with option to purchase. Each Month I paid him, $1,500 per month rent. Both the option consideration and the rent applied toward the purchase price. The six months gave me plenty of time to sell my old residence and raise down payment cash without being pressured to accept a low offer.
Perhaps you can get a similar short-term-lease option on the house you want to buy. However, don't overcommit yourself to paying all cash for your new home. Be realistic. d
If your old home is going to sell in today's market, expect to help finance your buyer's purchase by carrying back a second mortgage or other seller financing. Finance your new home purchase the same way, because it is highly unlikely that you'll get enough cash from your sale to pay all cash.
DEAR BOB: We recently sold our old home and bought a larger new one. The realty agent told us we can defer paying any profit tax since we moved up to a larger house. How long does this tax deferal last? -- Marie G., Annapolis.
DEAR MARIE: The "residence replacement rule" tax deferral of Internal Revenue Code Section 1034 last until you sell your new principal residence and don't buy a replacement resident of equal or greater cost. In other words, your profit tax deferral can last forever.
When you are 55 or older, then all these deferred profit taxes can qualify for the $100,000 home sale tax exemption, if you've owned and lived in your latest principal residence any three of the five years before its sale. Ask your tax advisor to explain further.
DEAR BOB: For various reasons we have accumulated four houses over the years. Three are rented to tenants. My wife thinks we should sell these three houses and take back 20-years mortgages for retirement income. I am 74 and my wife is 71. What do you think about her idea? -- Randolph T., Rockville.
DEAR RANDOLPH: I think you have a very smart wife. You'll probably earn more net income by selling those rental houses and taking back mortgages than you earn from them as rentals. However, provide for periodic interest rate adjustments on the mortgages in case we have continued hyperinflation.
Acquiring several rental properties while you were young and selling them for retirement income is the best way i know to provide for your future old-age financial security. By taking back the installment sale mortgages, you'll minimize your capital gain tax, too. Ask your tax advisor to explain further.
DEAR BOB: When we obtained our mortgage loan several years ago, we thought we were borrowing at 10 percent interest. Our lender recently started sending us new monthly mortgage statements that say the interest rate is 10 1/4 percent. We haven't been late with our payments, and we do not have one of those new variable interest rate mortgages. How can the lender raise our interest rate? -- Mrs. G. H., Upper Marlboro.
DEAR MRS. G. H.: When you obtained your mortgage loan, you probably paid the lender one or two points for a loan fee. Each point (equal to 1 percent of the amount borrowed) raises the lender's true annual yield by about 1/8 percent.
For purposes of Regulation Z -- the Truth-in-Lending Law -- lenders must tell the borrower the true annual percentage rate, including the loan fee. Your lender probably is computing your loan payments at a 10 percent interest rate but is using a 10 1/4 percent interest rate for the annual percentage rate disclosure.
Double-check the lender's interest computation to be sure it is at the 10 percent rate. Notify the lender if you find a mistake.
By the way, your after-tax interest rate is much lower than 10 percent. For example, suppose you are in a 30 percent income-tax bracket. To estimate your after-tax interest rate, multiply the 10 percent loan rate by your 30 percent tax bracket. The result is 3 percent. Substracting 3 percent from 10 percent produces a 7 percent after-tax interest cost on your bargain mortgage.
DEAR BOB: Please give me the name of a good book on property management. Jon W., Washington.
DEAR JON: There are several excellent property management books. I like Leigh Robinson's "Landlording" (third edition, Express Books) and Albert Lowry's "How to Manage Real Estate Successfully in Your Spare Time" (Simon and Schuster).