DEAR BOB: Almost 10 years ago we sold our home and wound up having to pay our buyer $1,500 to settle. She claimed we failed to tell her about leaky plumbing that she discovered shortly after purchase. We honestly didn't know about the leaks, which were concealed inside the walls. The buyer discovered the extensive problem when she tore out the kitchen cabinets while remodeling. As we soon plan to sell our current home we would like to prevent any similar problem with our next buyer. Your advice please. -- Corbett R.
DEAR CORBETT: You are to be congratulated for anticipating a too common problem that home sellers and their real estate agents encounter. In the last few years home buyers have come to expect a near-perfect house and if they find the slightest defect they expect the seller and/or real estate agent to pay for its correction. But, as you discovered 10 years ago, often the seller doesn't know of the problem.
California real estate agents seem to have come up with the best solution to this problem and I expect other states will soon use the same procedure. As of Jan. 1, all sellers of California residences must give their buyers a written disclosure statement that lists all known defects in the house. The real estate agent also must sign this form, noting any defects the agent discovered upon visual inspection.
The big advantage of a written home defect disclosure form is that the buyer can consider the disclosed drawbacks in the residence when making a bid. In states that don't yet require a written disclosure form, the best real estate agents insist that their sellers fill out such a form.
By disclosing all known defects, the seller and real estate agent protect themselves from liability to the buyer if a defect is discovered after the buyer moves into the residence.
But as an additional safeguard, home sellers can further protect themselves by putting in the sales contract: "This property is being sold 'as is' with no warranties or representations by seller or agent." Then if an unknown defect materializes after the sale, the seller and agent are not liable for damages. However, even in an "as is" sale, if the buyer can prove the seller or agent knew of the defect and failed to tell the buyer before purchase, the buyer may be able to collect damages. Consult a real estate attorney for further information.
DEAR BOB: You often say "consult a real estate attorney" but I'm wondering what is the best way to find a good one. I have a problem involving an easement across my neighbor's property. But our family lawyer doesn't seem to know much about real estate law so I am reluctant to hire him. How can I find a good real estate attorney? -- Corla W.
DEAR CORLA: Your question is frequently asked. The best way to find a good real estate attorney is a recommendation from a friend, business associate, real estate agent or real estate investor who was satisfied with a real estate attorney's work.
Another good method is to phone the local Board of Realtors for the name of its attorney. This person is usually up to date on new real estate law developments.
Still another excellent method is to phone a nearby community college or university to get the name of their real estate law course instructor. This person is usually a part-time teacher and a full-time real estate attorney.
For real estate legal problems, I hasten to add, it is important to hire an attorney who specializes full time in real estate law. There have been so many new real estate law developments in the last few years that it's virtually impossible for a general-practice lawyer to keep up to date without concentrating on real estate law full time. Also, it's usually much cheaper to hire a real estate attorney who won't have to spend endless hours at your expense researching the law regarding your problem.
DEAR BOB: A few weeks ago you explained the attributes of a good mortgage lender. As a mortgage loan agent, I don't agree with you about quick loan approvals within a few days after receiving the borrower's loan application. It takes considerable time to verify the borrower's credit and income. That can't be rushed. Also I think you are wrong to say never to pay a loan application fee. Our firm requires the borrower to pay the appraisal fee plus a credit report fee "up front" because these are out-of-pocket costs for us whether or not the loan is approved. -- Leo O'D.
DEAR LEO: In my opinion if a mortgage lender can't approve a conventional non-VA or FHA loan within a week after the complete application is received, that lender shouldn't be in the loan business. The best lenders now offer quick loan approvals, contingent upon the home appraisal, which may take several weeks. However, FHA and VA home loans often take longer because of the bureaucratic delays.
I should have clarified the warning to borrowers not to pay large loan-application fees. At the time the loan application is submitted, home loan lenders are justified to require payment for the appraisal and credit report fees that should not exceed $300. I was cautioning against paying outrageous fees such as the $500 to $1,000 charges demanded by some lenders.
DEAR BOB: When my wife died in 1977 I gave her half of our house to my daughter. At that time the house was appraised at $55,000. When I die, what will be the capital gains situation on my half of the house if my daughter should decide to sell? -- Pieter P.
DEAR PIETER: Under current federal tax law, inherited property is received by the heir with a cost basis of its fair market value on the date of the decedent's death.
To illustrate, suppose the house is worth $100,000 when you die and you will your half to your daughter. Her basis will be $50,000 for the inherited half plus her $27,500 (half of $55,000) basis for the other half received earlier for a $77,500 total basis. If she sells the house for $100,000, the capital gain will be $22,500 ($100,000 minus $77,500). Ask your tax adviser to explain further.
DEAR BOB: We are trying to buy a home but are encountering nothing but frustration. About a month ago we signed a contract to buy a home but found we couldn't qualify for the mortgage. Then we learned the real estate agent steered us to a particularly tough lender and we could have gotten the loan from an easier mortgage company, but by then it was too late and someone else bought the house. Last weekend we went out looking for a home and were surprised by the few open houses. The real estate agents say there is a shortage of good listings priced reasonably. We also have been considering buying a small income property, such as a duplex or triplex, but find those prices make absolutely no sense as investments. Do you think today is a good or bad time to buy real estate? -- Norris B.
DEAR NORRIS: It's always a good time to buy real estate if you buy the right way. Except in economically depressed areas, in my opinion the best bargains today are fixer-upper or distress houses. Avoid the "red ribbon deals," which are homes in almost perfect condition offered for top dollar.
I realize most home buyers and investors don't want to buy property that requires immediate repair work. But acquiring such real estate is the best way I know to make an immediate profit by paying a low purchase price. Finding these run-down properties isn't easy, but most real estate agents can show you several. Also look for clues, such as "handyman special," and "needs TLC," in the newspaper classified ads.
As for financing your purchase, be sure to shop among at least two banks, two S&Ls, and two mortgage brokers for a mortgage. Loan terms vary widely, as do qualification rules. If you can pay a 25 percent down payment, ask the lenders about their "no qualifier" and "easy qualifier" home loans. Today is one of the best home-buying opportunities in many years, but thousands of others want to buy too, so expect keen competition.
DEAR BOB: About two years ago we bought our home and got a new mortgage. Now we want to refinance to reduce the interest rate. But our lender treats us like we just walked in off the street. We were told to fill out a new loan application, provide income and bank deposit verifications, and even give copies of our tax returns for the last three years. Our monthly payment record is perfect. Also, the lender says we have to pay a 2 percent loan fee, a $225 appraisal fee and even a new title insurance fee. Is there any way to cut down on all this paper work and the refinance costs? -- Homer R.
DEAR HOMER: I agree that much of the paper work to refinance an existing mortgage is unnecessary if the borrower has an on-time payment record with the same lender. The reason lenders make borrowers jump through hoops is that the file must look good if the lender decides to sell the loan in the secondary mortgage market.
But not all lenders are the same. If you are borrowing 75 percent or less of the home's appraised market value, verification and qualification rules are greatly relaxed. Also, lenders who keep loans in their portfolio are usually much easier to do business with than those who plan to immediately sell the loan in the secondary mortgage market to tough lenders like Fannie Mae and Freddie Mac.
As for reducing your refinancing costs, some lenders will waive a new appraisal if you are just refinancing to reduce the interest rate and don't want to take out any cash. Ask your original title insurance company how much discount you can get. Many title insurers give discounts if a previous policy was issued within the last one to five years.
DEAR BOB: About seven years ago my grandmother gave me her home, but she retained a life estate in it. She died six months ago and I've decided to sell the house since I no longer live nearby. My question is what is my basis? Is it the market value on the day my grandmother deeded the house to me or on the day she died? -- Jarvis H.
DEAR JARVIS: Neither. A donee's basis for gift property is the same as the donor's basis. Your grandmother's purchase price for the home plus the cost of capital improvements she added during ownership becomes your basis. The difference between this amount and your net (adjusted) sales price will be your taxable capital gain when you sell.
Your situation shows why it would have been better to receive the house by inheritance. Property received by inheritance is valued at its market value on the day of the decedent's death. If the heir then sells the property, the taxable profit is the difference between the value on the date of death and the net (adjusted) sales price. Consult your tax adviser for full details.
DEAR BOB: We recently applied to refinance our home mortgage and were turned down. The loan officer said our credit and income are excellent, but our depreciation losses from our investment properties are too high. Is there anything we can do to avoid rejection for the same reason by another lender? -- Neva W.
DEAR NEVA: Yes. Most mortgage lenders don't know how to add back a real estate investor's depreciation tax deductions shown on Schedule E of their tax returns. When you apply for a mortgage and give the lender copies of your income tax returns for the last two years, be sure to point out the depreciation is a "paper loss," not an actual loss so it should be added to your taxable income shown on your tax returns. Readers with questions should write Bruss directly at P.O. Box 6710, San Francisco, Calif., 94101.