DEAR BOB: About three years ago we sold a house we had inherited. Never having lived in the house, we knew little about it, so we sold it "as is." The obvious defects were clearly disclosed in writing to the buyers. But shortly after they moved in they discovered a third bedroom had been added without a city building permit.
To legalize the third bedroom, the city required the drywall be removed so the wiring could be inspected. Some of the wiring was dangerous and had to be corrected. The cost of the work was about $6,700. The buyers then sued us as well as the Realtor, who also had no knowledge of the defect. The buyer's lawyer argued we should have gone to City Hall and we would have learned there was no building permit for the room addition.
Frankly, I was not even aware the room had been added on to the house. Do you think we and the Realtor should have to pay? -- Rupert H.
DEAR RUPERT: No. But anything can happen in a trial court. Although you and the Realtor were innocent and had no knowledge of the defect, a judge or jury could find you liable and you have no viable alternative but to pay. An appeal might cost more than the $6,700 amount of the judgment.
Your situation should serve as a warning to all property sellers and their real estate agents. Disclose, disclose, disclose. Even though you did not know the room was an addition and could not have protected yourself any better than to sell the home "as is," which means you won't pay to have any defects repaired, the court found you liable anyway. My opinion: It isn't fair. But there isn't much you can do about the unjust result.
DEAR BOB: My neighbor claims my garage encroaches on her property by about five inches and she wants me to move my garage. I contacted the title insurance company and they refuse to help me because I did not have a survey made at the time I purchased my house about six years ago. What should I do? -- David McP.
DEAR DAVID: Consult a real estate attorney. The title insurance company is correct that title insurance does not insure boundary locations unless a survey was made and the survey is insured, often at an extra cost.
However, in most states there is a relatively short statute of limitations for encroachments. If the garage encroaches and it has done so for many years, it may be too late for the neighbor to assert her claim.
DEAR BOB: I own a small neighborhood shopping center. The city wants to widen the street and take part of my parking lot. They have made me a fair offer for the square footage that will be taken by eminent domain condemnation. However, instead of being able to park two rows of cars, now only one row will be able to park, thus hurting the volume of my shopping center.
Is there some way I can be compensated for the diminished value of my shopping center since I will now have much less parking? -- Nathan R.
DEAR NATHAN: Yes. When part of a property is condemned by eminent domain, the award should also include severance damages to the remainder of the property that wasn't condemned but is diminished in value. Consult an attorney experienced in condemnation matters because you need professional help to pursue your damage claim with the city.
DEAR BOB: I owned a vacant lot that fronts on a busy highway. An investor asked if I would like to sell my lot. I said no. Then he asked if I might like to trade for some apartments that would provide me with income. More important, I decided to move my son in as the manager to give him something to do.
We traded my free-and-clear lot for the apartments and I assumed the existing mortgage. But prices were never put on either property. Now I am wondering if I have any tax to pay on my lot.
It only cost me about $7,000 many years ago and is now worth more than $250,000. Do I owe tax? -- Margaret H.
DEAR MARGARET: If you did not receive any taxable "boot," such as cash or net mortgage relief, you do not owe any tax on the tax-deferred exchange. Prices are often left off the properties in tax-deferred exchanges. This way each trader thinks he got a good price. As long as you trade up to a more valuable property and trade equal or up on the equity, no boot was received. Consult your tax adviser for further details.
DEAR BOB: I am a real estate broker who avidly reads your columns, which give insight as to what the public wants to know about home buying and real estate in general. We often start out our office sales meetings by discussing your column. Although we don't always agree with you, we respect your opinions.
Recently you discussed the issue of qualifications for home loans. This has been a big problem in our office because home buyers ask us for our lender recommendations. We consider several local lenders "easy," but their loans are unattractive adjustable-rate mortgages with negative amortization. But the lenders with the best fixed-rate loans have tough qualification rules. Why the big difference? -- Roland T.
DEAR ROLAND: Most banks and S&Ls keep their adjustable-rate mortgage loans in their portfolios. As a result, they can be flexible on their borrower qualifications for ARMs.
But new fixed-rate mortgages are usually sold in the secondary mortgage market to tough lenders such as Fannie Mae and Freddie Mac. These inflexible lenders have rigid rules and require unreasonable loan file documentation. As a result, qualifying for a "conforming" home loan that will be sold to one of these lenders is not easy. As an example of their rules, I can't qualify because I own too many rental properties. Yet that has absolutely nothing to do with the loan security, which is the home being acquired or refinanced.
I hope this helps explain why portfolio lenders who keep their loans can be flexible about borrower qualifications, but lenders who sell their loans in the secondary mortgage market must conform to tough rigid rules.
DEAR BOB: For the last three months my condominium has been listed for sale. It is priced reasonably according to comparable condo sales prices. The agent seems to be doing a good job. She advertises the house several times a week and holds an open house every other weekend. But no offers so far.
I've got to move out of town next month. Do you think I should rent the condo instead of selling it? -- Norman V.
DEAR NORMAN: No. If you will be moving away, managing a rental from a long distance is not easy. A better alternative would be a one-year lease with option to purchase. For example, try running a classified want ad such as "$3,000 Moves You In. Spacious condo (describe it). All your rent applies to down payment on purchase. Call Norman for details (phone number)."
Be prepared for your phone to ring. However, be sure to check out the tenant-buyer's references very carefully because you don't want any long-distance problems.
DEAR BOB: Our town house will go to foreclosure sale next month. My wife and I are getting a divorce and neither of us wants to make up the almost $3,500 of defaulted payments. But we have about $15,000 equity in the town house that we hate to lose. Any ideas? -- Davis P. DEAR DAVIS: First, let's face the facts. You don't have $15,000 equity. You have a $15,000 equity minus the $3,500 it will take to cure the mortgage default. Another problem is you need to get the lender's cooperation to let a buyer take over the existing mortgage.
After you have gotten the lender's cooperation for a loan assumption to a qualified buyer, run a newspaper classified ad such as "Foreclosure Loss. Pay just $10,000 to take over mortgage on a delightful town house ... . "
From the $10,000 the $3,500 arrearage must be paid before the buyer can obtain marketable title, so you and your ex-wife will only net about $6,500. But that's better than the nothing you would receive after the foreclosure sale.
DEAR BOB: The house next door to mine is for sale. I want to buy it as an investment and to control who lives near me. But the owner's asking price is outrageous. What is the best technique for getting an offer accepted even though it is far below the asking price? -- Miles S. DEAR MILES: A big earnest money deposit can be very influential to get a seller to accept a low offer. When the seller sees your large deposit check on the kitchen table, he knows you are a serious buyer. But a small deposit check with a low offer probably would be a waste of time.
DEAR BOB: We are selling a rental house and buying a larger house that we would like to use as our personal residence someday. Our tax adviser told us to trade the rental house for the house we are acquiring. But she is uncertain how long it must be rented after the tax-deferred exchange. Do you know? -- John A.
DEAR JOHN: Nobody knows the answer to your question. You can make a tax-deferred IRC 1031 exchange of the rental house for a larger rental house with equal or greater equity. Of course, you cannot take any "boot," such as cash or net mortgage relief, out of the exchange.
Both properties must be "like kind." That means they must be held for investment or use in a trade or business. Virtually any property can qualify except your personal residence or "dealer property," such as a home builder's inventory of new houses.
Most accountants and tax advisers recommend renting the acquired property at least six to 12 months before converting it to personal use. However, your tax adviser is correct the tax law gives no specific guidance on this issue.
DEAR BOB: You often use the terms Realtor, broker and agent. Please explain the difference. Which is best for listing my home for sale? -- Mark W.
DEAR MARK: Each state has two types of real estate licensees. One is the real estate broker. To earn this license, the broker must meet either minimum educational and/or real estate sales experience requirements and pass a written examination. The broker may work independently or may hire salespeople to work under his or her supervision.
The other type of real estate license is the salesperson or sales agent license. It is obtained by passing an examination. In addition, many states require minimal educational requirements, such as a basic course in real estate principles. A sales agent must work under a broker's supervision.
To become a Realtor, a broker joins the local Board of Realtors and subscribes to its Code of Ethics. Sales agents may also join the local board, thereby becoming a member of the state association of Realtors and the National Association of Realtors.
When you list your home for sale, the sales agent will be taking the listing on behalf of his or her supervising broker.
DEAR BOB: We are trying to follow your advice to buy a fixer-upper house so we can buy at a bargain price and make a profit by renovating it while we live in it. Several houses we have inspected are being offered "as is." But the realty agents aren't very helpful explaining what that means. Please clarify. -- Jules C.
DEAR JULES: An "as is" property sale means the property is being sold in its present condition and the seller will not pay to have any defects corrected. As a smart buyer, you should put in your purchase offer words such as "Although the property is being sold in its 'as is' condition, seller has disclosed in writing all known defects, such as the leaky gutters and the inadequate wiring."
If the seller accepts that offer by signing it and if other defects become apparent so you can prove the seller knew about them, the seller is liable to you for the cost of repairs. But your difficulty will be proving the seller knew of the problems. In other words, when a property is offered for sale "as is," that really means "buyer beware."
DEAR BOB: I recently inherited a 44-unit apartment building from my late aunt. It is professionally managed by a large, well-known property management company that charges me 7 percent of the gross rents. The woman in charge of my property is a certified property manager, but she does not seem very competent. All the company does is deposit the rents collected by the resident manager, who calls a plumber or handyman if something is wrong.
How can I find a truly professional management company that will do a good job of keeping the building full and well-maintained as well as giving me prompt monthly financial reports? -- Ward L.
DEAR WARD: In my opinion, the most thankless job in the world is being a professional property manager. This person is caught between the landlord, who wants to maximize net income, and the tenants, who think the rents are too high and the service level is too low. As you discovered, a certified property manager with extensive professional training is not always a top-quality manager. However, that CPM designation is usually indicative of a well-qualified property manager.
To find a professional property manager who is competent and whom you like, I suggest if you are a member, consult the local apartment owner's association for recommendations, ask fellow apartment investors for their recommendations and interview some of the property managers listed in the phone book yellow pages. Of course, before hiring a new management company, be sure to verify the manager's recommendations from current clients.
DEAR BOB: I recently married a lovely young lady. She owns a condominium that she plans to sell. I own a small house where we now live, but I want to sell so we can buy a nicer home together. Although we will be selling two residences, is there any way we can defer tax on both sales? -- Richard U.
DEAR RICHARD: Yes. The "rollover residence replacement rule" of Internal Revenue Code 1034 is available to you. If you buy a replacement principal residence within 24 months before or after the sales, costing at least as much as the total adjusted net sales prices of your two former principal residences, then both of you qualify for tax deferral on your sale profits.
To illustrate, suppose your wife's condo sells for $100,000 and your house sells for $125,000. If you together buy a new principal residence costing at least $225,000 in this example, then you may defer tax on the sale of both former principal residences. Consult your tax adviser for further details.
Readers with questions should write Robert J. Bruss directly at P.O. Box 280038, San Francisco, Calif. 94128.