DEAR BOB: Homes are selling slowly in our town and the real estate agent who has our listing suggests we agree to carry back a large second mortgage to make our home attractive to buyers. That sounds rather dangerous to me. What do you think? -- Grace S.

DEAR GRACE: I think you should listen to your real estate agent. In a slow "buyer's market," your home will stand out from the crowd of other homes listed for sale if you offer attractive financing. Not only can a second mortgage help sell your home, but it can give you excellent income for many years to come.

However, when you carry back a second mortgage you should verify that the buyer is making payments on the first mortgage each month. One way to do this is to phone the first lender monthly to be certain the payment was made. Another way is to make a condition of your second mortgage that the buyer send both mortgage payments to you each month and you will then forward the payment to the first lender.

If the buyer fails to make either the payment on your second mortgage or on the first mortgage, you can foreclose. The buyer has time to reinstate the mortgage by paying the missing payments.

Should a foreclosure sale become necessary, if there are no bidders at the auction to pay off your second mortgage, you get the property back to resell for a second profit.

Rather than fearing a second mortgage, you should welcome it as an opportunity to earn a secure monthly income, plus a possible windfall if you foreclose and get the property back. But don't get your hopes up because foreclosure rarely becomes necessary. For details, consult a local real estate lawyer.

DEAR BOB: About five years ago I added my son to the title of my farm. I was in poor health then and I thought it would ease the probate situation if I should die, but I recovered. I have a buyer for the farm, but my son, who lives about 1,500 miles away, refuses to sell. I am getting old and want to retire. Is there anything I can do to force a sale? -- Elmer H.

DEAR ELMER: I'm sure you realize it was a mistake to add your son's name to the title. Since he refuses to cooperate, your only legal alternative is to force a sale by bringing a partition lawsuit.

The court can order the property sold with the sale proceeds divided according to the ownership interest of each owner. Your lawyer can give you further information.

DEAR BOB: We made an offer to buy a house. The real estate agent assured us that if we were not happy with the inspection reports on the house we could get out of the deal.

After the termite inspection and the professional building inspector's reports came in we saw this was much more of a fixer-upper house than we anticipated. When we asked for our $1,000 back, the agent said we knew the house needed work and the defects listed by the inspectors were minor, so we can't back out.

How can we get a refund of our $1,000 since we can't afford all the necessary repairs? -- Wesley T.

DEAR WESLEY: Your situation shows why it is so important to get everything in writing when buying or selling real estate.

The statute of fraud makes it extremely difficult to enforce any verbal understandings because real estate contracts must be written to be legally enforceable. Without written evidence to prove your understanding that you could get your deposit back if you were not satisfied with the inspections, you have an uphill battle. Consult your lawyer for details.

DEAR BOB: When we sell our home we will have to pay a mortgage prepayment penalty, which I calculate is about $1,200. Can we deduct this from our taxable profit? -- Nathan S.

DEAR NATHAN: No. Prepayment penalties have no effect on your taxable home sale profit. However, you can deduct a home mortgage prepayment penalty as an itemized income tax deduction. Ask your tax adviser for details.

DEAR BOB: Our home was listed for sale almost four months with a fine real estate agent. She tried very hard to sell the home. Shortly before the listing was to expire, she brought us a purchase offer from her brother. The offer was about $15,000 below our asking price, but because the house was vacant and we were paying on two mortgages, we decided to accept.

The contract provided for a 60-day closing time. Unknown to us, during the 60 days the brother or the agent found another buyer who paid over $10,000 more than we sold the house to the agent's brother.

At the closing, we thought it was strange that our deed was to the ultimate buyer, not to the agent's brother. We feel the agent's brother made a quick $10,000 profit at our expense. Do you think we should do anything about this? -- Danielle Y.

DEAR DANIELLE: The situation you describe is called a double escrow. That means the property is conveyed from the seller to the first buyer who immediately resells the property to a second buyer. In most states there is nothing illegal about a double escrow if full disclosure is made to the seller.

However, in your sale the realty agent had a fiduciary duty to you to disclose all material facts, including the second sale by the agent's brother at a profit of more than $10,000. That is called a "secret profit." It was received at your expense by a close relative of the realty agent.

Perhaps it was just a coincidence that a second buyer was found who would pay $10,000 more than you received for the house. I suggest you report the matter to the state real estate commissioner for investigation and possibly revocation of the real estate agent's license.

You also might want to sue the parties involved for your $10,000 lost profit. Consult a real estate lawyer for details.

DEAR BOB: When discussing investment properties you often use the term depreciation. Please explain what it is and how an investor calculates depreciation. -- Fernando O.

DEAR FERNANDO: Depreciation is a non-cash income tax deduction for estimated wear, tear and obsolescence of a structure held for investment or for use in a trade or business. Your personal residence is not depreciable and neither is land value.

Under current law, owners of investment and business property used for residential rental can depreciate it over 27.5 years. Commercial properties must be depreciated over 31.5 years.

For example, suppose you buy a $1 million apartment building, allocating $200,000 to non-depreciable land value and $800,000 to the depreciable building. Each year for the next 27.5 years you can deduct $29,090 for depreciation on Schedule E of your tax return. The result is to shelter $29,090 of annual rental income from taxation.

Since depreciation is a non-cash deduction, it protects ordinary income from taxation, but it requires no cash payment to gain the deduction. For this reason, depreciation is considered to be the best tax deduction of all.

DEAR BOB: My husband is eligible for a VA mortgage. I was talking with the loan officer at our bank and she suggests we apply for a VA mortgage because she says it is easier to obtain than a conventional mortgage. But the problem is the home seller has to pay the VA loan discount fee.

We made one offer to buy a house and the seller refused to pay the VA charges. What do you think about VA mortgages? -- Nancy F.

DEAR NANCY: Your loan officer is correct that the VA loan qualification rules are generally easier than for conventional mortgages. Another major advantage is that no cash down payment is required. Most VA lenders will now make VA mortgages up to $184,000, and this amount is very competitive with conforming Fannie Mae and Freddie Mac mortgages, which require cash down payments.

But the big VA loan drawback, as you discovered, is the law prohibits the VA borrower from paying more than a 1 percent loan origination fee. Many home sellers refuse to pay VA loan discount points because it is the buyer's loan, not the seller's.

However, these sellers fail to realize they will be getting an all-cash sale. The FHA abolished this limitation several years ago and it is about time VA also eliminates the harmful law.

DEAR BOB: When we bought our home recently, on the closing statement was an item for property tax proration. The buyer had already paid the property taxes, but we were charged for the months of the fiscal year during which we own the home. This seemed strange to us. Were we ripped off? -- Ryan H.

DEAR RYAN: No. It is customary to prorate the annual real estate taxes between the buyer and seller according to the number of days during the fiscal year each party owns the property. Although the seller had paid the property taxes, it is only fair to prorate them and charge you for the days you own the property.

DEAR BOB: The market for home sales in my town can best be described as "stagnant." A few home sales are taking place, but there are many unsold homes listed for sale.

I've been talking with several realty agents about the possibility of putting my home up for sale. They showed me some recent sales prices of homes in my neighborhood, but none of the homes were as nice as mine, which has several upgrades and is the only one in my subdivision with an in-ground swimming pool. The estimated prices these agents gave me make no allowance for my upgrades and the swimming pool.

Do you think I should hire a professional appraiser? -- Joanne P.

DEAR JOANNE: Especially in a "buyer's market," the market value of your home depends on recent sales (not asking) prices of similar neighborhood homes. With a glut of unsold homes in your town, prices are flat, so the agents were correct not to estimate much extra for your upgrades and the swimming pool.

Your home may be over-improved for its neighborhood if it is the only one with a swimming pool. By the way, a pool can be a detriment because many parents of small children refuse to buy a home with a pool. High pool maintenance costs also discourage many prospective buyers.

If you are serious about selling, hiring a professional appraiser would be a good idea to get another viewpoint on your home's market value. Ask for recommendations from local banks and S&Ls because you want an experienced appraiser who is familiar with home sales prices in your neighborhood.

DEAR BOB: Several weeks ago you said a loss on a personal residence can be turned into a tax-deductible loss by renting it to tenants. I disagree.

Internal Revenue Code Regulation 1.165-9(b)(2) says when a personal residence is converted to rental use, its tax basis becomes the lesser of its cost or fair market value at the time it is converted. The conversion of the home to rental status will not create a deductible loss. -- Colin W.

DEAR COLIN: You are correct. The problem was that the person had recently bought his home, it has not appreciated in market value and he will have a loss after he subtracts the sales's agent's commission and other sales expenses.

Since a loss on the sale of a personal residence is not tax deductible, my suggestion was to rent the house to tenants before selling, so the loss will become deductible.

For example, suppose the homeowner bought the house for $100,000 and it is worth $100,000 today. Therefore, his adjusted cost basis is $100,000. If he pays a $6,000 sales commission to an agent, he has a $6,000 loss on the sale. By renting the house to tenants, that $6,000 loss becomes deductible instead of being wasted.

Readers with questions should write Robert J. Bruss directly at P.O. Box 280038, San Francisco, Calif. 94101.

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