DEAR BOB: Because of a job transfer, we plan to put our house up for sale next month. We already have interviewed several real estate agents about listing it. One suggests we deliberately underprice the house by about $40,000 to stir up buyer competition.

Two other agents we interviewed didn't like that method. They said it could backfire and that we might wind up getting less than fair market value if we receive only one or two purchase offers. But I've seen several underpriced houses locally that got multiple purchase offers, and one house sold for far more than the low asking price. Is this risky?--Nick R.

DEAR NICK: Yes. The home sale market still is surprisingly strong in many areas even though mortgage interest rates have risen about 1 percent in recent months. But home sales activity usually slows in November and December.

What will you do if you get only one purchase offer for your house, let's say, at your below-market asking price? Of course, you don't have to sell, even at that price, but you and your agent will look foolish if you reject a full-price offer. Personally, I think it is dishonest to set a low asking price that the seller has no intention of accepting, just to stir up buyer competition and bid the price up.

Based on the comparative market analysis forms prepared by the three agents you interviewed so far, you should have a good idea of your home's true market value. Rather than setting the asking price $40,000 below that value, instead set it just slightly below the price you are willing to accept. Then if you receive only one purchase offer, you can accept and live with it.

DEAR BOB: Our home loan has been sold four times since we got it about six years ago. This last time a Texas mortgage servicer has messed up our payments. For the past two months, although we always mail our payments on the first day of each month, they claimed we were 15 days late with the payment. I'm sure the mail service isn't that bad. When we phone to protest, the servicer quickly cancels the late fees. But this second time, the clerk said if our payment is received late again, the late charge won't be waived. What should we do?--Ed R.

DEAR ED: In the past few months I've received several letters similar to yours about mortgage late-fee scams. I know it's a hassle, but next month mail your payment at the post office and get a proof-of-mailing receipt from the postal clerk. That's much cheaper than sending your payment by certified mail.

If your lender says you were late, protest strongly and send a copy of your mailing receipt to both the loan servicer and that firm's government regulator. Some dishonest loan servicers try to scam borrowers because they get to keep the late fees, which are 100 percent profit. It's only a few dollars per loan, but the total adds up--for borrowers and loan servicers.

DEAR BOB: Suppose a home seller agrees to reduce his sales price if the buyer will accept the house "as is." Is this legal? Would it be binding?--Ray S.

DEAR RAY: An "as is" home sale means the seller must disclose known defects but will not pay for any repairs. "As is" sales are perfectly legal when they are agreed to by both the buyer and seller in the sales contract.

If defects are discovered by the buyer before the sale is completed, the buyer does not have to agree to an "as is" sale in return for a price reduction. Nor does the seller have to agree to pay for unexpected repairs.

However, many sellers will accept the house "as is" if the agreed price is reduced. For further details, consult a real estate lawyer.

DEAR BOB: About 10 years ago, we lent money to our son. We agreed to a "standing mortgage" with no principal payments. Now he thinks we owe him money. He has paid only the interest on the money he borrowed. Where can I get more information?--Jean W.

DEAR JEAN: The two major types of mortgages are amortized and interest only, also called a "standing mortgage." An amortized mortgage is fully paid off by the principal and interest payments, such as in 15 or 30 years. But an interest-only, or standing, mortgage requires only interest payments until the balloon principal payment comes due, such as in 10 or 15 years.

I hope your son signed a promissory note to you, secured by a mortgage or deed of trust on his property. That is your proof of the loan terms when the balloon principal payment comes due. If he paid you more than the interest due, however, the extra payments reduced the loan's principal. I don't understand how he could think you owe money to him. Consult a local real estate lawyer for more details.

DEAR BOB: I am thinking about selling my house and carrying back a mortgage from the buyer to provide retirement income. If I do so, is this an installment sale? Do I still get my $250,000 home-sale tax exemption? Please clarify.--Paul G.

DEAR PAUL: You can claim your $250,000 home-sale tax exemption in the year of your principal residence sale. I'm presuming you owned and lived in your "main home" an aggregate of two out of the five years before its sale. If you are married and both spouses meet the occupancy requirement, you and your spouse can claim up to $500,000 of tax-free home-sale profits.

However, if your home-sale profit exceeds your exemption, then that part of your profits will be taxable as an installment sale. A percent of each principal payment from the buyer is taxable, and calculating this gets complicated, so you'll need your tax adviser's help. Of course, the interest you receive is taxable as ordinary income.

DEAR BOB: Please help us decide what to do about selling our house. Because of unemployment and illness, we are two months behind on our mortgage payments. The mortgage company recently began foreclosure. An investor contacted us about buying our house and taking over our mortgage to restore our credit.

She will pay us $10,000 cash for our equity and take title to our house, giving us a one-year lease so we don't have to move and upset our two children. She will reinstate our mortgage. Do you think this is a good deal?--Linda Ann W.

DEAR LINDA ANN: Of course I can't advise if that $10,000 payment is adequate compensation for your home equity. If that investor does everything she promises to reinstate your mortgage and to make the monthly payments from your rent, that will help restore your credit without your having to move. Be sure to get the agreement in writing just in case problems develop.

If the investor formally assumes your mortgage, the lender will probably demand she pay an assumption fee and qualify to take over the mortgage. However, she probably plans, instead, to buy your house "subject to" the mortgage. That means she takes over the payments, but you remain liable if she defaults in the future.

Technically, buying "subject to" a mortgage violates the mortgage's due-on-sale clause, and the lender could call the loan. But that is unlikely as long as the mortgage payments are made on time. You may want to consult a local real estate lawyer to further discuss the pros and cons of the proposed sale.

DEAR BOB: I read your article about that couple who let their neighbors use their driveway for many years. We have a similar situation. We don't mind that the neighbors occasionally use part of our property to reach their storage building. However, in case we decide to sell our property someday, how can we avoid their acquiring a permanent easement over our land?--Herm C.

DEAR HERM: If you give your neighbors permission to use part of your land, that cannot become a prescriptive easement later. A prescriptive easement requires "open, notorious, hostile and continuous use" for the number of years required by the state where the property is located.

However, if you tell your neighbors they can no longer drive over your land to reach their storage building and if they continue to do so for the required number of years without your permission, then they could acquire a permanent prescriptive easement.

To prevent that possibility and to avoid misunderstandings, ask a real estate lawyer to prepare a letter to them that grants revocable permission to use your land.

DEAR BOB: My wife and I have owned and occupied our house for about 10 years. We hold the title in our living trust, as you often recommend. Does the $250,000 home-sale tax exemption apply even though legal title is in the living trust?--Arthur S.

DEAR ARTHUR: Yes. Several U.S. Tax Court cases have held that living trusts and even estates can claim the $250,000 ($500,000 for married couples filing jointly) principal residence sale tax exemption. Of course, the "aggregate" two out of the past five years ownership and occupancy tests must be met. Your tax adviser has further details.

DEAR BOB: My wife and I bought our house in July 1995 and lived there until November 1997. It is now a rental. We then moved into my old house, bought in 1989, which had been a rental. We live there today. My wife and I hold titles to both houses.

As I understand that $500,000 home-sale exemption rule, we have until October 2000 to sell the first house and still meet the two out of past five years occupancy rule. But as of December 1999, we can also qualify for the $500,000 sale exemption on the house where we are currently living. If we sell the first house in January 2000 and use our exemption, how long do we have to wait to sell the second house and use the exemption again?--Dan K.

DEAR DAN: The new $250,000 home-sale tax exemption ($500,000 for a married couple filing jointly) can be used once every 24 months. That's presuming the sellers meet the "aggregate" two out of the past five years ownership and occupancy tests.

If you sell that first house in January 2000 and claim this tax break found in Internal Revenue Code 121, presuming the second house still qualifies, you can then sell it after January 2002 and claim up to $500,000 principal residence tax-free sale profits on it, also. However, the depreciation you deducted on the houses while they were rentals is subject to "recapture," or tax. Consult a tax adviser before selling to work out the tax details so you won't be surprised.

DEAR BOB: I am 62 and would like to get one of those lifetime tax-free-income reverse mortgages. Are condominiums eligible?

--Charles O.

DEAR CHARLES: Yes, principal-residence condominiums are eligible for reverse mortgages. Mobile homes are not eligible unless they're on a foundation on a separately owned lot. However, farms and other combination business-residence properties are not eligible for reverse mortgages.

DEAR BOB: We paid $350 to have our house appraised in January. We should have refinanced then, but we thought interest rates might drop. Instead, they went up. Can we still use that January appraisal to refinance our mortgage?--Victoria S.

DEAR VICTORIA: No. Most mortgage lenders insist that they, not the borrower, order an appraisal from an approved appraiser. More important, most lenders require the appraisal to be recent, not more than 30 to 90 days old. However, in most communities the market values of houses have risen since January, so your house is probably worth more today than it was then.

DEAR BOB: My wife and I bought a two-bedroom, one-bath house in a good neighborhood about two years ago. It was all we could afford at the time. We love the neighborhood and our neighbors, but our house is too small now that we have twin babies. It is the smallest house on our block.

Some time ago you wrote about making profitable and unprofitable home improvements. If we add a third bedroom and a second bathroom to our house, will those be profitable or unprofitable improvements? We have been looking for a larger house in the vicinity but can't find anything that we like and can afford. What do you advise?--Vance R.

DEAR VANCE: Adding a third bedroom to a two-bedroom house usually does not increase the home's market value by more than what the addition costs. However, adding a second bathroom should add twice its cost to your home's market value.

Since you like your house and the neighborhood, and since you won't be making an overimprovement, because you have the smallest house in the area, I see nothing wrong with adding that needed bedroom and bathroom--if the floor plan makes sense. Please realize it is a necessary improvement, but probably not a very profitable one.

DEAR BOB: My late husband and I have owned our house almost 40 years. But now it's time for me to move on to a nearby retirement home. My sons want to fix up the house before putting it up for sale.

After I move out, they plan to paint, re-carpet, re-roof and fix the place up. They also want to remodel the kitchen and bathrooms. But I said no. It seems to me the best thing is either to sell the house "as is" or to do just minor fix-up, without the remodeling. What do you recommend?--Agnes H.

DEAR AGNES: You are fortunate to have sons who will help get your house ready for sale so it will earn top dollar. However, it seems they may be a bit out of control.

Painting, carpeting, repairing and even necessary re-roofing can be profitable home fix-up repairs. But renovating the kitchen and bathrooms is major, expensive work that doesn't add much more market value than it costs. The big risk is that potential buyers may not like the renovations and won't even offer to buy the house.

Just do the minor work you listed, perhaps also adding new light and plumbing fixtures. Skip the major renovations. Many home buyers are looking for older houses with charm. Don't let your sons ruin it by overimproving.

DEAR BOB: My parents want to help me financially get started investing in real estate. Our plan is to buy fix-up houses together. They need the depreciation tax shelter. Since I'm involved with construction, I can arrange the renovations. We will split the resale profits 50-50. I will live in the first fix-up house to be sure everything works out successfully. How would you advise holding title?--Jerome P.

DEAR JEROME: Putting title in a living trust for the benefit of all three owners is the most flexible title arrangement. When you or your parents die, probate costs and delays are avoided.

Another title alternative is joint tenancy with right of survivorship. This method also avoids probate costs and delays, but without the living trust benefits. Before you and your parents decide how to hold title, consult a local estate-planning lawyer.

DEAR BOB: When I bought my house, the mortgage lender made me pay $880 per year for flood insurance. Recently, my lender said I don't need flood insurance. As of July 17, 1997, well before I bought my house, my house was excluded from a special flood hazard area.

Nobody will refund my $880. What can I do?--Joanne T.

DEAR JOANNE: Your situation is ideal for small claims court. Name the lender and the insurer as defendants. Let the judge decide if you are entitled to a refund and who should pay.

Readers with questions should write Robert J. Bruss at P.O. Box 280038, San Francisco, Calif. 94128. {copy} 1999, Tribune Media Services Inc.