QDEAR BOB: Other neighborhoods around town show significant appreciation in the price of homes, but ours is flat. When real estate agents list homes in my area at prices comparable to the other neighborhoods, the buyer's mortgage usually is denied because of a low appraisal. Even after a second or third appraisal, the seller is forced to reduce the sales price by $10,000 to $15,000 or lose the buyer. Can a home seller refuse to lower his price when the buyer's mortgage is denied due to a low appraisal? -- Robert M.

ADEAR ROBERT: You have probably read recently that home prices, on average nationwide, appreciated more than 9 percent in the last 12 months. That is a fantastic rate. Historically, homes usually appreciate in market value about 5 percent annually.

Perhaps homes for sale in your neighborhood have asking prices that are too high. Listing agents recommend asking prices based on recent sales prices of comparable nearby homes. Maybe they aren't using truly comparable recent home-sale prices to establish market value in your neighborhood.

Appraisers estimate the actual market value of a home from the sales prices, not asking prices, of comparable neighborhood homes sold within the last six months.

Just because a home buyer offers a price that the seller accepts doesn't determine the market value of that specific home. Until the buyer can pay that price, usually with the help of a mortgage from a lender who requires a professional appraisal, no sale occurs.

Yes, a home seller can refuse to lower his asking price. However, smart home buyers include a mortgage contingency clause in their purchase offers so if the home doesn't appraise for the price offered, the buyer can cancel the sale.

Don't blame the appraiser if a home doesn't appraise for the price offered by the buyer. Maybe the buyer offered too much, based on recent comparable neighborhood home-sale prices.

DEAR BOB: My husband is in a convalescent home after suffering a stroke and he is unable to remember places or names. I am 78 and I plan to transfer title to my home to my children to avoid probate and save inheritance tax. Is there any other option? -- Lucy G.

DEAR LUCY: You need to consult an estate-planning lawyer. If both you and your husband hold title to the home, and if he is incompetent, you can't transfer the title without court approval unless you have his signed durable power of attorney.

More important, giving your home to your adult children now could be a major mistake. Then you lose control, such as if you need to obtain a reverse mortgage for tax-free income. Also, as gift recipients, your children will be burdened with your purchase price cost basis, which is probably low.

A far better alternative is to transfer title to your home into a revocable living trust. It avoids probate costs and delays, but you retain full control.

DEAR BOB: My husband and I are considering buying an investment home in a vacation area. We would put it in a rental program. If we can rent it at least two weeks every month, it won't have a negative cash flow. Or, should we buy a pure rental house for investment? I prefer the first option because we could personally use the home for vacations. What do you advise? -- Kristi C.

DEAR KRISTI: Never buy a part-time rental property that you must be able to rent to tourists to avoid negative cash flow. Consider yourself fortunate if you can keep such a property rented at least two weeks every month, as you described, to avoid negative cash flow. During the slow season, the house might be vacant for several months.

If you can't afford to keep that house vacant 100 percent of the time during the slow season, don't buy it. Although homes in most vacation areas have recently done quite well in market value appreciation, there is no guarantee that will continue.

I presume your primary reason for buying is to create a sound real estate investment. Part-time homes in vacation areas don't meet those criteria.

DEAR BOB: My daughter recently sold her condominium through a discount broker for a sales commission of 4 percent. She was pleased with its service. It put her listing into the local multiple listing service, placed it on its Web site and on www.realtor.com , and advertised her listing in the newspaper every other week. She held Sunday open houses for three weeks until a buyer made an offer. Then she called the listing agent, who prepared the sales contract. Everything proceeded to a satisfactory closing about 30 days later. Why are you so tough on discount brokers? -- Ted N.

DEAR TED: I am not tough on discount brokers. One of my good friends is the founder of a fast-growing nationwide discount franchise. He is active in his local association of real estate agents and is respected in the profession.

Discount brokers are right for many home sellers, however, most sellers need a full-service real estate agent to successfully guide them through the home-sale maze, which gets more complicated all the time. I am neither pro-discount broker nor anti-discount broker.

BOB: I am 68 and am interested in a living trust, but I was told it doesn't apply to my situation. My lawyer has my power of attorney on my house and other investments are to be distributed to my five children. The only real estate I own is my home, worth about $300,000. I am single and operate an active business. According to your article, I might not be doing the right thing. What do you advise? -- Myrna Y.

DEAR MYRNA: I am shocked you gave your lawyer a power of attorney to transfer title to your house and other assets because after you die, that power of attorney form automatically terminates.

A power of attorney form is not a substitute for a will. You need to consider deeding the title to your home and other major real estate assets into your revocable living trust. Then you can control what happens to your major assets in that revocable living trust while avoiding probate costs and delays. Consult a lawyer who specializes in living trusts.

DEAR BOB: I am a widow, 75, who owns a home with a $28,000 mortgage. My house is worth at least $300,000. I currently work part time, earning about $12,000 per year. I would like to retire. Although my house has a $28,000 mortgage, can I get a reverse mortgage, which would provide me at least $1,000 per month? -- May C.

DEAR MAY: Yes. However, $28,000 of your reverse mortgage must go in a lump sum to pay off your existing $28,000 mortgage. The reason is a reverse mortgage must be recorded as a first mortgage.

After that, you can use your reverse-mortgage entitlement anyway you wish. You can set up a credit line or monthly payments for your lifetime, even if you live to 120.

DEAR BOB: We own our home and recently learned about a biweekly mortgage, which would pay off our home loan in about 21 years. But when I contacted our credit union mortgage lender, it refused to convert our home loan to biweekly payments so we can save thousands of interest dollars. Now we are getting offers from a company that will set us up with a biweekly mortgage to save us money. What should we do? -- Michael E.

DEAR MICHAEL: Your current credit union mortgage lender has no obligation to convert your home loan into a biweekly mortgage. Reading between the lines of your letter, it sounds as if you met someone who represents a biweekly mortgage plan. For a fee, usually about $395, plus a $6 monthly fee, you can be set up with a biweekly mortgage.

But did you read the fine print that you will still have the same mortgage, with the biweekly mortgage company collecting one-half of your current monthly payment every two weeks from your checking account, and remitting the extra amount to your lender each year? You can essentially do the same thing without any hassle or extra cost.

Just divide your monthly principal and interest payment by 12. Disregard any escrow for property taxes and insurance. Then add that amount to your regular monthly mortgage payment, clearly marked for principal reduction.

For example, suppose $1,200 is your monthly principal and interest payment. Dividing by 12 is $100. Then add that $100 to each monthly mortgage payment. You will achieve the same mortgage interest savings without any extra cost.

DEAR BOB: I buy my homeowner's insurance through my mortgage lender's insurance affiliate. About four months ago, while I was away, my home caught fire and it will cost at least $150,000 to repair. My insurance will only cover $34,000, the amount of my mortgage balance. I thought I had adequate fire insurance because I trusted the insurance company. What can I do? -- Venice H.

DEAR VENICE: It sounds as if your homeowner insurance company insured you only for the amount of the mortgage balance. Unfortunately, millions of homeowners make the same mistake, but most never suffer a major loss, as you did.

I suggest you retain a lawyer to negotiate with your insurance company and your mortgage lender. Because the lender recommended the insurance company that underinsured you, you may have grounds for a lawsuit for fraud and misrepresentation against both parties.

Your situation is an example why homeowners should not insure for the amount of their mortgages. Instead, insure for home replacement cost. Your mortgage balance has nothing to do with the cost of rebuilding your home after a fire loss.

DEAR BOB: We bought our house about two years ago. Because of the recent drop in home mortgage interest rates, we recently refinanced to cut our interest rate by about 1/2 percent. However, we were charged for title insurance again. Is it legal to charge us for title insurance even though we just paid for title insurance about two years ago?

-- Jon H.

DEAR JON: Every mortgage lender will insist on receiving a new lender's title insurance policy. Because the title insurance you purchased two years ago is not transferable, your new mortgage lender insisted on receiving a new policy.

However, in many states, it is possible to obtain a discount on a lender's title insurance policy if the property was purchased or refinanced within the last year or two. I suggest you contact your title insurer to see if you could get a discount.

DEAR BOB: You recently advised a condo owner who could not get any satisfaction from his homeowner association board of directors to sell and move on. I disagree. We had a similar situation where we live. Our condo board of directors was corrupt. Finally, several of my neighbors and I decided to do something about it, rather than sell our condos. We ran as a team for the condo board of directors. The incumbents were shocked. We contacted every condo owner, even the absentee owners. The result was we threw out the incumbent directors and won by 69 percent to 31 percent. Then we discovered, to our shock, that the reserves were less than $500 per unit. We immediately voted, after two meetings and a lot of publicity, to increase the monthly fees to raise our reserves. After two years, our reserves are where they should be, now well over $1,000 per unit. We threw out the old management company and instituted tough anti-renter rules, which reduced our rental percentage to 14 percent. Instead of recommending condo owners sell out, why don't you recommend they stay and fight? -- Paula H.

DEAR PAULA: Congratulations on your success at implementing good management for your condo association. Unfortunately, that is not always feasible. Sometimes, it is better to cut your loss and move out.

DEAR BOB: I am told I can buy homes from owners who failed to pay their property taxes. Is this true?

-- Debra W.

DEAR DEBRA: Yes, you can bid at the local tax collector's real estate sales for unpaid property taxes. However, my experience has been you will rarely see a property with a house on it come up for tax sale. That's because if the house has a mortgage, the mortgage lender will receive notice of the pending property tax sale. The lender will then pay the property tax so the house never goes to a tax deed sale. Then, if the homeowner doesn't reimburse the lender, the lender declares the mortgage in default and begins foreclosure.

The result is that only properties that have no institutional lender will usually go to property tax sale. These are often vacant lots and other parcels of limited value.

DEAR BOB: My sister died in June and she had all her major assets in her living trust to avoid probate. When my brother and I went to see her lawyer, he said it would cost about $2,800 to probate the estate. He demanded a $1,500 fee to handle the estate, so I wrote him a check. How much should it cost to probate an estate where almost all of the assets were in the deceased's living trust? -- Levin W.

DEAR LEVIN: If you and your brother are the named beneficiaries in your sister's living trust, except for convenience, there is no valid reason why you would want to hire a lawyer. However, if there are assets that were not deeded into your late sister's living trust, then you might need a lawyer to probate those assets. Maximum attorney fees for probating an estate are usually set by state law. But most lawyers will negotiate these fees down if you ask.

DEAR BOB: My wife and I want to buy our first homes. Do you think we should buy a house at a foreclosure sale to save money? -- Kirt K.

DEAR KIRT: Buying a property during the foreclosure process isn't simple. If you buy at the foreclosure auction sale, in most states you must have cash (cashier's checks are safer) either at the sale or shortly thereafter.

Most home buyers are unable to raise all the cash necessary to bid at foreclosure sales. However, there are other foreclosure purchase opportunities, such as buying from the defaulting owner before the foreclosure sale, or from the foreclosing lender after the sale if no bidders showed up.

DEAR BOB: I bought my home for about $250,000 and can now sell it for $600,000. After the $250,000 principal-residence-sale tax exemption, I will have exposure to about $100,000 taxable capital gains. What is the percentage tax rate on capital gains? Can it be offset by the capital improvements I added? Also, should I ask my buyer to pay the sales commission to lower my asking price and reduce my capital gains? -- Morgan G.

DEAR MORGAN: The federal capital gains tax rate is a maximum of 15 percent. In addition, don't forget any applicable state tax. You should add the cost of capital improvements you made to your purchase price.

To illustrate, if you paid $250,000 for the house, and you made $50,000 of capital improvements, your adjusted cost basis is therefore $300,000.

If you ask your buyer to pay the sales commission, you will be at a severe disadvantage compared with other home-sale listings. And it won't do you any good -- the government already allows you to subtract any sales commission from your gross sales price, thus reducing your capital gain.

For example, if your home's sale price is $600,000 and you pay a 6 percent sales commission of $36,000, your adjusted sales price is only $564,000. Consult a tax adviser for details.

DEAR BOB: My husband and I expect to keep our home five to eight years before moving up to a larger home. We have an opportunity to refinance at 4.5 percent fixed interest for 10 years. The problem is that this is an interest-only mortgage. The payment is lower than for a fully amortized mortgage. But we won't be building any equity. Should we take this interest-only mortgage? -- Bonnie H.

DEAR BONNIE: Interest-only mortgages can be a good deal for homeowners who plan to stay in their homes just a few years. But you should be aware you won't be building any equity because an interest-only mortgage doesn't amortize the mortgage.

I like interest-only mortgages because all of the monthly payment is tax-deductible itemized interest.

However, if you expect to stay in your home five to eight years, I suggest refinancing with an adjustable-rate mortgage with a fixed interest rate for the first five, seven, or even 10 years.

DEAR BOB: Can I sell my two rental properties and buy another of a higher value by using a Starker exchange? -- Frank V.

DEAR FRANK: Yes. You can sell your two rental properties and defer the capital gain tax by making in Internal Revenue Code 1031(a)(3) tax-deferred Starker exchange for one larger property held for investment or for use in a trade or business.

Be aware that to defer tax on the sale of rental properties, you must trade equal or up (total) in both equity and market value without taking out any taxable "boot," such as cash or net mortgage relief. You must also meet the strict 45-day and 180-day deadlines for the replacement property. Consult a tax adviser for details.

Readers with questions should write Robert J. Bruss at 251 Park Road, Burlingame, Calif. 94010, or contact him via his Web page, www.bobbruss.com.

{copy} 2004, Inman News Service