QDEAR BOB: In September, we bought an older house, which had recently been remodeled. Our professional home inspector said the roof, which is flat, appeared to have been repaired recently. During a moderate rain about a month after we moved in, the roof leaked in several spots. When we called the real estate agent and the seller, they both said the roof didn't leak when the house was sold to us so they have no liability. We talked with two roofers who agreed the roof needs to be replaced. One roofer bid $12,500 and the other bid $14,850. When we talked to our attorney, she reviewed our sales contract that says we agreed to "mediate" any dispute that arises with the seller, but if that doesn't work we have to go to binding arbitration. When we signed our purchase offer, the real estate agent strongly "pushed" us to agree to arbitrate any disputes. Is that good or bad? -- Vickie R.

ADEAR VICKIE: Mediation of real estate sales disputes is fine and I highly recommend it as a way to resolve buyer-seller disputes at low expense. When your attorney notifies the seller that you think the house was misrepresented because the roof leaked badly in the first moderate rain after purchase, she will remind the seller of the contract obligation to mediate disputes.

The parties, with the help of their attorneys, will then choose a neutral mediator who has real estate experience. In a simple matter like this, mediation shouldn't take more than one day. Each party presents its evidence, such as your roofer estimates. The parties usually split the fee of the mediator. If he or she is really good, the result will usually be a compromise of some type.

However, if mediation fails, because both buyer and seller agreed to binding arbitration for any sales disputes, then you and the seller will choose an arbitrator who will hear the evidence and render a binding decision. That decision is then presented to the local court for confirmation so it becomes the equivalent of a judgment.

The big drawback of binding arbitration is there is no appeal, even if the arbitrator made a mistake. There is no court trial or jury. The rules of evidence are often loosely applied.

Personally, when I buy or sell real estate, I never agree in the sales contract to binding arbitration of future disputes. My philosophy is that's not the time to give up my legal rights to a jury trial if a dispute later arises. However, should a lawsuit later develop, the parties can then agree to binding arbitration if they desire.

DEAR BOB: I plan to sell my home and buy a smaller home within 25 miles. Should I use the same real estate agent for listing and for buying? Would he have any conflict of interest? -- George M.

DEAR GEORGE: If you are satisfied with the agent's service on the sale of your home, and if he is familiar with the area where you plan to buy, why not use him for both transactions?

To gain your repeat business, it would not be unusual for the agent to offer you a discount on the sales commission for the house you are selling. Should yours refuse to do so, however, I wouldn't feel obligated to use him if you find a better buyer's agent near your new home location.

DEAR BOB: I want to sell one of my two investment properties. Can I make an IRC 1031 tax-deferred exchange by using the sales proceeds to build a rental house on my second property? -- Joe U.

DEAR JOE: No, because you already own the second property. A tax-deferred IRC 1031 exchange requires the sale of an investment or business property and purchase of a replacement "like-kind" property of equal or greater cost and equity.

DEAR BOB: I am the president of a 16-unit condominium association. Monthly fees were set up by the developer based solely on square footage of each unit. The problem is the sizes of the units range from 500 to 1,500 square feet, so the monthly condo fees range from $40 to $220 per month. The four big units bear most of the financial burden. What are some other ways to divide up the condo costs? -- Jeremy H.

DEAR JEREMY: Your homeowners association's covenants, conditions and restrictions determine how the monthly homeowner fees must be assessed. If the CC&Rs state it is based on square footage, that method can only be changed by a vote of the members. It looks like you're stuck with the current method unless the members vote to change it.

DEAR BOB: I want to have my home appraised before I put it on the market. I have talked with three real estate agents and they differ in their opinions of its market value. What qualifications should I look for in an appraiser? I hate to just pick a name out of the yellow pages. -- Jeanie B.

DEAR JEANIE: Each of those three agents you interviewed about listing your home for sale should have provided you with a written comparative market analysis. This form shows current asking prices of similar nearby homes (your competition), recent sales prices of comparable neighborhood homes, and even asking prices of recently expired competitive listings.

The CMA form provides space for each agent to give you a suggested asking price and probable sales price. Until you have at least three CMAs, you're not fully ready to sell your home and set a realistic asking price.

If you insist on hiring a licensed appraiser, ask your nearby banker or credit union real estate loan officer for names of local appraisers they recommend. Your cost will be at least $350, perhaps higher.

DEAR BOB: In a recent article, you said $500 was too high for a loan application fee. What is a good price for such a fee? -- Sandra S.

DEAR SANDRA: The best mortgage lenders don't charge any up-front loan application fee. Or, if they do, they credit it toward your loan closing costs. When I refinanced my home a few months ago, I specified I wanted a "no-cost" mortgage. As a result, I didn't pay any mortgage application fees.

The reason some lenders charge a loan application fee is to "tie up" the prospective borrower. Without a loan application fee, the lender can't be sure if the borrower is serious. At most, I wouldn't pay more than a $100 mortgage application fee to be credited to closing costs.

DEAR BOB: I will be retiring at the end of the year and will move to another state. In January, I will put my condo on the market, and it should bring about $325,000. With the proceeds from the sale, I want to pay cash to buy a patio-garden home for about $150,000 at my new location. If I find a property to buy before my condo sells, what type of loan should I seek? I currently have no mortgage and have an excellent credit rating. I was told by a loan officer to apply for a mortgage on my condo but the settlement costs seem outrageous. What should I do? -- Virginia B.

DEAR VIRGINIA: When you find a home you want to buy at your new location, with your great credit score you should be able to finance its purchase with a home equity line of credit, called a HELOC. However, most bank HELOC lenders will only loan up to 75 percent of market value. If you can fund the remaining 25 percent from your cash reserves, you're in a great situation.

Check with a local bank or credit union at your new location to discuss this inexpensive choice. The HELOCs I have obtained had virtually zero closing costs. Their interest rate is usually at the prime rate.

After your condo sells, then you can pay off your HELOC balance.

DEAR BOB: After having long discussions with our real estate agent on how to price our beach condo for sale, he informed us his wife wants to buy our condo before it "officially" goes on the market for sale. How do we know if the asking price was influenced by his personal interest in our property? Is this like a for-sale-by-owner situation? Should we pay any real estate sales commission? -- Patrick K.

DEAR PATRICK: Just to be sure you are receiving full market value, I suggest you interview two other real estate agents who sell beach homes. Tell them you are thinking of selling and want their full comparative market analysis listing presentations.

If their recommended asking prices are substantially higher than the first agent's evaluation, go ahead and list for sale with the best agent. But include a written "reservation" in the listing so you won't owe any sales commission if you sell to that first agent.

If he buys the beach condo, just because he is a real estate agent doesn't mean he should get a discount in the form of a sales commission. You are correct; it becomes a "for sale by owner" situation with no sales commission payable.

You might want to consult a local real estate lawyer before signing his sales contract purchase offer.

DEAR BOB: When we refinanced our home, we told the mortgage broker we didn't want a prepayment penalty because we planned to sell within a year or so. But at the closing, there was a prepayment penalty in the documents. The broker assured us it wouldn't apply unless we refinanced. He said this is a "soft prepayment penalty." So we signed. However, now that our house is on the market for sale, when we inquired about the mortgage payoff amount, we were told there is a prepayment penalty. The mortgage broker says we shouldn't have to pay any prepayment penalty because we are selling, not refinancing. Is this true? -- Lucy W.

DEAR LUCY: Without reading the documentation, I can't fully answer. I've seen mortgage prepayment penalty clauses that apply if the borrower refinances within three years, but don't apply if the home is sold within that time. Such clauses allow lenders to recover their costs and are fair to both parties. I have such a clause in my recently financed home loan.

In real estate, for an agreement to be legally enforceable, it must be in writing. Unless your mortgage prepayment penalty is as you understood, the lender could refuse to waive it when you sell.

How much of a penalty is involved? Perhaps a few hundred dollars?

My suggestion is don't let it delay your home sale. Keep protesting with the mortgage lender. If the lender refuses to waive the prepayment penalty at the sale closing, I would sign the papers "under protest," and then sue the lender in local small claims court. Don't lose a sale profit over a small amount.

DEAR BOB: In 2000, my wife's parents died and left their estates to my wife and her brother. Part of the estate was a property in Sarasota, Fla. At the time of the inheritance, it was valued at $1,600. My wife and her brother recently sold that property for $53,000 and split the proceeds. Do they need to pay taxes on the $53,000? How can they avoid paying taxes? -- Larry C.

DEAR LARRY: The capital gain on the sale of that property was $53,000 minus its $1,600 "stepped-up basis" market value in 2000 at the time of the inheritance. Your wife's taxable share is presumably half of that capital gain.

The co-owners could have made a tax-deferred Internal Revenue Code 1031 exchange for another investment or business property of equal or greater cost and equity.

However, it's too late now to avoid tax because they received the cash proceeds from the sale. Fortunately, long-term capital gains are taxable at the low federal tax rate of 15 percent.

DEAR BOB: Do you know the state laws about homeowner association fees? When we moved into our townhouse, the fees were $90 per year. Now they are $185 a year. We have only lived here for five years. Our retirement income hasn't increased, and this fee is really hurting us. The homeowner's association doesn't do anything; neither the tennis courts nor the playground are ever used, and the pool was unusable for half of the summer. Isn't there a state law about homeowner association fees? -- Kristina D.

DEAR KRISTINA: I know your letter is serious, but readers in higher-fee homeowner associations are laughing and saying to themselves "Be happy. You've got a bargain to only pay $185 for your homeowner association fees."

That's low. State laws do not determine homeowner association fees.

Your homeowner association board of directors sets the monthly or annual fees. I suggest you attend the meetings and ask for a copy of the latest financial reports so you can see how the money is being spent.

Your fees are used to keep up the common areas, such as the pool, tennis courts, playground, etc. If you feel the money is not spent wisely, attend the homeowner association meetings and speak up with constructive suggestions. Don't just complain.

DEAR BOB: I am just starting real estate investment. About six months ago, I bought my first rental house. I was lucky and found some great tenants who are improving my property at their expense. I've heard there are real estate investor's clubs. How can I find one in my area? -- Katherine W.

DEAR KATHERINE: Congratulations on starting your real estate investment career with rental houses. I think they are the best long-term investments.

To find a local real estate investment club, on the Internet go to www.nationalreia.com. That is the official Web site of the National Real Estate Investors Association Web site.

Also check the local newspaper real estate pages for lists of real estate meetings. Most clubs allow visitors to attend meetings for a nominal fee. But the "best deal" is to become an annual member so you can attend all the events. You will soon discover these meetings are a great resource to hear interesting speakers and for locating properties, vendors, buyers, and other local investors to help you.

DEAR BOB: I am considering selling my home, which was bought 30 years ago. The property consists of two adjoining lots. My home rests on one of the lots and is probably worth about $450,000. The empty adjoining lot is probably worth $225,000. How can I best dispose of both properties since home builders don't want my house and home buyers don't want the empty lot? If I sell them separately, will I owe a huge capital gains tax on the lot sale? -- Jim B.

DEAR JIM: You can make two separate sales, both of which qualify for the Internal Revenue Code 121 principal residence sale tax exemption up to $250,000 (up to $500,000 if you and your spouse each qualify and file a joint tax return in the year of sale). To qualify, you (and your spouse) must occupy your principal residence at least 24 of the 60 months before the sale(s). Only one spouse's name need be on the title or titles.

Your exemption includes capital gain on the sale of the adjoining lot if it is sold within 24 months before or after the sale of your principal residence.

DEAR BOB: My son, in his late 30s, has moved to Indiana where my daughter-in-law found a good job. They are renting a townhouse, and my son has stayed in Michigan to try and sell their house while continuing working. The house is mortgaged. He wants to leave Michigan and be with wife and their children. The house is listed for sale but there has been no "action." If the house sells, after paying the real estate sales commission, he will only net about $5,000 to $7,000 cash. Can my son legally give the house to the mortgage company and take his loss? How will this affect his credit rating? -- Sandra B.

DEAR SANDRA: Most mortgage lenders no longer accept a deed in lieu of foreclosure. The reason is the lender then becomes obligated for any junior loan (such as a home equity second mortgage) and other liens such as unpaid property taxes, judgment liens, income tax liens, and mechanics' liens.

At his age, your son should not burn his bridges with the mortgage lender. Keep up the payments on time. However, it won't hurt to phone the lender.

A better alternative is to ask if the lender will allow a credit-worthy buyer to assume the mortgage with no or a low down payment. Then your son's listing agent can advertise "low down payment, take over mortgage payments." The down payment should be enough to pay the realty agent's commission and other sales expenses.

You didn't say how long the house has been listed for sale. If it is over 90 days, the reason it hasn't sold is probably because it is overpriced. Perhaps it's time for a price reduction or a switch to a more effective listing agent.

DEAR BOB: After my father died in 2003, I inherited his house, and my son lives in it as a renter. I pay a high rate on insurance and property taxes, because it is not owner-occupied. I plan to put the house up for sale next spring, asking about $119,000. I've thought of adding my son's name to the title to reduce the insurance and property taxes, as the house would then no longer be considered a rental. Do you think this is a good idea? -- Luke B.

DEAR LUKE: I presume your "stepped-up basis" to market value on the 2003 date of your father's death is lower than today's market value around $119,000 for the home. Also, I presume you have been depreciating the house on your tax returns while it has been rented to your son.

The difference between your depreciated basis and the net sales price, after paying the sales commission and other selling expenses, is your taxable capital gain. Depreciation will be recaptured (that means taxed) at a 25 percent federal tax rate upon sale.

If you plan to sell within the next few months, I don't see any advantage to adding your son to the title.

However, if you had put him on the title at least 24 months before the sale date, then his capital gain profit up to $250,000 would be tax-free under Internal Revenue Code 121. But since you plan to sell within a few months, it's too late to do that.

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.

(c) 2005, Inman News Service