QDEAR BOB: I am new to real estate and am confused by the word escrow. I've heard it means closing settlement of a property sale and also that it refers to payment of property taxes and insurance. Which is correct? -- Raymond R.
ADEAR RAYMOND: Great question. Webster's Dictionary isn't helpful. Among definitions it says escrow means, "in the care of a third party until certain conditions are fulfilled, as a bond, deed, etc." Both escrow purposes you specify are correct. I prefer my explanation I give to my real estate law students: an escrow holder is supposed to be a neutral stakeholder.
In real estate, there are two primary purposes for an escrow holder. One is the third party who holds the property buyer's money and the seller's deed. The escrow holder then gives the seller's deed to the buyer in return for the buyer's cash. Of course the escrow holder does much more, such as making certain the title is insurable, recording the deed, and paying various closing expenses such as the realty agent's sales commission, appraiser's fee, transfer fees, the seller's mortgage balance, and other tasks. In many states, a settlement lawyer, bank, or title company performs the duties of an escrow holder.
The second purpose of an escrow is completely different. It refers to the mortgage lender's escrow account held for the borrower's monthly property tax and insurance premium payments. FHA and private mortgage insurance home loans require escrow accounts. Millions of other home loan borrowers prefer such escrow accounts, rather than paying property taxes and insurance premiums directly.
Each month, borrowers pay into their mortgage escrow account one-twelfth of the annual property taxes and homeowner's insurance premium along with their mortgage payment. The lender holds these payments until the property taxes and homeowners' insurance premium become due and then pays those expenses.
DEAR BOB: I am thinking about refinancing my home loan, but I have a pre-payment penalty of about $9,000. The mortgage lender says I might be able to deduct this penalty on my income tax return. Is this correct? -- Walter S.
DEAR WALTER: Yes. Home mortgage prepayment penalties qualify as tax-deductible itemized interest. But how did you get stuck with such a huge prepayment penalty? In the future, never accept a home loan with a prepayment penalty unless it has a corresponding benefit such as a low interest rate.
DEAR BOB: We are making an offer to buy a home, and our real estate agent wants us to pay a $295 "transaction fee." He said it is "standard." But we were never told about this fee before. The agent says it is for licenses, lockbox and administrative fees. What is the norm for these fees? Our agent is upset that we are trying to get out of paying this fee -- Steven B.
DEAR STEVEN: As a home buyer, you should not pay your agent any fee. He or she is well paid by receiving 50 percent of the home's sales commission. If I were you, I would fire the buyer's agent unless that transaction fee is waived. Just refuse to pay. If your agent then fails to present your purchase offer to the home seller, go direct and cut out that greedy buyer's agent who won't waive a mere $295 transaction fee.
This is known as a "junk" fee, which is 100 percent pure profit to the agent's brokerage. If your agent can't pay his or her own license fee, lockbox charge, and office expenses, that agent is misleading you. Congratulations on protesting. If that agent wants your home sale, the transaction fee will be quickly waived.
DEAR BOB: I am thankful you are a proponent of holding titles in living trusts to avoid probate costs and delays. But let your readers know they should notify their insurance company. Any property title which has been transferred into the owner's living trust needs to have that living trust listed on the homeowner's insurance policy. It should also be listed on any umbrella policy for excess liability insurance. Homeowners only need notify their insurance agent of the name of their trust to include coverage at no extra cost. I work in insurance and you wouldn't believe the number of people who fail to give us this vital information -- Erin S.
DEAR ERIN: Thank you for alerting us to the importance of notifying our insurance agents when title to our homes and other real estate assets are held in our living trusts.
DEAR BOB: I heard that I can get out of paying capital gains tax on the sale of my primary residence, though I have lived in it less than 24 months, if I am moving more than 50 miles away, since I am changing my employment location. Is this true? -- Ashlee H.
DEAR ASHLEE: You are close, but not 100 percent correct. To qualify for a partial Internal Revenue Code 121 $250,000 (up to $500,000 for a married couple) principal residence sale tax exemption, one of the acceptable reasons is a change of employment location. To qualify, your job site change must qualify for the moving expense tax deduction.
That means your new job location must be at least 50 miles further away from your old home than was your old job site. It doesn't matter if you change employers, or become self-employed. However, there is a minimum work time required in the vicinity of the relocation.
Suppose your old job was 5 miles from your former home. For you to qualify for the moving cost tax deduction, and the partial IRC 121 principal residence sale tax exemption, in this example your new job site must be at least 55 miles (5 miles plus 50 miles) from your old home. The distance from your new residence to the new job location is irrelevant. Consult a tax adviser for details.
DEAR BOB: We are in the process of buying a new home. The builder offered us an incentive of about $20,000 if we go with their in-house mortgage company. Is this legal? -- Caesar D.
DEAR CAESAR: It is legal if fully disclosed the builder owns or is involved with the mortgage company. But you don't have to obtain your mortgage from that firm. Shop around to compare the builder's mortgage terms with what you can obtain elsewhere.
DEAR BOB: I just bought a house and found out it has a major leak. I cannot use the master bath because it leaks and water comes out on my downstairs den floor through the wall. My professional home inspector says he is not liable because it was a hidden problem. What can I do to get help repairing this problem? -- Peggy C.
DEAR PEGGY: If there was visible evidence of the bathroom leak when your professional home inspector checked the house, and he missed it, he is liable for your damages -- probably the repair costs. However, if there was no evidence of the leak, you can't expect your professional inspector to discover it.
If you can prove the home seller and/or realty agent knew of the leak, but failed to disclose it before your purchase, then the seller and/or agent may be liable to you for the misrepresentation. Even if the house was sold "as is," which means the seller won't pay for any repairs, the seller still must disclose known defects.
DEAR BOB: Recently you explained the benefits of home equity credit lines. Can such a loan be obtained on a non-owner occupied rental property? -- Mark McK.
DEAR MARK: Each home equity credit line lender, mostly banks, set the rules for their loans. I am aware of several major nationwide banks that approve home equity credit lines on one- to four-unit rental properties. I suggest you "dial for dollars" among local banks to learn if such credit lines are available in your area.
DEAR BOB: The mortgage company that holds our home loan told us they do not guarantee they will pay our property taxes from our escrow account on time within the discount period. Is this legal? It seems to me the mortgage company, which requires us to have an escrow impound account, should be responsible to pay the taxes on time. What recourse do I have? -- MeLynda R.
DEAR MELYNDA: Your e-mail is shocking. I suggest you write a polite letter to the mortgage lender and insist either your escrow impound account be cancelled or the lender pay your property taxes on time to avoid any penalties.
Then monitor your escrow account closely to be certain the lender charges you only the property tax amount and you are not assessed any penalty for the lender's late property tax payment.
When a mortgage lender requires its borrowers to have a property tax escrow impound account, there is no valid reason for the lender to not pay the property taxes on time to take advantage of any discounts.
If necessary, take the mortgage company to local small claims court for any lost discount or penalty its negligence costs you.
DEAR BOB: It looks like I can sell my home for at least $525,000. After paying the sales commission and paying off my credit cards and car loans, I will have enough to buy a nice home in a lower-cost community. What will my taxes be? -- Bruce G.
DEAR BRUCE: It doesn't matter that you plan to buy a lower-cost replacement home. All that matters is the difference between your home's adjusted cost basis and your adjusted sale price. Uncle Sam doesn't care if you want to spend the sales proceeds on a trip to Tahiti or any other exotic pleasure. To qualify for up to $250,000 tax-free principal residence sale profits (up to $500,000 for a qualified married couple filing jointly), Internal Revenue Code 121 requires you (and your spouse) to have owned and occupied your home at least 24 of the 60 months before its sale.
DEAR BOB: I took care of my ailing mother, who had her home in trust. She has died and my dad is the trustee. Under the terms of the trust, I am to get the house, but my father is not cooperating by giving me information. How long does he have to put the house title into my name? Also, there is a mortgage. Will that loan be paid off or does it need to be refinanced to be put into my name? -- Lynne K.
DEAR LYNNE: A living trust trustee has a "reasonable time" after the trustor's death to distribute the living trust assets. Wise trustees wait several months to be certain all debts of the decedent are paid before distributing living trust assets. Unless there are unusual circumstances, after six months the living trust trustee should distribute the assets according to the terms of the living trust.
If there is a mortgage on the living trust property that you are to receive, you will acquire that property subject to its mortgage. As an heir, the mortgage lender must allow you to take over the mortgage payments and cannot enforce a due-on-sale clause. Of course, after you hold title, you are free to refinance if you wish.
After waiting at least six months, if your father refuses to transfer the title to you, it might become necessary for you to file a quiet title lawsuit to obtain title. A probate lawyer would have details.
DEAR BOB: I have a negative amortization mortgage on my rental property. I pay only the minimum required monthly payment, which doesn't even cover the full interest payments, so my mortgage balance keeps growing. When I sell or do an Internal Revenue Code 1031 tax-deferred exchange, how will my capital gains be calculated? Will the interest I didn't pay affect the calculation of my capital gain? -- Hazel O.
DEAR HAZEL: No. Your mortgage balance has absolutely nothing to do with your capital gain when selling real estate. The capital gain is the difference between your adjusted cost basis and your adjusted sales price.
The adjusted cost basis is your purchase price, plus most closing costs that were not deductible at the time of purchase, such as transfer fees you paid, plus capital improvements added during ownership, minus depreciation deducted on your tax returns. The adjusted sales price is your gross sales price minus selling expenses, such as the sales commission, transfer fees, and other closing costs.
The difference between these two numbers is your capital gain, which will be tax-deferred if you make a qualifying Internal Revenue Code 1031 exchange for another investment or business property of equal or greater cost and equity.
DEAR BOB: Can a mortgage lender judge a prospective borrower's credit based on incorrect information in the consumer's credit report if that report shows the item is in dispute? -- Antoinette A.
DEAR ANTOINETTE: Institutional mortgage lenders can and do rely when making their lending decisions on credit reports from the three national credit bureaus, TransUnion, Expedia, and Equifax. Lenders also receive your Fair, Isaac Corp. credit scores.
That's why you should have any credit report errors corrected before you apply for a mortgage. The best place I've found to check all three of the credit reports is at www.myfico.com. The cost is about $45 for all three of the credit reports, including your FICO scores.
If you spot any errors, be sure to contact each credit bureau and ask for "verification" within 30 days. If the credit bureau is unable to verify the incorrect information within 30 days, the wrong information must be removed from your credit report. Be sure to ask for a corrected credit report after 30 days.
DEAR BOB: A house in my neighborhood is now vacant after the death of the elderly owner. I never met her, but I believe she has no family. The house looks like it needs lots of work, but it is in a great location. How can I find who owns it and how do I make a purchase offer? -- Bill L.
DEAR BILL: The best place to start your detective work is the county courthouse where public property tax records are kept. Check the address where the property tax bills are mailed. If tax bills go to the vacant property address, on the envelope below your return address mark, "Address correction requested." Your letter will be forwarded, but for a mere 70 cents the post office will then give you the forwarding address. If your letter is returned to you, then you know there is no forwarding notice on file at the post office.
Another great source is to ask the neighbors. They usually know about the adjoining homes and who is involved with them. For example, the owner of a vacant house adjoining mine died about three years ago. I met his heirs and know where to find them if I need to do so.
Your work should pay off. It sounds like you are on the trail of a bargain.
DEAR BOB: I am considering the purchase of a multi-family home. What is the best time of the month to close on this purchase to benefit from pro-rated rents and security deposits held by the seller? -- Diana D.
DEAR DIANA: Concerning the tenant security deposits, it doesn't matter what time of the month you close your purchase. You will always be credited for the full amount of the tenant security deposits.
If you are getting a new mortgage, it's best to close on the last business day of the month. However, if that day is a Monday, close by the prior Friday. The reason is if you close on a Monday, you will be charged mortgage interest over the weekend because the loan will be funded on the prior Friday.
If you are taking over an existing mortgage, it's best to close early in the month because the seller is liable for the mortgage payment on the first day of the month, but you will be credited for the pro-rated rents collected by the seller on the first of the month.
DEAR BOB: Several months ago, one my tenants told me his refrigerator wasn't working correctly. I asked for time to buy a replacement and then told him to go to a large store nearby to buy one. I did not keep copies of our e-mail exchange. Last week he told me, via e-mail, that the refrigerator quit and he went out to buy a replacement. He sent me a bill for the new refrigerator, his spoiled food and his time, at $50 per hour. I'm not sure how to deal with this. He should have phoned me, but he did not. Now he is threatening to withhold next month's rent unless I pay him what he asks. -- Frances F.
DEAR FRANCES: You shouldn't have asked your tenant to shop for a refrigerator. That's your job as a landlord.
If I were in your situation, I would politely ask him to send you the bill for the refrigerator he bought so you can send him a reimbursement check. With your check, remind him there was no agreement to pay him for any additional expense and you expect the full rent to be paid on time on the first of next month. As a goodwill gesture, you might offer to pay for the spoiled food.
If the tenant deducts from his rent payment the $50 per hour for his time, don't cash that rent check but promptly serve him with a notice to pay rent or move. This is the first step to begin the unlawful detainer eviction procedure. At that point, your tenant will realize you mean business and he must pay the full rent or risk eviction. For more details ask a local lawyer who specializes in evictions.
DEAR BOB: I plan to sell my freestanding condominium villa and am considering the purchase of a new manufactured house with a double-attached garage. Do these homes appreciate like traditional houses, or do they depreciate like mobile homes? -- Marlene P.
DEAR MARLENE: A manufactured home, on separate lot that you own, should appreciate in market value just like a "stick-built house." Today's home manufacturers do a beautiful job of building homes in factories to Housing and Urban Development (HUD) standards. Then they truck the segments to the site for installation on a concrete foundation. I've inspected many manufactured houses and, unless you knew they were built in a factory, you would think they are built on-site.
However, don't confuse manufactured homes on separate deeded lots where you own the land with mobile homes on non-owned rental lots. Mobile homes on leased lots usually don't appreciate as well as manufactured homes with foundations on separate deeded lots.
Readers with questions should write Robert J. Bruss at 251 Park Rd., Burlingame, Calif. 94010, or contact him via his Web page, www.bobbruss.com.
(c) 2005, Inman News Service