Sellers object to paying $500 security deposit

By Benny Kass, Monday, May 19, 2008.
 
Inman News

DEAR BENNY: I am a seller with a $620,000 home in Oregon. As part of the inspection addendum, the buyers are demanding that we put down a $500 security deposit with the title company, refundable if there is no damage to the home between now and move out. Our home is in superb condition. I assume that the refund of our money would be based on the buyers' subjective opinion, since they included no specifics of how they would determine if we would receive the money back. (They also have asked for every single nit-picky item that the inspector found to be remedied.) What are the pitfalls of agreeing to put down this deposit and how do we protect ourselves? --Shelly

DEAR SHELLY: I suspect that you will never get any of the $500 back. So here's my suggestion: Just agree to give them $500 when you go to closing, on the condition that they agree to take the house on an "as is" basis -- as of the date of the home inspection. Don't waste time with the escrow; you will be haggling over more "nits" forever. 

If your buyer does not agree to this credit, then at the very least I would put a time limit on when the escrow is to be released. Two weeks should be more than adequate.

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 Don't be fooled: fence-sitters are not buyers

Diary of a Real Estate Rookie

Inman News

Thank you so much for your thoughts on the state of the housing market. I was most impressed with your emphatic declaration that real estate is currently overpriced and that the nearly 70 percent of Americans who own their own homes are "just a bunch of ninnies."

It is not always easy to be smarter than two-thirds of the country, but you, with your smug declaration that you would "continue renting till prices fall 50%" are clearly some kind of exceptionally far-sighted genius.

The fact that you may have previously come to me as a potential client, only to be told that your target housing would cost five times your annual income, does not weigh in on this debate, I'm sure.

No, you may not have had the wisdom to pull your salary up or your desires down to get your income in line with a starter home; how could you have, when you were using that gigantic brainpower of yours to declare that home prices would keep falling till 2010?

When I first got out of college I went to work on Wall Street. I missed the crash of '87 but was in the office for the mini-crash of '88, where grown men (and they were mostly men) who had been in the business for 20 years stopped what they were doing to gather around a computer screen to watch a line go down, down, down.

That was a bad market day, the kind we used to say would drive investors "out on the ledges."

Well, clearly housing has cycles just as stocks do. The fact that America's real estate is in a slide is best illuminated by the statistic that last year home prices went down, the first annual decrease since the Great Depression.

But it really doesn't mean that all market activity has ceased. Existing homes may be selling at a pace of only 5 million a year, but honestly, that's enough business for me that you can stop cracking jokes about my needing to learn to flip burgers for a living.

What's more, not all of those home sales are the painful struggles that you imagine them to be. I know I'm in the Northeast, which has been spared some of the pain, but things up here that are listed at decent prices still go pretty quickly. I listed my suburban house at 3 percent less than my Realtor advised — yup, I wouldn't sell outside of my own real estate territory, just like a doctor wouldn't cut out his own appendix — and I got an offer the week after I listed.

Now, giving up that 3 percent didn't make me happy, and the price my Realtor advised was probably 10 percent less than it would have been a year ago. But that 13 percent off the peak is still 50 percent higher than when I bought, ninny that I was.

But these are joys that you too can experience, the gut-wrenching thrill of watching neighborhood prices pop up and slide down, when you become a homeowner. (You can also experience the unique frisson of watching money you thought you were going to vacation on turn into roof shingles instead.)

Until then, don't act supercilious and tell me, "oh, everything's overpriced, I'm not a buyer." True, some listings are overpriced, but the ones that aren't are attracting people who have kids and need more space, or people who have to move for their jobs. I'm a homeowner because paying a mortgage is my way of hiding money from myself, and the monthly loan payment is made in dollars that would otherwise get frittered away on shoes and sushi.

Even as the market cycles up and down, I'm building equity, and in 30 years I expect to be richer than I am now. Even as the real estate market is getting stomped on, nearly 5 million people like me are around. You tell me at these prices you're not a buyer? Honey, you never were.

Alison Rogers is a licensed salesperson and author of "Diary of a Real Estate Rookie."

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 Don't Buy Home if You'll Need to Sell in a Recession

By Dian Hymer, Monday, April 14, 2008.

Inman News

Some people -- including financial wizard Warren Buffett -- think the United States is already in a recession.

Technically, economists define a recession as two or more consecutive quarters of negative growth as measured by the gross domestic product (GDP). Commonly, however, recession is a term used to describe a period of general economic decline.

The last commonly recognized recession in the U.S. occurred in 2000-2001 following the stock market crash of 2000. During that period, there were three quarters of nonconsecutive negative GDP growth. They occurred in the third quarter of 2000 and the first and third quarters of 2001. It wasn't until the third quarter of 2003 that GDP growth surpassed 3 percent.

During this recessionary period, housing slowed a bit in 2000 and was followed by robust appreciation for approximately five years in many housing markets around the country. The inventory of homes for sale was low; interest rates were at multidecade lows; and the stock market was perceived as an unsafe place to invest. So, money poured into real estate. Real estate was the bright spot in an otherwise sagging economy.

The same cannot be said about the current economic slowdown. This lull was brought on, at least in part, by the subprime credit crisis that started in August 2007. Housing is now seen as a source of the problem.

The peak home-selling season is approaching. Open houses, at least in the San Francisco Bay Area, are already well attended. Interest rates are still hovering around the 6 percent level for conforming fixed-rate mortgages. And home prices have declined from a year ago in many markets around the country. This could be an advantageous time for house hunters to buy a home.

The fear of recession and the possibility of lower home prices ahead have some prospective home buyers sitting on the fence. Many buyers will adopt the approach-avoidance stance until they see a clear sign that home prices in their area have bottomed out.

HOUSE HUNTING TIP: Keep in mind as you weigh your home-buying decision that it is impossible to time the housing market. We won't know the market has bottomed out until prices plateau or are on their way up. Also, consider that the home-sale market is a localized phenomenon. National trends may have little to do with what is happening in your neighborhood.

Home buyers who take the plunge now need to feel comfortable with the notion that the market value of their home might decline before it stabilizes or increases. The key is to be sure that you won't need to sell during the downturn.

Keep a close eye on the inventory in your area. Many areas of the country have large inventories of unsold homes. New home construction is down as builders offer incentives to sell the inventory on their books. But, once the inventory is depleted, home-sale activity could gain momentum.

In some areas, unsold new homes have not been a factor. Some areas near metropolitan centers were built out decades ago. There's no land left for housing developments. Prices in these areas have held up better than in areas with a lot of unsold new construction.

Deciding whether or not to buy a home is not the no-brainer it was a few years ago when rates were low, home prices were increasing and financing was easy. Now, you actually need to qualify for a loan, and the direction of the economy is uncertain.

THE CLOSING: Buying a long-term home when prices are low and interest rates are favorable is a good idea if you can afford it. Waiting could cost you more. It's a decision to make carefully.

Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.

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How to Deduct Mortgage Insurance, Interest, Points on Taxes

By: Benny L. Kass, www.inman.com

Let's look at several interest deductions that can save you money while preparing your 2007 income tax return:

1. If you are unable -- or unwilling -- to put down a lot of money and want a larger loan, there are two things that lenders can do.  They can require that you put down only 5 or 10 percent and give you two loans: one for 80 percent and a second for the 10 or 15 percent difference.

Or, they can require that you obtain private mortgage insurance.  This is coverage -- which the homeowner pays for -- to compensate the lender should there be a shortfall between the amount of the money received at a foreclosure sale and the loan balance.  There is also mortgage insurance provided by the Federal Housing Administration (FHA); the Veteran's Administration (VA), called a funding fee; and the Rural Housing Service's guarantee fee.

If you entered into a transaction after Jan. 1, 2007 that included some form of mortgage insurance, you may have the right to deduct these insurance payments like home mortgage interest.  However, there are some restrictions.  First, the loan must be secured either by your principal residence or a vacation home that is not rented out for more than 14 days a year.

The insurance contract must have been issued after Jan. 1, 2007.  The deduction is reduced by 10 percent for each $1,000 that the adjusted gross income (AGI) exceeds $100,000 (or $50,000 if you file an individual tax return).  If your AGI is more than $109,000 ($54,500 if filing separately), you cannot take advantage of this deduction.

2. Mortgage interest: Interest on mortgage loans on a first or second home is fully deductible, subject to the following limitations: acquisition loans up to $1 million, and home-equity loans up to $100,000.  If you are married, but file separately, the limits are split in half.

To qualify for an acquisition loan, you must buy, construct or substantially improve your home.  If you refinance for more than the outstanding indebtedness, the excess amount does not qualify as an acquisition loan unless you use all of the excess to improve your home or treat it as a home-equity loan.

The Internal Revenue Service has ruled that one does not have to take out a separate home-equity loan to qualify for this aspect of the tax deduction.  The remaining interest is treated as personal interest and is not deductible.

3. Seller-paid points: Here's an area often overlooked by buyers.  Points paid to a mortgage lender will reduce interest rates.  Each point is 1 percent of the loan.  And typically, for every point that you pay a lender, the interest rate will be reduced by one-eighth of a percent.

When negotiating a real estate sales contract, buyers will often ask the seller to make certain financial concessions so that a deal can be reached.  Such concessions include (1) the seller paying some or all of the buyer's closing costs, (2) the seller giving a cash credit at settlement, or (3) the seller paying some or all of the buyer's points.

The IRS has ruled that points paid by a seller can be deducted by the purchaser; you should be able to fully deduct the entire payment from your income tax that you file for this year.

There is one drawback to deducting seller-paid points: The amount of the points paid by the seller will be used to reduce the purchaser's tax basis -- the number that will eventually be used to calculate whether a sale results in taxable capital gains.  If you pay $450,000 for the property and deduct $7,200 of seller-paid points, your tax basis in the property becomes $442,800 ($450,000 minus $7,200).

Under current tax law, taxpayers who live in their house for at least two years can fully exclude from taxable income up to $250,000 of gain ($500,000 for married couples filing a joint return) on the sale of their principal residence.  Thus, the lower tax basis may not be significant -- unless the taxpayer makes a profit that exceeds these amounts.

Two useful IRS documents are Publication 936, entitled "Home Mortgage Interest Deductions," and Publication 910, "IRS Guide to Free Tax Service.

By: Benny L. Kass, www.inman.com

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 What Home Buyer Calls Defects Really Aren't

By Barry Stone, Tuesday, April 1, 2008.

Inman News

Dear Barry,

We purchased our home 1 1/2 years ago, and our home inspector missed a number of problems. These include rotten eave boards, a bad roof, a rusted water heater, garage-door openers not equipped with safety eyes, rotted window frames, an unvented kitchen stovetop, a broken vent on the furnace, and the list goes on. We trusted him because he was recommended by our Realtor. Do we have any recourse? --Sandra

Dear Sandra,

The first step in the process of recourse is to notify the home inspector and the agent that these problems were not disclosed. You should invite them to your home for a review of these issues. And be sure to do this before making any repairs because corrected problems are not as negotiable as existing ones. Be aware also that not all of the issues you listed are within the scope of a home inspection and some may not involve actual defects. Here are some examples:

• Rotting wood at the eaves and windows may or may not be included in the scope of the inspection. You should check the inspection contract in that regard. Termite inspectors are the ones who typically inspect for rotted wood.

   

   

• Older garage-door openers were not required to have safety eyes.

   

   

• In most states, venting is not required at a kitchen range.

   

On the other hand, the rusted water heater, the broken furnace vent, and the faulty roof should have been disclosed by the inspector if the problems were visible at the time of the inspection.

It is an unfortunate reality of the real estate business that some agents cannot be trusted to recommend the best home inspectors. This does not apply to all agents, but it does apply to some. Therefore, your agent should be asked, "Was this the most thorough and experienced home inspector you know?" In most cases, agents know which inspectors are the best. If you can get the name of a "top gun" home inspector in your area, a second inspection would be advisable. This may alert you to additional problems that may have been missed by the agent's inspector.

Dear Barry,

I own several condos in a large building. Recent roof leakage caused $4,100 in damages to my unit. The homeowners association (HOA) has agreed to repair the roof but will not repair the damage to my unit. Part of the problem is its neglect of normal roof maintenance; it allowed pine needles to accumulate on the roof and in the gutters, and this affected roof drainage. Is there any way to make the HOA repair my unit? --Tom

Dear Tom,

If the HOA has not maintained the roof in a responsible manner, that weighs against its disclaimer of liability for consequential damages. You should check the documents that govern your condo complex to see how HOA responsibilities are spelled out. If the HOA is required to maintain the roof, that increases its liability for damages to your unit. If they remain firm in their refusal to make interior repairs, you might test the issue in small claims court. For a nominal filing fee and a few hours of inconvenience, you might be able to enforce your position.

To write to Barry Stone, please visit him on the Web at www.housedetective.com.

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Mortgage Concepts Every Buyer Shoud Know 

By Jack Guttentag, Monday, March 31, 2008.

Inman News

Home purchasers sometimes get into trouble because they are not clued into the sequence of steps involved in financing their purchase. These are qualification, preapproval, approval and lock.

Qualification (or "prequalification," as it is often called) is an opinion that your income, assets and current debts qualify you for a loan of some specified amount. The opinion may come from a lender, a Realtor, or it may be your own based on your use of an affordability calculator. Whatever the source, the opinion does not take your credit into account, and no one is committed by it.

It used to be that Realtors did a lot of qualifications, often back-of-the-envelope affairs, so that they would not waste time looking for houses in a price range the buyer could not afford. Increasingly, they ask borrowers to become preapproved by a lender because it is more reliable than a qualification, and lenders are willing to provide it free of charge as a way of stimulating business. Home sellers have also learned to ask potential buyers for a preapproval.

Preapproval is a conditional commitment by a lender to make a loan prior to the identification of a specific property. On a preapproval, unlike a qualification, the lender verifies the information you provide and checks your credit. A preapproval will stipulate a loan amount or monthly payment, but not necessarily the loan type or the price.

The lender's commitment under a preapproval is always conditional, but rarely are the conditions spelled out. Preapprovals don't have expiration dates, but some considerable time may elapse before the borrower receiving a preapproval comes back to convert it into an approval. During that period, things can happen that cause the lender to back off. For example, the borrower's credit deteriorates or she loses her job. No one can reasonably expect a lender to approve a loan in those circumstances.

Less clear-cut are the impacts of adverse market changes, such as the tightening of underwriting requirements that occurred last year, on outstanding preapprovals. If a lender has preapproved a loan and the market changes to the point where the same loan would not now be approvable, will the lender honor its obligation? I fear that in most, if not all, cases, the answer is "no." Fortunately, abrupt changes in underwriting rules occur very infrequently.

Approval is a commitment by a lender to make a loan. Unlike a preapproval, a specific property (along with its appraised value) is identified, and the loan details are spelled out. These include the type and purpose of loan, down payment, and type of documentation. It will also include an interest rate, even though a rate is not firmly established until it is locked. The presumption underlying an approval is that the probability of closure is high -- much higher than with a preapproval.

It is not 100 percent, however, because borrowers sometimes drop out, and sometimes one or more of the conditions that accompany the approval are not met. Approval letters contain "Prior to Doc" and "Prior to Funding" conditions, which are checklists of nitty-gritty details that must be completed before the final documents are drawn, and before funds are disbursed. Sometimes, one of these details derails the train.

Lock is a commitment by the lender to a specified price -- rate and points. Ordinarily, lenders lock at the borrower's request, and view the borrower as being committed as well, though they don't always communicate this very well, or at all. Since locking imposes a cost on lenders, some of them charge a nonrefundable fee, which may be credited back to the borrower at closing.

I recommend that prospective home buyers qualify themselves, since they are much better positioned to know what they can afford than anyone else. Use calculator 5a on my Web site.

I recommend that they get preapproved as a way of establishing their bona fides to home sellers and Realtors. Only one preapproval is needed, and it does not commit them to the issuing lender. It is only fair, however, to include that lender among the loan providers you shop when you have a contract to purchase and need a loan. But bear in mind that if you switch to B after being preapproved by A, you must now be approved by B.

I recommend that when your loan is approved, you lock the price the same day, because that is when you know the price. Holding off because you expect market interest rates to decline is a bad gamble. You don't know how to forecast future interest rates any more than I do. Besides, unless you can monitor your rate on the lender's Web site, the market rate when you finally lock will be what the lender says it is.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

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 Painting Tips From The Pros

By Paul Bianchina, Friday, March 28, 2008.

Inman News

If you're an avid do-it-yourselfer, you know the value of a simple can of paint for sprucing up walls and revamping tired rooms. But you've probably also experienced the love/hate relationship that seems to be a part of painting, so here are a handful of tips that should make your next paint project a little easier and more enjoyable.

1. Get organized: Painting is more than just opening a can and grabbing a brush. If you take the time to gather up all your paint gear, paint, rags, ladders, tools, aspirin and everything else you anticipate needing before you start, the job will flow much smoother.

2. Mark the cans: Use clear tape to cover over the name of the paint color, as well as any custom-formula markings put on the can by the paint store. This will help keep them from being obscured by paint drips. To simplify paint touchups, put a blank white label on the can's lid. On the label, write the name of room(s) where the paint was used, put a small dab of the actual paint on the label to simplify color identification, and then cover the label with clear tape to protect it.

3. Tint your primer: If you are priming your walls or woodwork prior to painting, have the primer tinted to a color that's close to the finish color, rather than leaving it white. Primer, which is less expensive than paint, provides good adhesion, and having it tinted may save you from applying a second coat of paint.

4. Intermix your paints: If you are using multiple gallons of paint, open at least two and intermix them in a clean 5-gallon bucket to ensure an even color blend.

5. Skip the roller tray: Many professional painters don't use paint trays for their rollers, which are easy to knock over or step into. Instead, use a roller screen that hooks inside your 5-gallon bucket.

6. Cover your brushes: When you need to get away from the painting for a while, wrap your brush and your roller cover in plastic wrap or aluminum foil. This will keep them from drying out while saving you the hassle of cleaning them before the day is done.

7. Be prepared: No paint job is without drips and other minor problems. Keep several clean rags close at hand -- one in your back pocket, one hanging on the ladder, etc. Rags are your best friend for getting little messes taken care of right away. Also, keep a bucket close by with a little clean water in it (for latex paints) or paint thinner (for oil-base paints) to aid with cleanups.

8. Proper cut-in: Do your cut-in work with a brush before grabbing the roller. For best results, you want to overlap your painting while it's still wet, so work in one area at a time, and then roll on the paint before the cut-in has dried. This "wet-lapping" helps blend the paint better.

9. Top to bottom: Start with the ceiling first. Paint the walls next, working from top to bottom. This allows you to better handle and drips.

10. "Push" the paint when brushing: When painting against a corner or an edge, such as a piece of trim, don't put the brush all the way against the edge -- paint on the bristles can leave small marks on the adjoining surface. Instead, touch the wet brush to the wall slightly away from the edge you're painting up to, then use the brush to push the paint -- not the bristles -- up to the edge.

11. Watch the grain: When painting wood trim or doors, always paint in the direction of the grain.

12. Brush cleanup for latex paint: Run warm water in a sink or bucket. Add a small amount of dish soap and a small amount of fabric softener. Soak your brushes for five to 10 minutes, then finish rinsing and cleaning under running water. Twirl the brush handle back and forth between your hands to spin out excess water. Allow to air dry, and then store the brush in its original cover to help maintain its shape.

13. Rinse and dry roller covers: Use a roller scraper, which looks like a putty knife with one concave-curved side, to scrape excess paint off the roller cover and back into the can. Soak the cover in the above solution, and then insert the cover into a roller spinner, which is an inexpensive hand-operated device that spins the cover quite rapidly. Spin the cover under running water to remove the rest of the paint and to rinse the cover, then shut the water and continue the spinning to remove most of the moisture. Air dry, and then store the cover in its original plastic cover.

Remodeling and repair questions? E-mail Paul at paul2887@ykwc.net.

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 Buyers, You'll Be Wealthier If You Quit Renting

Buyers, you'll be wealthier if you quit renting

By Bernice Ross, Friday, March 28, 2008.

Inman News

This is a great question for first-time buyers. The Department of Commerce reports that between 1995 and 2004, the average renter accumulated a little over $4,000 in net worth. The average homeowner accumulated $184,400. That translates into $180,000 more, or $1,500 per month. In other words, each month that the average first-time buyer continues to rent, it costs them $1,500 in lost wealth accumulation. Furthermore, renters are subject to rent increases as well as higher tax rates because they cannot take a mortgage deduction.  

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Home Sellers Keep Profits, Avoid Taxes 

By Benny Kass, Thursday, March 27, 2008.

Inman News

(This is Part 4 of a five-part series.)

"The taxpayer: that's someone who works for the federal government but doesn't have to take a civil service examination." --Ronald Reagan

Q: How can I make a profit of $500,000 and not have to pay a penny in capital gains tax?

A: Buy a house with your spouse, live in it for at least two years, and file a joint return. Of course, the house has to increase significantly in value.

This is perhaps the most significant tax benefit currently available for homeowners. With the enactment of the Taxpayer Relief Act of l997, signed by President Clinton on Aug. 5, 2007, the two old tax rules relating to home sales -- the "roll-over" and the "once in a lifetime" -- were abolished.

In order to take advantage of the up-to-$500,000 exclusion of gain (up to $250,000 if you do not file a joint tax return), there are two important tests: ownership and use.

You must have owned and used the home as your principal residence for two out of five years (or a total of 730 days) before the house is sold. The use does not have to be continuous. If, for example, you take a vacation -- or are away from the house for short periods of time -- this is still counted as "use." However, the longer the absence, the harder it will be to convince the Internal Revenue Service that your use was continuous.

If you are married, in order to take advantage of the up-to-$500,000 exclusion, both husband and wife must meet the use test, although only one spouse must meet the ownership test. Marital status is determined on the date the house is sold. In the event of a divorce where one spouse is given ownership pursuant to a divorce decree or separation agreement, the use requirements will include any time that the former spouse actually owned the property before the transfer to the other spouse.

It should be noted that if you obtained title to the house through a "like-kind" (section 1031 Starker) exchange, and subsequently established it as your principal residence, the ownership test increases to five years.

It you are on active military duty or in the foreign service, you can extend the five-year requirement for up to 10 years. Active duty means that you are serving for more than 90 days at a location that is at least 50 miles away from your home.

Unlike the old "once in a lifetime" rule, there is no limit on the number of exclusions you can take, so long as at least two years elapse between each taking.

But what if have to sell and are unable to meet the two-year ownership (and use) requirements? You still may be able to take a reduced exclusion of your gain if you fall into what the IRS calls "safe harbors": a change in employment; health reasons; or unforeseen circumstances. Let's look at these items separately:

1. Reasons of Health: To qualify for the partial exemption, the primary purpose of selling the house must be based on health. The safe harbor here is easy: If the taxpayer's physician recommends a change of residence for reasons of health, the taxpayer will automatically be entitled to take a partial exclusion. And health is rather broadly defined to include "the diagnosis, cure, mitigation or treatment of disease, illness or injury."

But the IRS wants taxpayers to understand that a sale "that is merely beneficial to the general health or well-being of an individual is not a sale … by reason of health."

2. Change in employment: If you have to travel at least 50 miles farther from the house you sold because of a job transfer, or even to take a new job, and the primary purpose of selling was because of employment reasons, you will be eligible for the partial exclusion.

The 50-mile distance is the IRS "safe harbor," provided that the change in place of employment occurred during the time that the taxpayer owned and used the home. However, even if you cannot meet the safe harbor, you still may be able to convince the IRS to allow the partial exemption based on "facts and circumstances." The regulations include an example of a doctor who sold her condominium and moved only 46 miles away from her previous residence. Because the primary reason for the sale was to allow the doctor quicker access to the hospital for emergency purposes, the IRS allowed the partial exemption based on the facts of this case.

3. Unforeseen circumstances: Each of us -- at some point in time -- will face conditions that could not be anticipated or even imagined before they happened, which significantly impact on our lives -- and on our financial situation.

Nevertheless, it would be manifestly unfair to be faced with a crisis, have to sell your house before the two years are up, and have to pay full tax on the profit you have made. Accordingly, Congress authorized the IRS to issue regulations governing this area.

According to the regulations, which were implemented by the IRS in 2004, a sale "is by reason of unforeseen circumstances if the primary reason for the sale ... is the occurrence of an event that the taxpayer could not reasonably have anticipated before purchasing and occupying the residence."

• involuntary conversion of the residence; for example, it was condemned by a governmental agency;

   

   

• natural or manmade disasters or acts of war or terrorism resulting in a casualty to the residence. Clearly, people who lost their homes because of the fires last year in California would fall squarely in this category;

   

   

• death of one of the owners of the property;

   

   

• cessation of employment as a result of which the taxpayer is eligible for unemployment compensation;

   

   

• change in employment or self-employment status that results in the taxpayer's inability to pay housing costs and reasonable basic living expenses;

   

   

• divorce or legal separation under a court decree, or

   

   

• multiple births resulting from the same pregnancy.

   

These are safe harbors. If you fall within one of these areas -- and have owned and used your house during the time since it was purchased -- you will be entitled to take the partial exclusion of gain.

If, on the other hand, you are not within the safe harbor, then according to the regulations "the taxpayer may be eligible to claim a reduced maximum exclusion if the taxpayer establishes, based on the facts and circumstances, that the taxpayer's primary reason for the sale ... is a change in place of employment, health or unforeseen circumstances."

You will have to convince the IRS that there were valid and compelling reasons that forced you to sell your house before the two years were up. The burden will be on you, and as we all know, dealing with the IRS is not easy.

If you are eligible for the partial exclusion -- either because you meet the safe harbor tests or the facts and circumstances test -- the amount you can actually exclude depends on how much time you used the house. The formula calls for dividing $250,000 (or $500,000) by 730 days, then multiplying by the days of use. Note that 730 days is two full years.

The law applies to all principal residences: single family homes, cooperative apartments and condominium units. If your boat or your mobile home is your principal residence, the exclusion can also be taken. In order to qualify as such, three things are required: sleeping quarters, a toilet and cooking facilities.

Now that you understand the exclusion rules, you have to calculate your profit? For many homeowners who bought after 1997, it's not that difficult. You take your purchase price, add any improvements and closing costs when you bought the property, and deduct this number from the net sales price.

But many homeowners took advantage of the "great American dream," and over the years sold and "bought up." The profit that was made on each sale was deferred under the old roll-over rules.

Let's take this example: In 1967, you purchased your first house for $50,000. In 1977, you sold it for $160,000, and purchased a new house for $225,000. For this example, we will ignore such items as home improvements and real estate commissions, although these are expenses which can -- and should -- be taken into consideration in determining your actual profit. Because you deferred $110,000 of profit ($160,000 - $50,000), the tax basis in your new home was $115,000. You determine your basis by subtracting the profit from the purchase price (i.e. $225,000 - $110,000).

In 1989, at the peak of a housing market cycle, you sold your home for $450,000 and purchased a new house for $550,000. Because the roll-over was still the law, you had deferred profit of $335,000 ($450,000 - 115,000). Even though you bought your new home for $550,000, your tax basis was only $215,000. Keep in mind that under the old "roll-over" rules, every new home you purchased had to take into account the deferred gain that you had made on the sale of your previous home.

Here is where the tax bite may occur: If, for example, you plan to sell your house in the near future, you must calculate your basis. If you are married and file a joint tax return (and have lived in the house for at least two out of the past five years), you will not have to pay any capital gains tax unless you sell your house for more than $715,000 (basis of $215,000 plus $500,000). But, if your spouse has died, and you can no longer file a joint tax return, you can shelter only up to $250,000 of profit. (NOTE: For sales beginning in 2008, under new legislation, a surviving spouse may take the "up-to-$500,000 exclusion provided that the sale occurs no later than two years after the date of the taxpayer's spouse.)

You or your accountant should make sure that you include the "stepped up" basis of the house in your calculations. This is obviously complicated, (since difference states have different rules) and you must have professional assistance before you sell your house.

It is absolutely critical that you keep all of your records and all of your settlement sheets. Expenses such as home improvements, real estate commissions, fix-up costs, and legal and title costs will reduce your profit -- and thus reduce your tax. If you are ever audited by the IRS, you will be required to produce proof of these expenses.

Next week: The Starker, or like-kind, exchange.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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Sky-High Water Bill A Red Flag To Buyers 

By Ilyce Glink, Friday, March 21, 2008.

Co-written by Samuel J. Tamkin
Inman News

Q: I just bought a home two weeks ago. On the day we closed, when I met the sellers' agent at the house to get the keys and move in, there was a tag on the door from the water company.

The tag was a warning that the previous month of water usage was very high and there must be a leak on the property. I have now verified that there is a leak. It is somewhere between the meter and the house.

The sellers' agent told me she would look into it. I still have the form that has the date of the meter reading and time. The time of the reading was before we actually closed on the property.

This is clearly an existing condition that nobody knew about until the city posted the warning. Should the sellers repair the leak because it was present before I closed on the property?

A: The answer to your question depends on the terms of your contract. If your contract provides that the seller must make repairs to the property for issues that are evident prior to the closing, then the sellers might be obligated to make the repair.

The real question is why didn't you get something in writing from the sellers indicating their agreement to make repairs? Or, why didn't you delay closing until you investigated the issue further? And finally, why didn't you hold back money to make sure that the sellers actually fix the problem?

Many states have seller disclosure laws, but the sellers' responsibility for disclosure is generally for matters known to them. You indicated that nobody knew of this issue, which would mean that the sellers did not know, couldn't disclose to you, and probably have no obligation to make a repair under many state seller disclosure laws.

Because you'll have to make the repair yourself, you should get three estimates and hope that the repair isn't too extensive. The listing agent told you she would look into it but didn't agree to make any payments or promises. It's likely that you'll end up having to pay for the repair yourself.

You should obtain copies of water bills from your local municipality for the prior two years to see when the increase in water usage was evident. You then should take that information, along with your real estate contract and the tag placed on your door, to a real estate attorney in your area to determine whether you might have a case against the seller.

If the fix is minor, you may decide to take care of it yourself. If the repair is major, you might want to move forward (so you're not running up an enormous water bill) and meet with an attorney. If the water bill shot up so high at one specific bill, the sellers would have known there was a problem with the house and probably would have had an obligation to disclose the issue to you.

But if the problem arose on the bill just before the sale, it might not be enough for the sellers to have known they had a problem with their water main.

Q: While attempting to sell my condo last May, I put down earnest money on another condo. My condo didn't sell, and I was very honest all along with the builder of the new condo about the status of my condo.

The builder said all along not to worry about the contract, but it was just stringing me along. Now the builder said it doesn't have to give me any of my deposit back. The Austin, Texas, market is still strong, so the builder should not have a problem reselling my unit. Can you please help me get my money back?

A: You need to review your purchase agreement for the condominium you are purchasing. I might even suggest that you talk to a real estate attorney to review your contract and any other documents you have from the builder of your condominium.

There may be something in those documents that may allow you to back out of the deal.

However, you signed a contract and agreed to buy the new condo. If the contract doesn't give you the right to cancel the deal if you don't sell your current home, you would be required to close on the purchase whether or not you have sold your home, or even if it would put you into bankruptcy.

The builder's remedies would be set forth in the contract. If the contract specifies that the builder gets to keep your deposit as the builder's remedy, then it may be entitled to keep it unless there is case law or a state law that would require the builder to give all or a portion of the money back.

Please take your documents and go to a good real estate attorney who is familiar with new construction laws in your area.

To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.

By Ilyce Glink, Friday, March 21, 2008.

Co-written by Samuel J. Tamkin

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 My Time Tested Tips For Selling Your Home

By: Ralph R. Roberts, www.rismedia.com

In response to my article, Realtor Caught in Cash-Back-at-Closing's Crosshairs, a newly licensed associate broker from Washington State e-mailed me asking whether cash back to the buyer at closing could ever be legal.  His question applied to the following scenario: The seller is facing foreclosure and his highly motivated to sell.  The buyer has good credit, a suitable down payment, and a desire to make a deal.  The home is listed and has been appraised at $480,000.  The seller is willing to discount the home by $80,000, losing some equity in the home but dodging the foreclosure bullet and saving part of his credit.

Instead of purchasing the home for $80,000 less, the buyer agrees to pay the full price of $480,000 with the agreement that the seller will pay back an incentive at closing of $80,000.  This would give the buyer the necessary funds to fix up the property.

The buyer delivers a real cash down payment that is proven to be in his bank account prior to the purchase, as per the banks requirements.  The bank has approved the loan based on its own appraiser’s evaluation and receives a suitable down payment of 5-20% depending on the loan requirements.

The broker then followed up with a couple of questions: How can this be inappropriate or wrong if the seller takes a loss but is happy with the deal?  Where is the harm if all is fully disclosed, and the bank is not put at any risk?  Consumers and professionals often justify such deals by claiming that the true market value of the home shows that the bank is receiving sufficient collateral.

However, the true market value of the home is the lesser of the appraised price or the actual price paid for the property.  In this case, the true market value of the property is not $480,000.  It is actually the price the seller is willing to accept-$400,000.  Presenting to the bank that the actual sales price is $480,000 is misleading and constitutes loan fraud.

As real estate brokers, we are often told that As long as the information is presented on the HUD statement, the transaction is legal.  What happens in almost all situations such as the scenario presented here, is that the professionals involved create two HUD statements -- one for the closing and another that is sent to the bank or they camouflage the $80,000 junior lien or a recently created obligation of the seller.  In other words, all is not being fully disclosed.

This is obviously a deceptive practice designed to mislead the bank into approving a loan it would otherwise have rejected.  If you have to create two HUD statements, one for the closing table and one for the lender or one that is camouflaged in some way to justify a transaction, then what you are doing is illegal.

I know of only a handful of situations in which receiving cash back at closing is legal:

1. You refinance your mortgage to cash out some or all of the equity in your home.

2. Your agent agrees to refund a portion of his or her commission at closing.

3. The buyer makes a deposit into the escrow fund, obtains a 100% loan, and then receives a credit back.  This isn't considered cash back at closing, because it is the buyer's own money.

Other than scenarios such as these, cash back at closing deals are unethical and illegal.  Now you might argue that illegal acts such as these are victimless crimes, but they do have the potential of causing harm.  Consider the following:

- The buyer's mortgage payment is higher than it needs to be, making it more difficult for the buyer to afford and more likely that the buyer will ultimately default on the mortgage.

- The bank approves a loan for $80,000 more than the true market value of the home.  If the bank must foreclose on the home in the future, it may not be able to sell the home for enough money to cover the remaining balance of the debt.

- The inflated sales price influences the prices of homes in the same area, making housing in the area less affordable and boosting area property taxes.

There are good reasons behind the rules and regulations that govern real estate transactions.  When we begin to bend those rules under the false assumption that nobody is getting hurt, we compromise the integrity of the real estate industry and damage the industry on which we make a living.

By: Ralph R. Roberts, www.rismedia.com

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 7 Real Estate Rules of Thumb T/F (Part 1 of 2)

By: G.M. Filisko, www.texasrealtors.com

Don't put all your eggs in one basket.  Haste makes waste.  Those old saws have been around forever because they're good advice for everyday life.  But what about real estate rules of thumb?  Is it true that the three most important things in real estate are location, location, location?  And in a negotiation, is splitting the difference always fair to both sides?

The answers and exceptions to the rules may surprise you.

1.  Don't buy the most expensive house on the block.

  True.  Generally speaking, lower-priced properties tend to pull down the value of higher-priced properties, and more-expensive properties pull up the value of lower-priced properties says Chuck Delaney, associate professor in the Department of Finance at Baylor University in Waco.

The underlying theory is that people want to feel like they’ve moved into the nicest neighborhood they can afford, agrees Mark Dotzour, chief economist at the Real Estate Center at Texas A&M University in College Station.  Ignoring that theory may hurt sellers on resale.  If sellers have a $250,000 home, and the rest of the homes in the neighborhood are valued in the $180,000s, they'll be competing with properties that aren't in their neighborhood, he explains.  If all the homes in another neighborhood are worth about $250,000, buyers might think, Do I want a really nice house in a lesser-quality neighborhood or a more-moderate house in a higher-quality neighborhood?

Exceptions: Unique properties, such as the only home on a block that overlooks the ocean or backs up to a greenbelt or a park, may be worth the extra money.  Another exception may be in the highest-priced neighborhoods.  If people are buying in a pure prestige area, maybe they want to have the most expensive home, says Larry D. Kokel, an appraiser at Kokel, Oberrender, Wood Appraisal Ltd. in Georgetown.

2.  More or less than six months of inventory means it's a buyer's or seller's market, respectively.

  True. We've found that to be pretty accurate, says Dotzour.  When inventory levels are below six-and-a-half months, prices and appreciation rates start to increase.  At six-and-a-half months, prices still go up, but at a slower rate.  When inventory levels get up around nine, 10, or 11 months, appreciation rates flatten out and drop.

Exception: So many other factors affect whether a market is a seller's or buyer's market, says Delaney.  For example, a market may be growing by double-digits every year -- with new employers creating jobs -- and six months inventory might not be near enough to meet anticipated demand over the short term.

3.  A home initially priced too high will eventually sell for a lower price than if it had been properly priced.

  True.  The longer an overpriced home sits on the market, the greater the probability the market will perceive something wrong with it, says Delaney.  It becomes stigmatized.  Delaney doesn’t mean stigmatized like if there was a murder at the property, but when properties sit for too long, buyers wonder whether other buyers know something they don't, so they shy away.  Buyers will know about it, and sales associates won’t market the properties as hard, even though, in theory, there's no reason that should happen, explains Jim Gaines, a research economist at the Real Estate Center at Texas A&M University.

Exception: It's over-simplistic to say overpriced listings sell for a lower price, says John Baen, a professor of finance, insurance, real estate, and law at the University of North Texas in Denton.  There are really two markets, and the rule is true in a down market but not in an increasing market. When houses are appreciating, the longer it takes to sell a home, the more likely it'll sell for a higher price.  Sellers can wait for the market to catch up.  In a declining market, the longer sellers wait to sell an overpriced listing, the less likely the home will be sold.

By: G.M. Filisko, www.texasrealtors.com

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7 Real Estate Rules of Thumb T/F (Part 2 of 2)

By: G.M. Filisko, www.texasrealtors.com

4.  The three most important things in real estate are location, location, location.

  True.  You never say never, and you never say always, but this one's pretty close to always, says Gaines.  Location is far and away the number-one variable, and the number-two variable is a distant second.

Exception: It's location, price, and terms, in that order, says Baen.  The rule came from retail sales in the commercial real estate business, where you're either in the corner location or you're not.  In residential real estate, if a property is overpriced and there's no financing available, it doesn't matter what the location is.

5.  It's better to close at the end of the month to avoid prepaid interest.

  False.  That's an irrelevant concept, says Dotzour.  Whether you prepay the interest or not, the bottom line is that, as a homebuyer, you're paying interest for the days you're living in the home.

Dennis Schmidt, associate counsel for the Texas Association of REALTORS®, warns of a potential problem for transactions that close at the end of the month.  So many people close at the end of the month that it creates a real bottleneck in the closing process and with service providers, he says.  You may avoid some problems simply by closing earlier, when everyone has a bit more time to thoroughly prepare and to handle any surprises that come along.

Exceptions: Harry Dinham, a Dallas mortgage broker and the past president of the National Association of Mortgage Brokers, sees some instances when closing at the end of the month makes sense.  If buyers are short on cash and can't come up with the money to cover prepaid interest at closing, they may be best off closing at months end.

6.  Negotiation: Let's split the difference so it's fair for both sides.

  False.  Splitting the difference may not be fair when the parties disagree on things that can't be split, such as timing or whether appliances stay.  And it's especially unfair when buyers make a lowball offer.  If I've listed my house for $200,000, and it's worth $195,000, explains Dotzour, if a buyer offers $170,000 and we split the difference at $185,000, that's not fair to me.

Even when the parties aren't that far apart in price, says Delaney, splitting the difference may not be fair.  If there's only a $10,000 difference in price but the sellers believe the property is fairly priced and that other buyers will more closely approximate what they're asking, they're better holding off, he explains.  On the other hand, if the property's been languishing on the market, it might be best to split the difference.  It depends on the motivation of both parties.

Exception: If both parties are holding firm in a price range that's reasonable for the property, then splitting the difference might make sense, says Dotzour.

7.  Buy a home in a good school district even if you don't have kids.

  True. Even though the school district might not be important to buyers who have no children, it'll be important on resale, says Kokel.  Buying in a less-reputable school district could reduce their pool of buyers, which may affect the resale price of the home.

What if buyers say they're buying the home they'll live in for the rest of their lives, so resale doesn't matter to them?  Dotzour says this rule still holds true.  I don't care if it's the last home you buy, a home is often the largest asset people have in their retirement, he says.  A lot of people need to rely on the proceeds from the sale of their home to pay for assisted living.

Exception: Delaney believes this rule is false.  I've never had children, but I'm in the best school district in the area, he explains.  I'll never recoup in a higher sales price what it has cost me in higher property taxes to live there for 20 years.  Will the pool of buyers on resale will be greater with his prestigious school district?  The pool might be greater in a lower-income class at any given time in a given area, he argues.  In fact, there might be five times more people who can't afford that home and might be actively seeking lower-priced homes.

By: G.M. Filisko, www.texasrealtors.com

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 Hiring Movers Often Takes Detective Work

By Ilyce Glink, Wednesday, March 19, 2008.

Inman News

(This is Part 1 of a two-part series.)

Contrary to the picture you're getting from most of the media in this country, millions of people are still moving. They're hiring movers, packing boxes, loading up the truck and moving on with their lives.

Most moves will be local. Others will be cross-country. There are simple moves and complex moves, but there is a method to the moving madness, according to Linda Bauer Darr, president and CEO of the American Moving and Storage Association.

"The most important thing you need to do when you're preparing for a move is to put your to-do list together," she explains, adding that the hard part is figuring out how much stuff you're trying to move and how long it will take you to get it all together.

"People lose perspective, and they get excited about their new house and they think about the house they're leaving. Hiring a mover is at the bottom of their list," she observes. "The first thing I'm going to do is figure out the mover I'm going to hire. It might not be sexy or glamorous, but it's important."

While not everyone needs a mover, or can afford to hire a professional company, the process of getting ready for a move remains the same, says Steve Bernas, president and CEO of the Chicago region of the Better Business Bureau.

First, you have to figure out how you're going to transport your stuff from your current home to your new home. If the amount is small, you may be able to use your car or borrow a friend's van or truck. If the amount is larger, but you still feel you can move yourself without injury, you can hire a small moving truck.

If you decide to hire a moving company, Bernas suggests asking friends, family members and work colleagues for recommendations of moving companies with which they had a good experience.

"Ask your friends or family for movers with which they have felt comfortable. Then, get a listing of our accredited moving companies online. Do your own research and ask around," he says.

There's no easy way to pick a good mover, he admits. Finding a company that won't rip you off requires you to do some serious homework.

"The Internet is a good tool, but consumers need to realize that just because a company's on the Internet doesn't mean it's a good company," he warns.

Bauer Darr says you should check out the moving company in person. "The company's office will mirror the kind of service you can expect, and will help you identify whether or not the movers are a real company."

Each moving company must be licensed by the Federal Motor Carriers Safety Administration. You can use links on the site to check whether the company is licensed, bonded and insured.

Before you hire a mover, Bernas suggests asking how long the business has been operating (a fact you can check online with the agency that regulates businesses in your state); whether it has the proper insurance (ask to see a certificate); how personal goods are handled; what type of wrap is used; whether climate-controlled trucks are used; whether the storage facility will be climate-controlled if your items must be stored between a move; whether you can speak with clients who have used the service; whether the employees are background-checked; and whether the individuals who will be moving your furniture are employees or independent contractors.

Moving experts suggest you get estimates from at least three different moving companies. The best estimates come from a personal visit to the home, where the mover has the opportunity to assess how much stuff you have and accurately predict how long it will take to pack it onto the truck and unpack it at your new home.

"It is a hassle," admits Bauer Darr. "Each one can take an hour or two, but it's well worth it."

While the movers are there checking out your stuff, you should ask them how much they charge for moving supplies. Then, compare their price to the cost of buying moving supplies at office supply stores such as Staples, Office Max, Office Depot, Costco or at other supply stores.

The cost savings can be significant. A mover might charge $2 or more per roll of 50 meter packing tape. You can buy the same stuff in a six-pack roll for $6.59 at Office Depot or buy nearly three times as much tape at Costco for $15.25.

Don't underestimate the number (and sizes) of boxes, tissue and tape you'll need, experts say. And if you're packing up yourself, be sure to leave plenty of time. Any extra time the movers spend putting your stuff in boxes will be billed at the prevailing hourly fee, which can add up quickly.

With enough planning, everything can go smoothly with your move -- unless you have the misfortune to hire a rogue mover.

Next week, we'll look at some different scams proliferating in the moving world, and what you can to do protect yourself.

To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.

By Ilyce Glink, Wednesday, March 19, 2008

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 20 Questions You Should Ask Your Listing Agent "Before"

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 Pricing Your Home

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 Pricing Guidelines

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Drawbacks of Overpricing

 Benefits of Proper Pricing

 Strategic Equity Management!

There are several reasons why purchasing a home is preferable to renting one. Rent payments go directly into the pocket of a landlord, while mortgage payments result in the accumulation of equity and the eventual ownership of the property. The tax advantages of home ownership are also significant since mortgage interest is tax deductible.

Ironically, these two benefits do not always work well together! Financial planning expert and best-selling author, Douglas Andrew, has revealed some surprising misconceptions as well as some innovative strategies in his book, Missed Fortune 101*. Andrew explains that most homeowners believe that paying down their mortgages quickly and increasing their equity is the best investment they can make. However, doing so results in a decrease in the tax benefits available since the loan is paid off sooner, causing the interest deductions to disappear.

As an alternative, Andrew suggests that homeowners obtain a fixed-rate, long-term mortgage. Rather than putting down a large down payment or paying extra principal, he recommends placing these funds in a carefully chosen investment vehicle that will earn a higher rate of return. By using the tax benefits of the interest deductions and the compounding of interest on the investment account, homeowners have the potential to earn a higher rate of return. In addition, should an emergency need for cash arise, the investment account will be much more liquid than the equity of the home.

* Missed Fortune 101 is available in local bookstores and through Amazon.com.

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 How To Sell Your Home For The Highest Price