Can the New Apartment Owner Raise Rent During Tenant’s Lease?
QUESTION: Last year, I signed a two-year lease for my apartment. The landlord agreed to give me a 10% rent discount in return for my prepaying my rent for the two years. Recently, the building was sold, and the new owner says my lease doesn’t apply to him because it was not recorded. He has sent me a rent raise notice, which I think is invalid. When the sale closed, the new owner received the amount of my prepaid rent from the previous owner, so he should have no complaint. In addition to the 10% discount, my rent is about $50 a month lower than comparable apartments. Can the new landlord raise my rent for the remainder of my lease?
ANSWER: No. Valid leases are binding on the new owner of a property. Recording a lease is not required to make it applicable to a new owner. If the rule were otherwise, a landlord could get out of a lease just by selling the building so that a new owner could raise the rent or evict an uncooperative tenant.
I suggest that you retain a real estate attorney to write the landlord a letter explaining your lease is binding on the new owner and he must honor it without any increase in rent until the lease expires. If the landlord carries out his threats, your attorney might have to get an injunction to stop him, but I doubt that will be necessary after it becomes apparent you know the law.
Can a Lease-Option Be Assigned to Seller?
Q: We leased a home with an option to buy. Everything is going great, and each month we get a 50% rent credit toward the down payment. However, we have decided not to exercise the option as we have better job opportunities that will require our moving out of town. However, my brother would like to take over our lease-option, including the down payment credit. But the landlord says the lease-option cannot be assigned. There is nothing in the agreement either allowing or prohibiting assignment. Can we assign the lease-option to my brother who will pay us $2,000 for the assignment?
A: Consult a real estate attorney. The general rule is all contracts are assignable unless prohibited by the contract terms or there is a “personal service” element, such as extension of credit by the seller based on your income and favorable credit history.
To illustrate: If the landlord agreed to finance your purchase of the house by carrying back a second mortgage when you exercise the option, that might make the contract non-assignable. However, if there is no seller financing involved and if there is no prohibition against assignment, the lease-option probably is assignable without the landlord’s permission.
IRS Says Your Labor Has No Tax Worth
Q: We recently purchased our first investment property, a rather run-down house that needs lots of work. However, we got “a real steal deal,” so we can’t help but make money. My husband is very handy and plans to do most of the work in the evenings and on weekends. We estimate the materials will cost about $10,000, but how do we value his labor when we calculate our cost basis for income tax purposes?
A: The IRS considers your husband’s labor to be worthless for tax purposes. You can add the $10,000 materials cost to your investment property’s purchase price, but you cannot add anything for the time and labor your husband will spend on the project.
It is usually best to hire out improvement work rather than do it yourself. Although I once painted every apartment in my nine-unit building because I couldn’t afford to hire painters, I would have been much better off borrowing the money to pay professional painters. Another benefit of hiring workers is that the job is usually completed faster and more professionally than when the owner does his own work.
Financing Rural Land Sales Can Be Difficult
Q: Two months ago, we contracted to buy 24 acres of rural land where we want to build a home and perhaps do a little farming. We are having trouble getting a mortgage although we are making a 20% cash down payment. The farmer, age 85, says he is too old to carry back a mortgage. We don’t want to lose our $1,000 earnest money deposit. Where can we get a mortgage?
A: Few if any lenders will make mortgage loans secured by rural land. I don’t know of any who will loan the 80% loan-to-value you need.
Most sales of small parcels of rural land, like yours, are financed by the seller. However, you might consult mortgage brokers in nearby towns to see if they know of any lender who will make the loan you need. But you should expect the interest rate to be high and the term will probably be short, not more than five years.
Why Local Residents Often Miss Best Buys
Q: I live in a growing town where most of the real estate is being developed by out-of-towners. As a longtime realtor, this greatly concerns me. For example, about two years ago, a mid-size shopping center was built by a New York developer who managed to get the rezoning that local people couldn’t get. What can we do to stop these realty bargains being taken over by outsiders?
A: Outsiders often spot real estate opportunities that local people are too close to see. To illustrate: The downtown area of my former home town, Minneapolis, was rebuilt by creative developers from Canada.
However, I don’t think your goal should be to stop outside developers. Instead, I suggest you take a critical look at your town. Try to spot the undeveloped parcels that can be upgraded, perhaps by changing the use or bringing new types of businesses to town. Don’t hesitate to hire outside consultants to learn their ideas on how your town can be improved. Work with local politicians because their cooperation will be necessary.
Buyer’s and Seller’s Markets Difference
Q: You and other real estate writers have used the terms buyer’s market and seller’s market. Please explain.
A: A buyer’s market means that there are more properties for sale than there are qualified purchasers. Conversely, a seller’s market means that there are more qualified buyers than properties available for sale.
During a buyer’s market, buyers can be very fussy and can negotiate hard with sellers. Prices are usually stable or may even fall. But in a seller’s market, the seller is king, can usually obtain close to the asking price, and there is little or no negotiation as to prices and terms.
There can be a buyer’s market in one type of realty in a community and a seller’s market in another. For example, where I live there is currently a seller’s market for houses. But there is a buyer’s market for office buildings, which are overbuilt.
No Tax Deduction for Loss on Sale of Home
Q: Less than a year ago we bought our home. Now we must sell it due to an unexpected out-of-town job opportunity. Although the house has appreciated in value, after we pay the sales commission and other costs, we will have a loss. Can we deduct this loss on our income tax returns?
A: Sorry, but a loss on the sale of your principal residence is not tax deductible. Please consult your tax adviser.
Real Estate Counselor Can Advise on Holdings
Q: I own about 20 properties, including several rental houses, vacant land, a small hotel and some commercial buildings. But I am undecided whether I should hold or sell these properties. Every realty agent I talk to advises me to sell, probably because the agents want the listings. My attorney and accountant are of little help either. Would you advise me, for a fee, on what I should do with these properties?
A: Sorry, I am not a real estate consultant. However, you will find certified real estate counselors who, for a fee, will evaluate your portfolio, make recommendations and help implement those suggestions if you accept them. Your local Board of Realtors can tell you how to find a certified real estate counselor.
Excess Mortgage Can Be Taxed at Sale
Q: We sold our home in 1988 and used that $125,000 “over 55 rule” to shelter most of our profit from taxation. However, our tax preparer says the difference between our approximate $86,000 mortgage balance, which exceeded our $45,000 cost of the house is part of our taxable profit. We weren’t counting on this. Please tell me this isn’t true.
A: Your tax preparer is correct. Apparently you refinanced your mortgage since your home had appreciated in market value. You had what is called an “excess mortgage,” meaning its balance exceeded your home’s adjusted cost basis. Since your profit is the difference between your adjusted or net sales price and the home’s adjusted costs basis, the excess mortgage becomes part of that profit.
Home Seller Questions Multiple List Benefits
Q: In a few months we plan to sell our home, so we have been talking with several real estate agents about listing it for sale. The agent who sells the most homes in our neighborhood recommends we do not put our home on the multiple listing service exchange unless it doesn’t sell within a month. She says using the multiple listing service cheapens a listing, but she will use it if we insist. What do you think?
A: I think that agent is trying to sell your home herself or at least within her office, thereby gaining a larger share of the sales commission. Such an arrangement may be good for her but bad for you.
I highly recommend using the local multiple listing service because it gives your home the widest possible market exposure to the greatest number of prospective buyers. If you don’t use it, you are cheating yourself. It costs no more to use the service, and the benefits far outweigh any disadvantages.
Most home sales involve two agents: the listing agent and the selling agent. If you cut your home off from selling agents with other real estate offices, you are limiting the number of prospective buyers who will see your home.
Impounds Difficult to Get Rid Off
Q: Our VA mortgage has an impound escrow account for property taxes and fire insurance. Each month, we are supposed to pay one-twelfth of the estimated annual bills, and the lender is supposed to pay them when due. But last year the lender forgot to pay the property taxes. When we got an overdue bill, we sent it to the lender who refused to pay the penalty for late payment.
We then wrote to the VA regional office, which told the lender to pay the penalty. It seems the lender is always overcharging us or undercharging us for the impound payments. How can we cancel this impound escrow account so we can pay our property taxes and fire insurance directly?
A: Sorry, but VA and FHA home loans require escrow impound accounts for fire insurance and property taxes, so there is virtually nothing you can do. The reason these impounds are required is that most VA and FHA borrowers have very little equity in their home at the time of purchase and the lenders want to be certain the fire insurance and property taxes are paid.
You did the right thing to contact the VA about the lender’s improper handling of your account. There is no excuse for a loan servicer not paying the property taxes and fire insurance from impound accounts on time.
