Agent Has No Excuse for His Silence on Planned Freeway
QUESTION: My daughter and son-in-law recently bought their first home. To put it mildly, I think they were swindled. An estate was selling the home, so an attorney represented the seller. But the real estate agent failed to disclose that the state had bought up all the houses across the street where a new expressway will be built in two years. This will cause massive construction problems and the noisy traffic will hurt the value of the house.
My daughter and son-in-law recently moved to the city and were not familiar with local developments. Don’t you think the real estate agent should have known about this new expressway and told them? If so, what can they do to get out of this bad deal?
ANSWER: A real estate agent owes a fiduciary duty, like a trustee, to both the seller and the buyer. Such a massive project as a new expressway should be common knowledge to local realty agents. Since your daughter and son-in-law were moving to the area from out of town and did not know about it, they were entitled to rely on the realty agent to inform them.
Although the seller was an estate, there still should have been full disclosure to the buyers about the noisy expressway, which will substantially affect the home’s market value and desirability. Since the defect was well-known in the community, there was no excuse for the seller, as well as the realty agent, not telling the buyers about the new noisy expressway.
You should suggest they consult a local real estate attorney to seek either rescission of the sale or monetary damages for the diminished property value.
Don’t Carry Financing for Seller Too Long
Q: I am 74, and plan to sell my home so I can move to a nice retirement home while I am still in good health. With today’s rising interest rates, I think I should carry back the first mortgage on my home so I can earn high interest.
Realty agents say my home should sell for about $195,000. I figure with a $20,000 down payment, I can carry back the $175,000 balance at perhaps 12% interest on a 30-year mortgage. That would be $21,000 annual interest, which is higher than I can earn elsewhere. What do you think of this idea?
A: Congratulations for realizing the benefits of selling your home on an installment sale and earning higher interest than you can receive elsewhere. However, I am not too confident you will live to 104 and collect the final payment on a 30-year mortgage. But if you don’t, every time your heirs receive a payment, they will thank you.
My suggestion is to go ahead with your idea, but have the loan callable by you or your heirs every five years. Then you will be in the driver’s seat to decide if you want the mortgage paid off or if you want to extend it for another five years.
I have several mortgage loans from elderly sellers that are callable every five years. So far, they have all elected to renew their high interest rate loans for additional five-year periods. But, at least they have the opportunity to get their principal if they should need the money.
An Unrecorded Deed May Prove to Be Valid
Q: I am trying to help my aunt straighten out her financial affairs. In going through her safe deposit box, I found the deed to her home, which appears to be unrecorded. It was executed in 1970 to her and her late husband. I have a friend who works at a title insurance company and he checked the ownership. He reports the house’s ownership is still in the previous owner’s name, but I know he is dead. What should I do?
A: That unrecorded deed may be perfectly valid if it was properly executed and acknowledged before a notary public. If not, your aunt may have to file a quiet-title lawsuit to perfect her title to the home. I suggest presenting the deed to a local title insurance company and buying a title insurance policy if the company will insure it. If not, the company can advise you on how to proceed at the least expense to clear up your aunt’s title to the property.
High Risks of Paying Cash for Your Home
Q: My wife and I recently sold our home for cash. It is a very nice feeling to have almost $200,000 cash in the bank. However, we plan to move to Sarasota, Fla., where we want to buy a nice retirement home.
Thanks to that “over 55 rule” $125,000 tax exemption, we don’t have to worry about paying any tax on our sale profit. Our problem is, I think we should pay cash for the small house we buy, but my wife says we should save our money and live off the interest. With the high interest rates we can earn on Treasury notes and money market funds, I admit that is tempting. But, don’t you think we should own our retirement home free and clear?
A: No. Please listen to your smart wife. I agree it would be nice to own your retirement home free and clear, but it is more important to have cash readily available for emergencies and other investments.
I wish I could share all the pathetic letters I receive from homeowner retirees who own their home free and clear, but now can borrow only at loan-shark rates (because they have insufficient income) to meet emergencies.
Unless you have significant income and other reserves, conserve your cash when buying that retirement home. You should expect to make a 20% to 25% cash down payment and obtain a mortgage for the 75% to 80% balance. I presume you will have adequate income to make the monthly mortgage payments.
Another benefit of obtaining a big mortgage is that Uncle Sam helps subsidize your interest expense. For example, if you are like most taxpayers in the 28% income tax bracket, for every $100 of interest you pay to the mortgage lender, Uncle Sam subsidizes $28, so your net cost is only $72.
However, if you pay all cash for your home, you receive no housing subsidy. Since you worked hard to earn your money, you deserve to benefit from it now. Get the biggest mortgage you can when you buy your retirement home.
Donating Real Estate Can Guarantee Income
Q: Many years ago, my father was greatly helped by the Salvation Army, which rehabilitated him when he was an alcoholic. I was in Germany in the U.S. Army and didn’t know about his problems. He recovered and made a success of himself. He is now 72 and has more money than he can ever spend. His will amply provides for my sister and me. But he wants to donate a substantial sum to the Salvation Army for the help they gave him.
His house is worth about $500,000, and the Salvation Army will accept it as a donation. It will give my father a lifetime income in return. He gets a charitable donation on his income-tax return if he gives the house to the Salvation Army. Do you think this makes sense?
A: Yes. The Salvation Army gladly accepts real estate donations and will provide lifetime income to the donor, based on the donor’s age and the value of the donated property. I can think of no better charity to receive your father’s gift than the Salvation Army.
Seller Financing Is Making a Comeback
Q: My husband and I plan to sell our home in the next few months. We plan to move to our vacation home, where we will live all year. I recall that a few years ago it was fashionable for home sellers to carry back all or part of the sales price in a first or second mortgage. We could use the extra retirement income, since we own our home clear with no mortgage. What interest rate do you think we could get if we carry the mortgage for our buyer?
A: As mortgage interest rates rise, seller financing is making a comeback. With today’s fixed-interest rate mortgages above 11% and adjustable rates almost that high after the initial “teaser rate” for six months, seller financing can be very attractive to home buyers. Another benefit is your easy financing means you can get top dollar for your home.
For example, I make mortgage payments on several homes at 12% to 13% interest rates to retirees from whom I purchased rental houses. These folks, who now live in retirement havens such as Florida, Arizona, California, Minnesota, and New York, depend on my income and, because I always make the payments on time, they have even asked me to extend the loans several times.
Still another advantage is that you can qualify for installment sale taxation of any profit which is not eligible for the “over 55 rule” $125,000 home sale tax break.
However, the interest income is taxable as ordinary income. In today’s market you should be able to get at least 11% to 12% interest on seller financing. Your realty agent can give you further information.
Family Rental Below Market Not Advised
Q: I own a home where I used to live. The tenant recently vacated and I want my elderly father to live there. However, he cannot pay the $1,100 per month the previous tenant was paying. My tax adviser says if I don’t collect market rent for the house I cannot continue to take tax deductions for this house. Is this true?
A: You can always deduct mortgage interest and property tax payments. However, if you charge below-market rent and the IRS audits your tax return, you could be denied any losses which exceed the amount of rent collected.
Avoid Condo Rentals If You Want Net Profit
Q: I have up to $10,000 to invest. I know that isn’t much, but I can buy a nice condo for just $7,500 down. I already own my home and would rent the condo. Do you think this would be a good investment?
A: Of course, I cannot advise on specific investments. However, I have yet to hear from a person who has earned a substantial net profit from a condo rental investment.
The big problems are that rent usually does not pay all expenses such as mortgage payment, property tax and monthly assessment fee, and condos usually do not appreciate in value as fast as single-family homes.
I realize the big condo attraction is low maintenance cost, but the disadvantage is condos usually don’t appreciate much in market value.
