What Recourse Does Seller Have When an Appraisal Falls Short?
QUESTION: Recently we thought we sold our home for the full $225,000 asking price, which is the highest sales price in our neighborhood. But our house has many extras such as swimming pool, spa, remodeled kitchen and bathrooms, and it is in tiptop condition. Our home sold in only four days to buyers who had been looking over six months.
However, trouble arose when they applied for a mortgage. The buyers have excellent income and credit, so that was not the problem. The appraisal was the difficulty. Our realty agent, who has 12 years sales experience and is a top saleslady, accompanied the appraiser.
She gave him details of six recent sales of nearby homes which had sales prices close to ours, but not quite as high because the other houses didn’t have all the extras our home has. After keeping us waiting 10 days, the appraiser came in with an appraisal of only $195,000, which is far less than the sales prices of the nearby homes.
Our agent was livid with rage, as were we and the buyers. When we requested a reappraisal, we were turned down by the lender. Finally, the buyers agreed to come up with a larger down payment, but the appraisal fiasco delayed the closing by about three weeks. Do you think I should sue the appraiser?
ANSWER: If you can prove damages due to the bad appraisal, consult your attorney about suing that appraiser. However, I think since everything turned out all right you should forget the unpleasantness and realize every profession has its bad apples, which you unfortunately encountered.
A similar incident happened to me several years ago when one appraiser valued my house $50,000 less than I thought it was worth. When I insisted on a reappraisal by another appraiser from a different firm, I was proved correct.
Appraisers have a very difficult job. They are caught between the mortgage lenders, who want conservative appraisals, and the borrowers, who want high appraisals. But, as you probably know, appraisal is an art and not a science, so two appraisers evaluating the same property can differ by thousands of dollars. However, an appraiser who refuses to fairly evaluate the facts of recent sales prices presented by your realty agent deserves to be criticized.
The real estate appraisal industry is under threat of federal licensing if the states don’t enact license laws. Currently, appraisers are virtually unregulated and even I could become an appraiser with little or no formal training. As a result, there are many excellent appraisers but plenty of incompetents. Hopefully, this situation will improve quickly as the states begin licensing appraisers or the federal government will be forced to do so to prevent further losses to mortgage lenders due to bad appraisals.
Title Must Stay as Is to Defer Profit Tax
Q: I want to sell my home and buy another to avoid paying tax on my sale profit. However, I would like to put the title in my son’s name just in case something happens to me. If I do so, can I still defer the profit tax?
A: Nice try, but it won’t work. To qualify for the roll-over residence replacement rule of Internal Revenue Code 1034, both your old and new principal residences must be held in your name. Of course, the replacement home must be purchased within 24 months before or after the sale for a price which equals or exceeds your old home’s adjusted (net) sales price.
However, you can add your son to the title if you wish after you complete the purchase. But the title at the time of acquisition must include the same owner(s) as the old principal residence. Please consult your tax adviser for further details.
Court Can Force Co-Owner to Sell
Q: Almost 10 years ago, my brother and I bought land together. Now we have received an offer from a developer who wants to build a small shopping center. But my brother thinks we can get a higher price if we wait. However, we have been waiting 10 years and this is the best and only offer we have received for this land which has no utilities. How can I make my brother sell?
A: If you want to get tough, you can bring a partition lawsuit to force the sale of the land. The court can order the land sold and the proceeds divided between the co-owners. Please consult a real estate attorney for details.
Selling the Old Home Before Buying New One
Q: Almost every Sunday my husband and I go looking at homes for sale. We have seen several we can afford to buy, if we can sell our present home for the price we think it is worth. However, the realty agents are very reluctant to take offers that are contingent on the sale of our home. What is the best way to handle this problem?
A: One way to solve the problem is when making your purchase offer be certain it includes a contingency clause for the sale of your current home. Most sellers will insist on a release clause, so if a better offer comes along, you have 24 hours to either cancel the contingency for the sale of your old home or cancel the sale.
But, a better solution, if you are serious about selling your home, is to list it for sale with your area’s best realty agent. When an offer materializes, if you provide for a long closing time, such as 60 to 90 days, you have plenty of time to buy another house. Selling your old home before buying a new one is wise because then you won’t be under pressure to accept the first purchase offer that comes along.
Tax Deferral Not OK on Vacation Homes
Q: We plan to sell our vacation home this summer. After many happy summers of enjoyment we have decided to take our profit and sell. Is there any way we can avoid tax on our expected profit of about $40,000?
A: Sorry, but your vacation home sale cannot qualify for the “roll-over residence replacement rule” tax deferral of IRC 1034. The reason is your vacation home is not your principal residence. Ask your tax adviser to explain further.
Be Wary of Land Contract Purchase
Q: My wife and I only have about $5,000 for the down payment on a home, so we realize we can’t be too fussy. However, we saw a newspaper ad for a house which the owner will sell on a land contract. As I understand it, we make the monthly payments to the seller and she pays the mortgage to the bank. But, we won’t receive the deed until we complete all our payments. Can we deduct our property taxes and interest? Are there any pitfalls to this type of arrangement?
A: A land contract sale means the seller retains the deed and the buyer becomes the “equitable owner” who can deduct the mortgage interest and property taxes. In some states this type of sale is called a contract for deed, contract of sale, agreement for sale and about 29 other names.
From the seller’s viewpoint, everything looks great unless the buyer defaults. Then the seller may encounter problems removing the land contract buyer from the property, if the buyer resists.
From the buyer’s viewpoint, you need to be sure the seller can deliver marketable title when you complete your payments. It would be a shame for you to make your final payment, only to learn the seller has unpaid liens that have attached to the property and prevent you from obtaining good title. Get a title check before you enter into the land contract sale.
Check Property Deed Before It’s Too Late
Q: When we received the deed to the home we purchased about six months ago, it just had our names on it. We told the realty agent we wanted to take title as joint tenants with right of survivorship. Should the deed say something about joint tenancy?
A: Yes. If you want to hold title to real estate as joint tenants, your deed should specify joint tenancy. In some states the words with right of survivorship also are required. Please consult a real estate attorney to clear up your title problem before it is too late.
Charge Fair Market When Relatives Rent
Q: I recently bought a rental house. My in-laws want to rent it. But they expect us to give them a bargain rent. However, my wife and I have to pay the mortgage payments, property taxes, insurance and maintenance. Isn’t there some law requiring us to charge a minimum rent?
A: Yes. The IRS can deny your tax deductions for the rental property, except mortgage interest and property taxes, if you don’t charge fair market rent. This is especially important if you rent to relatives. You can blame the IRS for making you charge your in-laws fair market rent.
Consult your tax adviser for further details.
Where to Go to Learn Real Estate
Q: My husband died recently. He always managed our real estate, which consists of seven rental properties. I would like to learn more about how to manage property. Do you think I should go to real estate sales school even though I do not want a real estate license?
A: Most commercial real estate schools are designed to train prospective real estate salespeople to pass the license examination. Your best source of real estate education for property management is a nearby community college. The cost is usually minimal. Also, read excellent books such as Leigh Robinson’s “Landlording” and “The Landlord’s Handbook” by Daniel Goodwin and Richard Rusdorf, both available in stock or by special order at local bookstores.
Are Improvements Tax Deductible?
Q: After looking at new homes we decided our old home looks pretty good to us. However, we badly need to add another bedroom and a second bathroom. Are the costs tax deductible?
A: No. But if you finance the cost with an improvement loan, the interest will be tax deductible. Also, save all your receipts because the cost of your improvements should be added to your home’s cost basis, thus saving you tax dollars when you eventually sell your home. Ask your tax adviser to explain further.
Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to the Real Estate Section, Los Angeles Times, Times Mirror Square, Los Angeles 90053.
