QUESTION: Some time ago you gave an example of buying a $100,000 home with a $10,000 cash down payment and a $90,000 mortgage. You said if the home appreciates just 5% annually in market value, that $5,000 increase is a 50% yield on the $10,000 down payment. But what about the interest cost on the $90,000? And the lost interest on the $10,000 down payment? My husband and I are renters because his company transfers him every two or three years, so we figure home ownership is not for us. Do you think we are making a mistake not buying a home?
ANSWER: Although I am very strongly in favor of home ownership and feel sorry for people who don't own their homes, in your situation I must emphasize it is hard to make a profit if you must sell your home every few years. Your problem is that the sales costs will eat up most of your profit unless the home appreciates substantially in market value.
If I were in your situation I would lease a house for two or three years with an option to buy. Although you may pay slightly higher than market rent to get a lease-option, you won't be incurring the financing costs of getting a mortgage. When your husband gets transfered, if the value of the home has appreciated, you can exercise your option and then sell the house. But if the home's value has not appreciated substantially, then just walk away and you will be no worse off than you are now as renters.
Renting a home is usually cheaper than buying it. However, renters don't get to benefit if the home goes up in market value. Also, after considering the income tax savings for the mortgage interest and property tax deductions, the cost of ownership is very comparable to rental costs.
As for your comment about the lost interest on the down payment, let's suppose you could earn 10% interest on the $10,000 down payment in the example. That lost $1,000 interest is more than made up by the $5,000 annual market value appreciation. While many areas have more than 5% annual appreciation in home values, some have less. If you don't think homes will appreciate in market value where you are considering purchasing, don't buy.
Home Builder Refuses to Correct Defects
Q: About nine months ago, we bought a brand-new home. Since then, the patio has cracked badly, the garage floor has sunk about 2 inches, the front door is crooked, the back yard is sinking and the roof leaks. At first the home builder corrected a few minor defects, but now he won't even come out any more. Our state law requires home builders to correct defects, but he refuses. The state contractor's license board is of absolutely no help. What should we do?
A: Please consult a real estate attorney. Situations like yours give the home building industry a bad reputation. Every new home has its problems, but there is no valid excuse for a builder not to correct defects in his new homes.
This example shows why it is so important for buyers of new homes to obtain a warranty policy from a third-party insurer such as the Home Owner's Warranty Corp.
Owner Must Occupy for FHA, VA Loans
Q: Recently you wrote that FHA and VA home loans are good methods of acquiring a home with little or no cash. As I am an eligible veteran, can I buy a house with a new VA mortgage and then rent it to tenants as investment property?
A: No. Both FHA and VA require the borrower to sign a statement that they intend to occupy the home as their personal residence. However, there is no minimum occupancy time. For example, you can move in for six months and then rent the house to a tenant.
Risk of Property in Joint Tenancy
Q: I think you should expose the risks of holding title to property as joint tenants. About five years, ago my brother and I bought some land together as joint tenants with right of survivorship. We agreed this would be an investment for at least 10 years. But in January my brother was killed in an auto accident.
I presumed that as surviving joint tenant I would now own the property alone. But you can imagine my surprise when my brother's widow told me she wanted to sell her half of the land. Unknown to me, early last year my brother had deeded his half of the land to a friend as security for a loan. When the loan was paid off, the friend deeded the land back to my brother. But his widow claims this broke up the joint tenancy, so she now owns half the land since she inherited everything from my brother under his will. Can my brother's widow force me to sell?
A: Yes. Your situation shows how, in most states, a joint tenancy can be ended without the consent or knowledge of the other joint tenant. However, this cannot happen in states that allow joint tenancy by the entireties between husband and wife.
When your brother deeded his half of the property to the friend as security for the loan, that terminated the joint tenancy because you and the friend obviously did not acquire title at the same time, an essential for joint tenancy.
Although your situation is highly unusual, it is a good example of why owning property in joint tenancy is not always the best way to hold title to real estate. This result could have been prevented if you and your brother had consulted an attorney to prepare a partnership agreement.
To make matters worse, you and your sister-in-law are now tenant-in-common co-owners. She can bring a partition lawsuit to force a sale of the property.
Agent 'Too Busy' to Present Their Offer
Q: At a Sunday open house my wife and I wanted to make a purchase offer. The agent was very busy as there were lots of prospective buyers inspecting the house. We waited about an hour, but the agent kept stalling us when we said we wanted to make an offer. So we left, went to a nearby real estate agent's office where a friend works; she wrote up our offer, and contacted the listing agent to present our offer bid to the seller.
However, the listing agent said she showed us the house, so she must present our offer to the seller, and she refused to let our agent deliver the offer to the seller.
Another buyer bought the house that evening. I feel we were discriminated against because we are Asian. Do you think we should do anything further?
A: Shame on that realty agent holding the open house for not encouraging you to make a purchase offer and for refusing to present your offer to the seller when you went to another agent to write up your bid. Although the first agent was busy, I have never met an agent who was too busy to prepare a purchase offer.
Yes, I think you were a victim of illegal discrimination. I suggest you contact the state real estate commissioner and file a complaint against the first agent. Your complaint will be investigated and the realty agent could lose her license.
What Is Best Way to Hold Realty Title?
Q: We plan to buy a home soon and are debating how to take title. Please compare joint tenancy with tenancy in common. Which is best for avoiding probate and rights of survivorship for a married couple?
A: Most married people select joint tenancy with right of survivorship to hold title to real estate. When one joint tenant dies, the survivor automatically receives sole ownership without probate. In states that allow tenancy by the entireties between spouses, the property cannot be sold without the other spouse's signature.
Incidentally, I notice your letter comes from a community property state. IRS Revenue Ruling 87-98 says if you hold property as joint tenants but acknowledge that it is community property, then when one joint tenant spouse dies the survivor gets a new basis stepped-up to market value. This is the same as community property but with the added advantage of avoiding probate.
Must Seller Disclose Work Without Permit
Q: About six months ago, we bought our home direct from the seller without benefit of a realty agent. Last month we applied for a building permit to add a bathroom. When the building inspector checked our plans she discovered the bedroom to which we want to add the bathroom was apparently constructed without a building permit.
When I called the seller, she said her late husband did all the construction and she doesn't know if he got a building permit. The inspector found some things that were built improperly and which must now be corrected at an additional cost to us. Do you think the seller should pay us the extra cost?
A: Yes. The seller should have disclosed the room addition was constructed without a building permit. Illegal construction diminishes the value of the property you bought and also might be dangerous. If you can't work out a fair settlement with the seller, I suggest you consult a real estate attorney.
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.