As an Investment, Older Home Is Usually a Better Deal Than New

QUESTION: My wife and I have been looking at least six months for a home to buy. She likes the brand-new homes out in the boondocks, but I like the older, established homes in neighborhoods where there are trees.

Several of our friends have purchased new homes and they tell us all the problems they encountered. But they all love living in a new house. As an investment, are new homes or older homes better investments?

ANSWER: As a general rule, older homes are better bargains. The cost of new homes is inflated due to all the extra expenses, such as governmental impact fees and the higher price of new construction, compared to the lower building costs in the past. However, home builders emphasize that the new homes have all the features that home buyers want.

I buy older homes for investment because I can negotiate with the sellers. Negotiating with home builders on price is almost impossible, but they will negotiate on the features to be included without extra charge.

Another reason I like to buy older homes is that I prefer buying in an established neighborhood. After acquisition, I upgrade the house to modern standards, often at considerable expense, but the total price is far less than a brand-new home would cost.

The argument for buying new or resale homes will never be settled. Only by evaluating the pros and cons of each can you decide which is best for your situation.

Try Home Equity Loan Instead of Refinancing

Q: I have a 2-year-old, fixed-rate, 30-year mortgage at 10.818%. Should I refinance?

A: No. The general rule is, don’t refinance your mortgage unless you can reduce your interest rate at least 2% and repay refinancing costs from reduced payments within 36 months. Be happy. You have a great loan.

If you have sufficient equity and need some cash, rather than disturbing your attractive loan, consider a home-equity credit line. The interest on such a loan up to $100,000 is tax-deductible on your federal tax returns. Please consult your tax adviser for full details.

Lease With Option Can Help Make Sale

Q: Many thanks for suggesting to another reader that she offer her difficult-to-sell house on a lease with option to purchase. I had the same problem, as my condo had not sold in over four months. When I told my realty agent to follow your lease-option ideas the agent fought me all the way.

She said it would never work. But the first weekend she ran your favorite ad line in big bold type: “$5,000 moves you in” and there were over 20 people at the Sunday open house. A nice couple paid the $5,000 option money, accepted the $1,000 per month rent without question although it is $200 higher than my old tenant was paying, and there was no haggling over the option price.

I gave the agent $2,000 of her sales commission now with the balance due when the couple exercises the option. As I am giving the tenants a $500 per month rent credit, I am pretty sure they will buy, aren’t you?

A: Yes. Lease-options are an excellent win-win technique for hard-to-sell properties. I don’t know why realty agents are so reluctant to use them if the regular sales listing method doesn’t work.

Original Borrower Liable for VA Loan

Q: A few years ago we sold our home, and the buyer took over our VA mortgage payments. As home prices had declined in our town, we were very pleased to get out because jobs were hard to find there. About two months ago we received a letter from our old lender, a local bank, notifying us they are foreclosing on our former residence and we will be liable for any loss.

When I phoned the banker he said home prices had not improved, our buyer had quit making payments but is still living in the house and there isn’t much chance of a sale for the amount of the mortgage. Is the banker telling the truth? Can the VA can come after us for any loss?

A: Yes. Even in states with anti-deficiency laws, the VA can and does go after the original VA borrower for any loss the VA suffers, even if the loss occurred after the original borrower sold the home.

Mortgage borrowers who allow their buyers to assume existing mortgages should be sure to obtain a written release of liability. Had you done this, you wouldn’t be facing a possible loss on a house you no longer own.

Unfortunately, there isn’t much you can do now to prevent a loss because you have no right to repossess the house. I suggest you consult a real estate attorney in the town where the bank is located to see if some settlement can be reached.

Buy Now; You Can Always Refinance

Q: Do you think we should wait to buy a home until interest rates come down? I ask because my wife and I are debating whether to buy a house now or perhaps wait a few months. Your advice, please.

A: My interest-rate crystal ball is very foggy today. But if mortgage interest rates drop, more prospective home buyers will be able to buy homes and increased buyer demand can drive home prices up.

However, if you buy a home today and pay around 10% interest, if interest rates fall substantially, you can refinance in the future.

But that 10% interest rate really isn’t 10% after you consider your income tax savings. To illustrate, if you are in a 28% federal tax bracket, your after-tax mortgage interest cost is really only about 7.2%.

Sales Commission Rate Ought to Be Lowered

Q: We are interviewing realty agents about listing our home for sale. In our town there are four major brokerages which control most of the home sales. Although our home should sell for about $450,000, all the agents we have interviewed so far insist on a full 6% sales commission.

But the listing contracts say real estate sales commissions are negotiable. I know there are discount brokers like Help-U-Sell, which charge lower fees, but my husband and I do not want to do the agent’s work of advertising, holding open houses and dealing with buyers. However, a $27,000 sales commission for selling our home seems excessive, don’t you think?

A: Although I will get hate mail from realtors, I agree with you that real estate agents should reduce the sales commission rate on the more expensive home sales.

But apparently the major brokerages in your town refuse to cut commissions, and there is not much you can do about it if you want to list your home with one of them. Incidentally, the reason the listing contracts say sales commissions are negotiable is because in many states the real estate law requires that clause.

Resort Rentals Often Lose Money for Owners

Q: We own a townhouse at a summer vacation resort. The owners’ association is supposed to try to rent the townhouses for owners who want to participate and pay the fee. Our townhouse has been rented only three times and the tenants badly damaged the furniture. The man who manages the rental program says we take our chances, just like a hotel owner takes chances with hotel guests.

But I think the manager should take big deposits or at least insist on credit cards and charge the tenants for damages, just like the rental car companies do. Both times our furniture was damaged the guests paid cash.

They live out of state, so it would be difficult to make them pay the total damage of about $1,000. Not only are we disappointed with the lack of renters, but the poor quality of those who rented. What can we do?

A: As you have discovered, resort rentals rarely are profitable. Very frequently they are losing propositions such as you encountered. Perhaps now you see why I do not recommend vacation home purchases except for personal use and with no profit expectation.

Oral Purchase Offer Is a Lot of Hot Air

Q: The home sale market in our town is rather slow now. Our home is listed for sale with an agent in whom we have the greatest confidence. Last week she showed our house to a nice young couple who I know can afford our house.

I happened to come home while the agent was showing our house. The young man asked me what we would take for the house, so I named a figure slightly below our asking price. He said that would probably be acceptable. But our agent says the couple won’t put it in writing. As we are eager to sell, what can we do to get the couple to buy at the price the man suggested?

A: A verbal purchase offer is not worth the paper it isn’t written on. In other words, the man’s oral offer to buy your home is worthless. The statute of frauds requires real estate purchase contracts must be in writing to be legally enforceable. Until you have a written offer, you have nothing.

How Long Should a Home Listing Last?

Q: How long should a home listing term be? The agent we like and with whom we want to list our home insists on a six-month listing. But my wife and I think that is far too long. I feel 60 days is about right. What do you think?

A: I agree a six-month listing is far too long. If the agent does not do a good job, then you are stuck with an incompetent agent.

My rule is the shorter the listing term, the harder, smarter and faster an agent will work to get your home sold. Recently I have been listing properties I want to sell for 30-day listings with the understanding that if the agent is doing a good job, but the property is not sold I will extend the listing for an additional 30 days. The result is the agent works hard to get the property sold, advertises it every day, holds weekend open houses and has sold the properties in less than 30 days.

Depending on local conditions, it may take more than 30 days in your town to sell your home. But don’t let any agent fool you with “average” number of days statistics to sell a home. Those figures include all the overpriced listings that never sell. I realize I will get hate mail from Realtors who say 30-day listings are too short, but only the agents who don’t have confidence in themselves reject such listings.

Heavy Mortgage Can Avert Foreclosure

Q: On one of those late-night TV shows the “so-called” real estate expert said it is best to either own your home free and clear or have it mortgaged to the hilt. But he didn’t say why. Please clarify.

A: If you own your home free and clear, it is obviously yours and nobody can take it away from you unless you fail to pay the real estate taxes or get a judgment lien recorded against you.

However, if you have the house mortgaged to the hilt, the lender won’t want to foreclose because there is little or no equity. If people are considering suing you, when they learn you have virtually no equity in your property they will probably lose interest in suing.

Talk to Several Agents Before Setting Price

Q: I am thoroughly confused about how to sell my home. My late husband and I bought it 23 years ago. I am 68. However, my son has built me a wonderful cottage on the grounds of his property where his family lives.

As I have a heart condition, I will be independent yet close to them, but not in their way. My problem is selling my home. An old friend is a realty agent. She wants my listing very badly and has given me a suggested asking price. However, my neighbors tell me it is not enough. How can I be sure I am not selling too cheap?

This is very important because my sales proceeds will be critical to my not having to depend on my son for retirement income, as my late husband left me nothing except good memories and the house.

A: Be careful. Much as you may want to list your home for sale with your friend, talk with at least two other agents before you decide.

Each agent should give you a written “comparative market analysis” form showing recent nearby home sales prices, current listing prices of neighborhood homes (your competition) and the agent’s recommended asking price for your home.

Until you have all this information from at least three agents, you are not ready to list your home for sale. But before signing a listing, be sure to ask each agent, including your friend, for references of their three most recent home sellers. Then phone the home sellers and ask them if they were unhappy in any way, and if they would use the same agent again. You will soon know which agent should receive your listing.

Realty Agents Must Submit All Offers

Q: When we listed our home for sale with what we thought was a capable realty agent we told her not to bring us offers below a specified amount. We knew our home was priced just slightly above what we would accept, and the agent knew this too.

But she continually brings us low-ball offers. However, she insists the law requires her to present all offers. Now she is mad at us for refusing to make counteroffers. How can we get rid of this lousy agent who won’t follow directions?

A: Your agent is just trying to do her job. Although the offer may be below your target price, make a written counteroffer to each offer. You will be pleasantly surprised. Your counteroffer will either be accepted or it will lead to a new offer, which you may find acceptable. Keep negotiating. Real estate is one of the few American sports, other than buying a car, where negotiation is still very important.

An Open Listing Is Poor Way to Market

Q: We took your advice about interviewing three real estate agents before listing our home for sale. However, we were not satisfied with any of them. They all acted too shrewd for us. After talking to our neighbor, who is a lawyer, we have decided to give them and several other local realtors an “open listing” to see who can sell our home. What do you think?

A: Not much. An open listing is really no listing at all. It is an invitation to one or more local real estate agents to find a buyer who makes an acceptable purchase offer. The agent who is the “procuring cause” of the sale is then entitled to the full sales commission. If you find a buyer alone, without the help of an agent, no sales commission is owed.

At first, an open listing seems very attractive to many home sellers. But there are many drawbacks. The major one is no agent is working hard to get your home sold. Since no agent has control of your listing, most agents work on open listings only on rainy days when there is nothing else to do. Few agents will spend time or money working on open listings.

Another major drawback is that you lose the benefit of the local multiple listing service. The MLS is a cooperative system of distributing listing information to all local member agents. However, only exclusive agency and exclusive right to sell listings are eligible to be included in the MLS system. If you don’t use the MLS you are cutting yourself off from prospective buyers whose agents are looking for a home like yours.

I suggest you keep interviewing real estate agents until you find one you like.

Go to the Top for Home Loan Approval

Q: A local savings and loan advertises heavily on TV and in the newspapers how easy it is to obtain a home loan with them. After we contracted to buy our first home we applied for a mortgage with this S&L.;

After waiting more than a week for an answer, I was told our application had been denied because the loan payments will take 36% of our income. But my husband and I have excellent jobs, perfect credit and only one major installment payment for our car loan.

So I insisted on getting the name of the S&L; president at the home office and I phoned him. Of course I didn’t get through to him, but I talked to a very nice “assistant.”

She promised to look into the problem. The next day she phoned me to state that although our loan application didn’t exactly conform to the lender’s guidelines, our loan was “personally approved” by the S&L; president. I thought you might pass along my experience to your readers because I’ve found it pays to complain. Isn’t the customer always right?

A: Thank you for sharing that valuable experience. Yes, the customer is always right. It does pay to complain when you are not satisfied. Congratulations on getting your home loan although you didn’t exactly meet the lender’s guidelines.

Don’t Get Into Bidding Contest for a Home

Q: A few of the realtors in our town have adopted what I consider a very bad tactic. They advertise their new listings starting on Friday for their weekend open houses. But interested buyers are then told all bids will be opened on Tuesday, and the seller can then decide which offer to accept. As a buyer, I find this very irritating. What do you think of this new tactic?

A: If I were a seller, I would probably like it. However, since I am usually a buyer, I greatly dislike it and would not participate.

A similar situation happened to me recently, but it backfired on the realtor who announced bids would be opened on Thursday. The one full-price offer was full of contingencies and the seller rejected it. All the other bids were substantially below the asking price and the seller rejected them too. As a result, the house is still unsold and the interested buyers, including me, were so turned off by the proceedings we refuse to negotiate.

I suggest you let it be known to the manager of that brokerage office that, as a buyer, you do not like the bidding gimmick. Since real estate agents depend on good will of buyers and sellers, if enough buyers protest that firm will stop their unusual bidding procedure.

Before You Marry, Ask About Tax Exemption

Q: I am 66, and my bride, whom I married almost a year ago, is 62. She didn’t like my house, so I reluctantly agreed to sell it so we can buy a new townhouse together. However, when I talked to my tax adviser he said I cannot use my $125,000 tax exemption because my new wife used her exemption when she and her late husband sold their home several years ago. This doesn’t seem fair. Please tell me it isn’t true.

A: I regret to inform you that your tax adviser is correct. You are a victim of legal age discrimination by the federal government. According to Internal Revenue Code section 121, the “over 55 rule,” a $125,000 home sale tax exemption is available when the seller is 55 or older on the day of sale, has owned and lived in the principal residence at least three of the five years before sale, and has never used this tax break before.

Unfortunately, the last requirement ruins your chance to use the “over 55 rule” because your new wife used her once-per-lifetime $125,000 home sale exemption when she was married to her late husband. Since she used her entitlement and she is now married to you, that means you cannot claim the exemption.

Your situation is a classic example of why persons 55 or older who plan to get married should ask their new spouse before marriage: ‘Honey, have you used your once-per-lifetime $125,000 ‘over 55 rule’ home sale tax exemption yet?” If the answer is “yes,” the new spouse should consider selling his or her old home before the marriage. Your tax adviser has further details.