What to Do If Your Home Doesn’t Sell as Quickly as You Would Like
QUESTION: About six weeks ago we listed our home for sale with a very highly recommended realty agent. He suggested the asking price and cautioned us that most homes sell for about 5% less. His company advertised our home heavily, put it on the local multiple listing tour for agents from other companies, and held open houses the first three weekends.
But we haven’t received any written offers. Our agent knows we are very anxious to sell due to an out-of-town job promotion. Fortunately, we only signed a 60-day listing, as we are very disappointed with our agent. As our listing expires soon, what should we do to get our home sold fast?
ANSWER: Your major mistake was not interviewing at least three realty agents about listing your home for sale. No matter how highly recommended the agent, you owed it to yourself to receive the written “comparative market analysis” forms from at least two other agents to learn what they thought your home is worth. Perhaps your agent estimated too high a price.
But you are to be congratulated for not signing a long listing. Although it appears your agent is doing a good job, if you are not satisfied you can switch to another agent when your 60-day listing expires.
I suggest you interview several other agents. Select these agents based on the recommendations of friends, business associates and success records of agents who sell homes in your neighborhood. Of course, include the agent who presently has your listing.
Perhaps the local market has changed since you listed your home. A price adjustment may be necessary. In some communities the number of prospective buyers increased when mortgage rates dropped in the last few months. But realty agents in other towns tell me their prospects declined because of economic uncertainty, expectations of possible further interest rate declines and the traditional summer slump.
There are many reasons a home may not sell immediately. It may be overpriced, in poor physical condition, in a bad location, listed by an agent other local agents don’t like to work with, ineptly marketed or just not the type of home for which there is much demand.
For example, in most towns three-bedroom homes sell much faster than two-bedroom homes, and condos sell slower than single-family houses. But setting the correct asking price close to the actual market value usually solves most problems.
Criteria Used for Selecting Questions
Q: I have written you several times, but you never answer my questions in the newspaper. How do you select the questions and why haven’t you answered my questions?
A: Because of the high volume of letters, I can only select the questions of widest interest to readers. Most letters must be condensed to conserve space. Short, typewritten letters receive preference over rambling, multipage, handwritten letters. Questions written on post cards are best, especially if the answer will be helpful to many readers in similar circumstances. Unique, unusual or bizarre questions have virtually no chance of making the column.
Can Seller, 82, Use $125,000 Exemption?
Q: My daughter is urging me to sell my home and move to a nice church-sponsored retirement home. At age 82, I am almost ready to give in because there are only a few men and many nice ladies there. However, I will only have about a $40,000 net profit on the sale of my home. I can easily afford to pay the tax. But I read in your column about an “over 55 rule” tax exemption for the elderly. As I hate to pay taxes, could I use this tax exemption?
A: Yes. The “over 55 rule” of Internal Revenue Code 121 allows a tax exemption on up to $125,000 of profit when selling your principal residence. To qualify you must have owned and lived in your home any three of the five years before its sale and never have used this tax break before.
However, this is a once-per-lifetime exemption, so if you use it to shelter your $40,000 profit from tax, the remaining $85,000 of your entitlement is wasted. But at your age I doubt you will be buying another home, so I recommend using your exemption. Please consult your CPA for further details.
Fixed-Rate Mortgages Best in Mixed Market
A: My husband and I are considering refinancing our adjustable-rate mortgage. The lender just sent us a notice that our interest rate will be going up. But I thought you said mortgage interest rates had come down. As we have a large equity in our home, over $50,000, we are thinking of taking out some cash to use for investments and to pay off bills. Do you recommend a refinanced fixed-rate mortgage instead of an adjustable?
A: In today’s mixed-up interest-rate environment, fixed-rate mortgages are by far the best deal. Adjustables are too expensive after the initial teaser rate, which only lasts three to 12 months.
As of this writing, fixed rate mortgages are around 10%. Teaser adjustables rates are in the 8% to 9% range initially, but after the first adjustment they will rise close to 10%. The problem is the indexes used for adjustables, usually the cost of funds index or the treasury bill index, are far too high after a “margin” of at least 2% is added on.
This major problem is keeping S&L; executives awake at night, as if they don’t already have enough problems.
A few years ago, mortgage lenders came up with the idea of adjustable mortgages to shift the interest-rate risk from lenders to borrowers. But the idea has now backfired on the lenders. Borrowers are refinancing their adjustables in droves to fixed-rate mortgages, which are cheaper, thus shifting the interest-rate risk back to the lenders. I think you will sleep much better with a fixed-rate mortgage at today’s affordable interest rate.
Tips on Using Rollover Replacement Rule
Q: Last weekend we saw some beautiful new homes, which are located near where my husband’s company is constructing its new suburban office building. He has been told to expect to move there in February.
We owe about $74,000 on our home mortgage and are thinking of selling our home, as the commute will take almost one hour each way. If we sell our home and buy a new home near my husband’s job, we figure on netting about $75,000 after paying off our mortgage. You often explain how to defer tax when selling a home, but how does the mortgage enter into the calculation?
A: The mortgages on your old and new homes have nothing to do with deferring the profit tax on the sale of your old home. To use the “rollover residence replacement rule” of Internal Revenue Code 1034, just buy a replacement principal residence costing at least as much as your old home’s net (adjusted) sales price within 24 months before or after the sale.
For example, you can sell your old home for cash, pay off the old mortgage, and buy a replacement home of equal or greater cost with nothing down using a VA mortgage. You can then spend your tax-deferred cash as you wish. Please consult your CPA for further details.
Watch Out for the Excess-Mortgage Trap
Q: I own a rather expensive home, which has proven difficult to sell. It has been listed with two realtors in the last six months but neither could sell it. They tell me the problem is that most mortgage lenders don’t want to make a “jumbo loan” and there are few cash buyers in our town.
I am willing to sell for a 10% down payment, but my CPA says I can’t afford to carry back a second mortgage (my first mortgage is assumable) because I have an “excess mortgage,” which would be taxable. Is there any way around this problem?
A: Yes. Since we just lost 99% of our readers, let me back up to illustrate your excess mortgage problem, which many home sellers also have, but they don’t know it.
Suppose you sell your home for $100,000 with $10,000 down and it has a $75,000 mortgage which you refinanced a few years ago. However, also imagine your cost for the home was $50,000.
That means you have a $25,000 excess mortgage ($75,000 minus $50,000). This $25,000 becomes taxable when you sell. However, if you only receive a $10,000 down payment, the profit tax on the $25,000 excess mortgage will eat up most of the down payment.
To avoid this problem, instead of carrying back a $15,000 second mortgage, carry back a $90,000 “wraparound” all-inclusive mortgage. Since you remain obligated on the underlying first mortgage, you won’t immediately have to pay tax on your excess mortgage.
It sounds like you need a new CPA who is familiar with the latest tax court decisions on wraparound mortgages to avoid excess mortgage problems.
Auctioneer Disagrees With Advice to Sellers
Q: I strongly disagree with your advice to a prospective home seller about not auctioning her home. As a professional auctioneer with hundreds of satisfied sellers, I suggest you learn more about auctions.
A properly advertised and conducted auction usually brings far more than a traditional negotiated home sale handled by a realty agent. You are correct that auctioneers usually handle distress sales, such as bankruptcies, but we are encountering many home sellers who want to get top dollar. Isn’t it time you give auctions a fair chance?
A: Auctions have their place, but I do not think typical home sales are the appropriate situation for auctions. People who bid at auctions want to buy bargains. If a home seller expects to get top dollar, and bidders want bargains, there seems to be an inherent conflict.
The residential real estate auctions I have attended were either distress properties or unique homes that a realty agent could not sell in the usual negotiated manner. The key to the distress property sales was financing prearranged by the auctioneer. This is usually not feasible in an auction of just one home. Without more evidence, I’m not convinced auctions are the best way to sell homes.
How to Clear Title After Joint Tenant Dies
Q: My brother and I owned land together as joint tenants. He was killed in a motorcycle crash about two months ago. He left all his personal assets to me. How can I clear up the title to the land?
A: The big advantage of owning property as joint tenants with right of survivorship is avoidance of probate. In most states, all you must do is go to the local county office where deeds are recorded to file an affidavit of survivorship and a certified copy of your late brother’s death certificate. For further details, please consult an attorney.
Get Written Disclosure of Defects in House
Q: About two years ago, some friends bought their first home. It turned out to be a nightmare. Although the house is located in a built-up suburb, they were shocked to learn the house was not connected to the city sewer. When the septic tank stopped up, they had to pay about $4,500 to connect to the sewer.
But their worst problems are structural. The seller apparently built several additions, which do not conform to the building code. The pier foundations are sinking and the house’s floor now slopes noticeably. My wife and I are thinking about buying our first home and don’t want to get caught in a similar situation. How can innocent buyers like our friends and ourselves prevent being stuck with a lemon?
A: The best way to avoid problems is to prevent them. When you find a home on which you want to make an offer to buy, before making your offer, ask the sellers and realty agent to disclose in writing any known defects in the house. Some states, such as California, require such disclosures. In other states, the best realty agents insist their sellers disclose home defects to prevent future lawsuits.
In addition, your purchase offer should provide contingency clauses for any professional inspections you want. In most areas, it is customary to obtain a termite or pest control inspection. The seller usually pays for any necessary repairs.
You may also want to make your offer contingent upon a satisfactory professional inspection report. The realty agent can give you a list of local inspectors who, for around $200, will give you a complete written report on the condition of the house. Many sellers now provide these reports to assure buyers the house is in good condition.
If you are suspicious about any part of the home, your purchase offer can provide a contingency clause for a satisfactory inspection report for that component. For example, if the roof looks old you may want to specify a roof inspection at your expense. Or if the wiring, plumbing and heating systems seem inadequate you can specify appropriate inspection contingencies.
Of course, you don’t want to have these inspections made until after your purchase offer is accepted by the home seller. Otherwise, you might be wasting your money on unnecessary inspectors. But such reports can be reassuring.
For example, a year ago I bought a badly run-down house. I was debating whether to tear it down or renovate it. For $250 I hired a professional inspector who checked every component of that house. His report assured me the house looked awful but was in basically sound condition. Incidentally, accompany the inspector so you can learn all about the home you plan to buy.
Make Certain Loan Payoff Is Recorded
Q: I recall several letters in your column about homeowners who had difficulties clearing the title when paying off their mortgages. What is the best way to avoid problems?
A: Phone or write your mortgage lender to obtain the final payment amount as of the date you expect to pay off your loan, such as the first day of next month. A few days before that date, mail or deliver your final payment to the lender.
If you mail it, send it by certified mail with a return receipt requested.
Include a letter specifying that this is your final payment and you expect the lender to promptly record a mortgage satisfaction or deed of reconveyance and to send you proof this has been done. If you do not receive this documentation within 30 days, contact the lender.
Many lenders fail to promptly record loan payoffs, thus causing difficulties for borrowers many years later, who find the paid off mortgage still encumbers their property.
Consult an Attorney Before Selling Home
Q: A dear friend received a very good, unsolicited offer to sell her home. She asked my advice whether there should be any penalty for the buyer forfeiting part of his earnest money deposit if he does not complete the purchase due to inability to obtain a mortgage and if she should accept a back-up offer in case the first buyer does not complete his purchase? What should I tell my friend?
A: Since you did not mention any real estate agent involved, your friend should consult a real estate attorney for assistance as to the legal aspects of the sale.
Presuming the buyer’s purchase offer contains a properly worded mortgage contingency clause, if he is unable to obtain the mortgage specified, then he is free to cancel the purchase. A well-worded contingency clause should contain a time limit for obtaining the loan, such as 30 days.
However, there is no reason your friend should not be compensated if the buyer does not complete his purchase. If she has not already accepted the offer, she could add in her counteroffer that if the buyer does not complete the purchase for any reason, the seller is entitled to $5,000 as liquidated damages.
Liquidated damages means agreed damages since the exact amount of harm to the seller is difficult to determine. Without such a clause, the buyer has a free option to tie up the house while he shops for a mortgage.
Yes, your seller friend can show the house to other prospective buyers and receive their back-up offer. However, she should accept such an offer only with the contingency of being released from the first buyer’s offer. Without such a conditional acceptance of a second offer, the seller could become obligated to sell the same house to two different buyers.
Selling Without Realtor Is Not Recommended
Q: Shame on you for constantly telling home sellers they need a realty agent to sell their home. I have sold two of my homes without any realty agent and both sales went very smoothly. I saved over $20,000 in sales commissions by selling alone.
The key to success is to have a good real estate lawyer who quickly prepares the paper work so there is no delay when a buyer wants to buy. Both times I sold my homes I just ran newspaper want ads for a few weeks, answered lots of phone calls, held weekend open houses, and saved lots of money. I’ll bet you are on the payroll of the realtors. Are you?
A: No, I am not paid in any way by the realtors to recommend home sellers use a professional realty agent when selling their home.
However, I must strongly disagree with you. Ninety-nine percent of home sellers are not able to cope with selling their home alone. One costly mistake can be far more expensive than paying a real estate sales commission.
For example, failure to disclose to the buyer a known defect in the home may result in a lawsuit which can cost the seller far more than the sales commission savings.
Another problem is that most home sellers are not able to prepare a legally binding sales contract. In these days of complicated home sales, which are contingent on details such as loan approval and inspections, even realty agents have to work very hard to keep sales from falling apart.
I agree with you the sales commissions seem like lots of money but the top realty agents earn every penny.
That is why I suggest home sellers interview at least three local realty agents and phone their client references to ask “Were you satisfied with your agent and would you list your home again with the same agent?” before selecting the best one.
Realty agents don’t like me to say that, but selecting a successful realty agent is the key to a profitable home sale.
Home-Equity Sharing Is Sometimes Risky
Q: I have read some newspaper and magazine articles about home equity-sharing. As I understand the concept, an investor co-owner makes the down payment and the resident co-owner lives in the house and pays the mortgage, property tax and maintenance expenses.
After five to 10 years, they agree to sell or refinance the house to pay back the investor and give him part of the profit. I want to invest in houses on this basis, as I think this would be a great way to own part of the property without any management or maintenance work. What do you think of equity sharing?
A: Not much. From your viewpoint, the big pitfall of equity sharing can occur if the resident co-owner fails to make the payments. As the non-resident co-owner, what will you do to get the resident co-owner out of the property?
Obviously, you can’t evict a co-owner like you would evict a deadbeat tenant. The legal answer is you must take the resident to court in a quiet title action. This could take a long time and be expensive, while the resident continues living in the house.
The resident might argue that he has built up some equity in the house and must be reimbursed. A difficult resident with a shrewd lawyer can tie you up for a long time.
Internal Revenue Code 280A, which authorizes equity sharing, says all owners must be title holders if they are to claim tax deductions. This eliminates the lease-option idea some misguided equity-sharing advocates suggest. Some equity sharing enthusiasts recommend that both parties sign quit claim deeds to be held by a trustee, such as an attorney, in case either party defaults.
While this theory sounds great, in practice the trustee has a difficult job deciding if there has been a breach serious enough to require forfeiture.
As you can see, if all does not go well, equity sharing can become a mess. However, I do like equity sharing between parents and their adult children, since everyone has known each other for at least 20 years. This is far safer than equity sharing among strangers. Further details are in my special report, “How Equity Sharing Works, Especially Between Parents and Their Adult Children,” available for $3.50 from Newspaperbooks, 64 E. Concord St., Orlando, Fla. 32801.
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.
