Rent Seems Cheap But in Long Run It Costs More Than Buying a Home
QUESTION: Almost every week you tell people to buy their first home and build some equity in it for a few years so they can sell it and buy a more desirable home. That’s hogwash.
Why should I sweat and strain to make the mortgage payments on a home I don’t like, so I might someday buy a nicer home that probably won’t be much better? I think renting makes much more sense.
For example, in the town where I live I can rent a very nice home for around $1,000 per month. If I buy that same typical home I will need a down payment of at least $25,000 cash and my monthly payment will be around $2,000.
As for not getting the tax deductions, it doesn’t make any sense to pay out $2,000 to get a $2,000 tax deduction, which saves me only $560 in federal income taxes. Isn’t it time you stop telling your readers to buy a first home?
ANSWER: No. About two-thirds of American households own their home. The other one-third are renters because they can’t afford to buy a home, they don’t want to buy a home or they want to buy a home but plan to move within a few years, so renting makes more sense.
To show what can happen if you don’t buy your own home, let me tell you about some renter friends who have rented the same two-bedroom apartment for over 35 years. They are now in their 70s and are retired on a meager pension and social security. For 35 years they have wasted money paying rent and have nothing to show for it but a pile of worthless rent receipts.
The only reason they can still afford the rent is that their apartment is under rent control and the landlord subsidizes their low rent. However, if the building is sold and the new owner wants to live in their apartment, they could be forced to move out. Unfortunately, they have little savings and no equity cushion as they would have if they instead had bought a home when they were young.
Virtually everyone who buys their first home has to stretch their budget. A home purchase not only creates a place to live but a forced savings account. I recall lying awake the first night in my current home, about 10 years ago, worrying about how I would make the mortgage payments. But somehow I made every payment, and today have built a substantial equity, mostly due to the home’s appreciation in market value due to inflation.
Yes, on an out-of-pocket basis renting is cheaper than owning a home. But in the long run, renting is far more expensive than owning a home because renters build no equity and can’t look forward to the day when their payments stop.
Few of us spend our lifetimes living in the first home we buy. But the important thing is our first home, no matter how humble, gets us started building equity, so, if we wish, we can move up to a nicer home. That’s what the American home ownership dream is all about.
Exemption Can’t Be Used on Two Homes
Q: We plan to sell our home, which has greatly appreciated in market value since we bought it 12 years ago. However, we plan to move to Florida where homes are much less expensive. If we also buy a vacation home, probably in northern Michigan, and the total prices of the two homes exceed our old home’s sales price can we avoid paying profit tax?
A: Nice try, but your plan won’t work. Since you didn’t mention anything about being 55 or older, I assume you are not eligible for the $125,000 “over 55 rule” home sale tax exemption.
The “rollover residence replacement rule” of IRC 1034 says you must defer your home sale profit tax if you buy a replacement principal residence of equal or greater cost within 24 months before or after the sale.
Please notice the rule says “a replacement principal residence.” Two residences won’t qualify because you can have only one replacement principal residence.
Incidentally, if you buy a less expensive replacement home, your profit will be taxed on the difference in the two prices. To illustrate, suppose you sell your old home for a $300,000 net sales price and buy a Florida mansion for $200,000. The tax result is up to $100,000 of your home sale profit is taxable. Please consult your tax adviser for further details.
Choose Best Agent, Not Just the Franchise
Q: My husband and I are debating which real estate agent should get our listing to sell our home. We have narrowed the choice to two agents. One woman has been “farming” our neighborhood for about five years. She is very successful. But she works for a local, independent brokerage.
The other agent, who admits he is new to the business with about six months sales experience, works for a franchised realty office that advertises very heavily on TV and in the newspapers.
Both agents have their pros and cons. As you often suggest, we phoned their references of previous sellers and the woman came out with the best recommendations from former clients. However, the new agent’s firm has a relocation program that helped a friend buy her home a few months ago. Which agent should get our listing?
A: Please make your choice by hiring the best agent. No matter how famous the franchised name or how many ads you see, the real estate sales business depends on the quality of each agent. That’s how the independent brokerage firms can compete with the big name franchise offices.
If the female agent has been very successful selling homes in your area and has good recommendations, don’t hold her lack of a big name franchise company against her.
Although the man admits he is new, that drawback shouldn’t count against him if he is energetic and has good client references. However, I hope you won’t place much weight on his firm’s franchised name because that name doesn’t sell homes because most offices are locally owned and operated. While relocation programs are important, they rarely result in direct in-house sales, so don’t put too much faith in that benefit.
If you expect me to make your choice for you, I hate to disappoint you, but I can only give you the guidelines above. My final suggestion is don’t sign a long listing. Ask what the average home sales time is in your community and list your home only for that period, such as 30 or 60 days.
If the agent refuses to accept anything less than a 90- or 180-day listing, in my opinion that agent is not very confident of their abilities. Personally, I use 30-day listings with the understanding if the home is unsold when the listing expires, I will renew the listing if the agent is doing a good job.
Warning to Buyers About ‘Fisbos’
Q: As a public service you should warn home buyers to be especially careful when buying from “fisbos” (homes for sale by owners). We bought our home from a nice old couple who were too cheap to hire a realty agent. Although we thought we were buying a bargain, we quickly learned the sellers got the best of us.
If we had purchased through a reputable realty agent, I’m sure the agent would have pointed out the house defects that the sellers failed to disclose, such as leaky gutters, defective wiring, rotted porch posts and sagging roof. Next time we buy a home, you can be sure we will use a reputable realty agent and insist on a professional inspection of the house.
A: Thank you for emphasizing the pitfalls of buying directly from the seller without the benefit of a professional real estate agent. I have purchased several houses direct from owners and I share your experience that do-it-yourself home sellers are not the world’s most honest people.
Rescission Is Remedy for Misrepresentation
Q: When my husband and I bought our home the realty agent said my husband could run his insurance agency from the front living room. The house is on a busy street where there are several other small businesses such as a beauty shop, antique store and real estate brokerage.
However, when my husband hung out his insurance agency sign, the next week a city building inspector informed him the zoning does not allow business use. We applied for a variance, but the city refused to approve it. The existing businesses have been there many years and are “grandfathered.”
A major reason we paid so much for the house was my husband’s plan to use the front room for his insurance business. He had to rent a business office that costs more than $1,000 per month. When we called the realty agent, she claimed she didn’t know we couldn’t use the house for a business. Can we get our money back?
A: When a property is misrepresented by the seller or realty agent, one legal remedy is rescission of the sale. Another possible remedy is monetary damages, but they could be very difficult to prove. Rescission means you would be refunded the sales price, minus the fair market rental value of the property. Please consult a real estate attorney for details.
Move Fence or Lose Ground to Easement
Q: Several years ago our neighbor built a fence where we thought the property line was located. However, we recently had a survey made as we plan to build a room addition. It showed the fence is about 4 feet on our side of the property line. When I talked to the neighbor, she said she can’t afford to have the fence moved. What should we do?
A: Unless the fence is moved, your neighbor could acquire a prescriptive easement to that 4-foot strip of your land, thus decreasing the value of your property. Open, notorious, hostile and continuous use can result in your neighbor becoming entitled to permanent use of that land strip. To avoid this unpleasant result, since your neighbor refuses to move the fence, consult a real estate attorney about legal action.
Divorce Isn’t Reason to Stop Home Sale
Q: My wife and I signed a contract to sell our home. About a week later my wife said she wanted a divorce. This greatly upset both of us. We decided it would be best not to sell the house. But the buyers refuse to cancel the sale and have sued us for specific performance of the sales contract. Since my wife will need to keep the house to raise our three children, can the court stop the sale?
A: If you and your wife signed a valid real estate sales contract, the buyer is entitled to enforce it by suing for specific performance of the agreement. In addition, the buyer can record a lis pendens against the title to prevent you from selling to someone else. Please consult your attorney for more details.
Realty Agent Favors Using Open Listings
Q: I strongly disagree with you. You recently said, “an open listing is no listing at all.” For the last 22 years I have earned a very substantial income as a real estate broker specializing only in open listings. I sell all types of properties from single-family homes to commercial buildings to raw land, all on open listings.
The reason owners like open listings is because they don’t feel under any pressure when they work with me. Sometimes I sell a property within a few weeks. Once it took me two years to sell a property. But I think you are wrong to tell property owners to use exclusive listings. Open listings are best for sellers and for realty agents.
A: Thousands of real estate agents will disagree with you because most agents prefer exclusive listings, which give them maximum control over the property. Whether the agent or the seller finds a buyer, an exclusive right to sell listing entitles the agent to a full sales commission.
Why Lease-Option Is Better Than Buying
Q: Several times you have recommended lease-options as a good way to acquire a home. But I don’t understand why I would be worse off to buy a home than to lease it with an option to buy. Please explain.
A: I didn’t say that. But I did suggest leasing a home with an option to buy is the best way to acquire control without the costs of buying the house. Lease-options can be especially profitable if you plan to occupy a home just for a few years.
Let me illustrate. About three years ago a real estate agent presented me with the following lease-option: The homeowner wanted me to pay all expenses of the home plus $500 net rent to him every month, with a year’s rent in advance. In return, he would give me an option to buy the house at its then current market value. The realty agent wanted $3,000 immediate commission plus an additional $3,000 commission when and if I exercise the option.
Since I could rent the house for a break-even cash flow, that sounded like a fair deal to me. I asked for a 15-year lease-option term and the owner agreed. Of course, I was anticipating the house just might go up in value during the next 15 years. But the owner is very happy receiving his $500 per month rent without any worries. In fact, I send him a year’s post-dated checks just to be sure he receives the $500 rent on time every month.
However, I receive no tax benefits from this lease-option. The owner continues to deduct the mortgage interest, property taxes and depreciation. I can only deduct the operating expenses.
You can be in a similar situation by lease-optioning a house. Even if you decide not to exercise the purchase option, be sure the option is assignable, so you can sell it at a profit. Of course, the longer the option term, the better.
Where to Find Tax Sale of Properties
Q: I saw on late-night cable TV where a fellow bought real estate at bargain prices at a county tax sale. How can I find out details on these tax sales?
A: Just phone or visit your county tax collector’s office for information on the next tax sale of properties where the owners have not paid the real estate taxes. Most counties hold one or two of these sales each year. The rules are different in each state and, sometimes, in each county.
My experience is these sales usually involve odd vacant land parcels, but occasionally a property with a nice house or other improvements on it will be offered for sale.
When you obtain the list of properties to be sold, try to contact the owners of the parcels that interest you and buy from them a few days before the sale. Then rush to the tax collector’s office and pay the unpaid property taxes to stop the sale. If you can’t find the owner, then you will have to bid competitively at the tax sale.
Who Would Choose an Adjustable-Rate Loan?
Q: My wife and I recently bought our first home. We got a fixed-rate mortgage at just under 10% interest. The same lender also had adjustable rate mortgages at 9.5% after an initial “teaser rate” of 8.85% for three months. We decided the fixed-rate loan was best. Do you think we made the right choice? Why would anyone choose an adjustable rate mortgage?
A: Yes. The interest rates on adjustable rate mortgages should be about 2% below fixed rate loans to compensate for shifting the risk of rising interest rates to borrowers. Current adjustable rate mortgage interest rates are too high because the indexes are too high in relation to long-term interest rates. The result is most home loan borrowers select fixed rate loans, as you wisely did.
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.
