Do-It-Yourself Home Sellers Take Advantage of First-Time Buyers
QUESTION: Since we bought our first home about six months ago, we’ve started reading your column. Unfortunately, we should have begun reading it long before we bought. Why don’t you warn home buyers to watch out for crafty do-it-yourself home sellers? We thought we would save the real estate sales commission by purchasing our home direct from the seller without benefit of a real estate agent.
But the sellers were also trying to save the sales commissions, so they were pretty inflexible. They were a very nice older couple who, we learned later, knew every trick. When we wanted to hire a professional inspector, they talked us out of it.
We later learned the pipes were old and the water pressure is low. Shortly after moving in, we had to replace most of the wiring, which was dangerous. Now we learned the furnace firebox is cracked and we need an expensive new furnace.
But the worst trick was that the sellers forgot to tell us the house has a septic tank and is not hooked up to the city sewer. It will cost us several thousand dollars to do that. Since our sellers moved out of state, our attorney says to forget suing. Why don’t you warn home buyers about dangerous home sellers who try to save the sales commission?
ANSWER: Thank you for bringing up a subject which rarely receives attention in this column. I frequently caution home sellers to hire a professional real estate agent to market their homes. But I don’t often have the chance to point out the pitfalls of buying direct from a home seller without the benefit of a real estate agent.
As your situation shows, negotiating directly between home buyer and seller isn’t easy. A skilled home seller can easily take advantage of novice home buyers, as happened in your situation. Once the home seller has the buyer’s money, it is extremely difficult to rescind the sale or recover damages.
I would like to be more helpful, but in your circumstances it will be very difficult to get monetary damages from the sellers who have moved out of state. But your situation can be a valuable lesson to other home buyers who should use the services of a real estate agent instead of buying directly from the seller.
There Are Pitfalls in Land Contract Buying
Q: My landlord has offered to sell me the home I have rented for the last four years. She calls the arrangement a “land contract.” As I understand the plan, I will make monthly payments to her, the same as my rent, and after 10 years, I will receive the deed and pay off the balance I owe.
But I am concerned that after I make 10 years of payments something might go wrong and my landlord might not be able to deliver clear title. However, this may be the only way I can ever buy a home, since no down payment is required. Have you ever heard of such an arrangement?
A: Yes. Land contract sales, also called contracts for deed, agreements for sale, installment land sales contracts, contracts for sale and about 29 other names in various states, all involve the seller holding title until the buyer makes an agreed number of payments.
The seller remains the legal owner and the buyer is the equitable owner entitled to all the tax benefits of home ownership. Of course, as the new owner, you will be responsible for maintenance of the home, too.
The best you can do is check the property title now to make sure it is marketable. Of course, there is no guarantee that it will remain marketable for the next 10 years, since the owner might encumber the property for more than its market value and not be able to deliver free and clear title. Using a land contract is not my favorite way to buy property, but it is better than not buying. Please consult a real estate attorney for further details.
Roll-Over Replacement Benefit Every 2 Years
Q: About four years ago, we sold our home and bought a larger one. We deferred tax by using that replacement rule you often discuss. Although we already used this tax break, can we use it again to buy a bigger home?
A: Yes. There is no limit to the number of times you can use the “roll-over residence replacement rule” of Internal Revenue Code 1034. However, it cannot be used more often than once every 24 months unless the sale and replacement also involves a job location change that qualifies for the moving expense tax deduction.
The new job must be at least 35 miles farther from your old home than your old job location was.
This tax break allows you to defer your profit tax on the sale of your principal residence when you buy a replacement home of equal or greater cost within 24 months before or after the sale. Please consult your tax adviser for full details.
Selling Without Agent Can Be Expensive Task
Q: We plan to sell our home and are debating whether to hire a real estate agent. After reading several of those do-it-yourself home sale books we are not too sure we can handle the technicalities of selling without using an agent.
But the sales commission saving is substantial and we need every penny, as we are getting a divorce. Do you think we should try for a month or so to sell without a realty agent?
A: Very few home sellers who try to sell without a professional real estate agent are successful. Most decide to hire a realty agent.
But selling your home alone can be expensive because you lose valuable time, incur extra payments for the mortgage and other expenses, and you must pay for advertising, which a realty agent normally handles.
More important, as a do-it-yourself home seller, you miss the big advantage of the Multiple Listing Service.
This cooperative distribution system that gives all local member realty agents information about the availability of your home is the most effective marketing technique realty agents have. The MLS provides instant access for realty agents who have buyers looking for a home like yours.
Without access to the MLS you are cutting yourself off from hundreds of prospective buyers.
As you may know, I am a real estate broker, but when I have a house to sell, unless a tenant buys it, I always list it for sale with a realtor. I know that as an owner, I cannot do an objective job of selling the house and getting the best price and terms for it. Also, I don’t want to be bothered with all the details of selling the property.
However, I make the agent work hard for the sales commission and I only sign short-term listings, with the understanding I will renew if the agent is doing a good job.
Offer Can Be Revoked Before It Is Accepted
Q: Our home has been listed for sale for about a month. The realty agent finally brought us a purchase offer, although it was about $4,500 below our asking price. The offer said it was good for five days, so we decided to wait before accepting it to see if a better offer materialized.
The next day the realty agent phoned to tell us the buyers got cold feet and decided to revoke their offer. We were very upset because the offer said it was valid for five days.
Since no other offer came along and we would have accepted the offer, do you think we should sue the buyers for breach of contract?
A: No. A real estate purchase offer can be revoked any time before it is accepted, even if the offer says it is valid for a specified number of days. Since you never accepted the purchase offer, no contract was formed, so there could be no breach of contract. For further details, please consult a real estate attorney.
Benefits of Unmarried Pair Co-Owning Home
Q: A good friend and I, both in our 50s, are considering buying a home together. If we make equal payments, how do we figure the tax deductions of mortgage and property tax payments? If we go 50-50 on improvements to the house, can we claim equal credit when we decide to sell?
If one of us dies, can our will beneficiary who acquires our half of the house force a sale if the surviving co-owner can’t buy out the decedent’s half after the death? Also, how do we handle the question “Are you a homeowner?” on credit applications?
A: For simplicity, you would be wise to keep everything on a 50-50 basis, such as down payment, monthly payments and capital improvements. Then you can each deduct 50% of the mortgage interest and property tax payments on your income tax returns.
If you don’t contribute equally to capital improvements, then each co-owner’s basis share will be different at resale time. When one of you dies, the decedent’s beneficiary could force a sale of the property in a partition lawsuit unless the survivor could buy out the new co-owner. Of course, this problem could be avoided by holding title in joint tenancy with right of survivorship.
You can truthfully answer the homeowner question “yes” on credit applications. While you raised some excellent questions, be sure to consult a real estate attorney to prepare a partnership agreement to settle co-ownership problems like those you raise.
Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent him at P.O. Box 280038, San Francisco 94128.
