Sales Contract Should Specify All Items Included in Purchase
QUESTION: I am still livid with rage at how we got swindled on the purchase of our home, which closed about a month ago. The listing the realtor showed us itemized the things that were included in the sale, such as stove, refrigerator, washer and dryer. But we are not professional home buyers, so we were not aware these items were not included on the purchase contract we signed to buy the house. We just presumed everything which was on the listing sheet would be included.
To our surprise, when we got the keys to the house, the seller had stripped the house bare. She didn’t even leave any light bulbs. It cost us over $4,000 to replace the appliances and everything else the seller stole.
When we confronted the realtor, he said, “Well, you didn’t say anything when we wrote up the contract, so I presumed you had your own appliances.” We talked to our attorney and she said it is not worth the time and cost to sue the seller because the legal fees would probably eat up most of what we might win. What should we do?
ANSWER: Your attorney is correct that legal costs would eat up most of the $4,000 you might win by suing the seller. But I hope you haven’t forgotten the realtor, who apparently misrepresented the home to you. If he implied that the appliances were part of the sale price, by showing you the listing sheet, then those appliances must be included.
The seller is correct that if you didn’t itemize the personal property you wanted included in the sale, then those items are not automatically part of the sale of real estate. However, your leverage is with the realtor, who badly goofed by not itemizing the appliances on the sales contract.
I suggest you put pressure on the agent to make things right. If he refuses to do so, don’t hesitate to let him know you will file a complaint for misrepresentation and fraud with the state real estate commissioner.
It would be much cheaper for the realtor to pay you the $4,000 rather than to risk losing his license. In addition, file a complaint with the local Board of Realtors, which may discipline its wayward member.
Over-55 Home Sellers Have 2 Years to Decide
Q: My parents are considering buying a second home and possibly selling their old home. They are well over 55 and qualify for the $125,000 home sale tax exemption. But they are not sure if they want to sell their old home before they try out living in their new home in a new town. Could they rent out their old home for a while before they decide to sell it?
A: Yes. Let’s review the Internal Revenue Code “over 55 rule.” To qualify, the home seller must be 55 or older on the day of sale, have owned and lived in the principal residence any three of the five years before sale and never have used this tax break before.
This means your parents can move out of their principal residence and rent out their old home for up to two years while they try living in their second home.
Within the two years they can decide if they want to sell their former residence and claim their $125,000 tax-free home sale profits even though it was rented for up to two years. Ask your tax adviser to explain further.
Buyer in Trouble Without Written Pact
Q: About a year ago, my wife and I bought a vacant lot where we want to build our dream home. We paid $10,000 down, and the seller carried back the balance on a first mortgage. She said when we are ready to build she would consider subordinating her loan to a new construction loan.
Now we are ready to start construction. We have the plans ready, the city has issued the building permit and we arranged a construction loan. But our seller says she doesn’t want to subordinate her loan to make it a second mortgage to a new first mortgage. How can we force her to honor her promise?
A: You should have gotten the seller’s subordination agreement in writing. As you know, if the seller subordinates her loan, it will become a second mortgage behind the new first mortgage construction loan.
However, the statute of frauds requires subordination agreements and virtually all other real estate contracts to be in writing to be legally enforceable. You may wish to consult a real estate attorney, but don’t get your hopes up.
Does Buyer or Seller Pay for Insurance?
Q: Many times you have recommended that property buyers obtain title insurance. But you never say whether the buyer or seller should pay the premium. It seems to me the seller should pay since it is the seller’s problem to deliver good title.
A: Everything is negotiable. However, local custom usually determines whether the buyer or seller pays for title insurance. For example, in the county where I live, the buyer usually pays for title insurance. But in the adjoining county the seller customarily buys the title insurance. Although local custom usually prevails, the buyer and seller can negotiate on who gets to pay for the title insurance.
Both Homeowners Must Sign the Deed
Q: My father and I own a rental house. We listed it for sale with a realty agent. While my father was away on vacation the agent brought an excellent offer. After phoning my father, who agreed to accept the offer, I signed it. But when the time came to sign the deed, he refused and said we should be getting more for the house. Now the realty agent and the buyer threaten to sue us if we don’t deliver the deed. Can I sign the deed on behalf of my father?
A: Unless you hold a power of attorney signed by your father you have no right to sign the deed on his behalf. By accepting that purchase offer alone, you obligated yourself to sell the property. Although you signed in good faith, if the realty agent sued you, you might be obligated for the sales commission. You are in a very messy situation. If you can’t persuade your father to sign the deed, I suggest you consult a real estate attorney.
‘In-Law’ Apartment May Not Be Legal
Q: I have seen several houses advertised for sale with an “in-law apartment.” Please explain what this means. Why don’t they just say it is a two-family duplex?
A: Advertising a house for sale with an “in-law apartment” is usually a shorthand way of saying the house has an illegal apartment that could be suitable for occupancy by a mother-in-law. Before you buy a house with an in-law apartment, check with the city as to the apartment’s legality. If you plan to rent it, the city might force you to vacate it. Don’t pay much extra for such an illegal apartment.
Is Auction a Good Way to Sell a House?
Q: I have had my house listed for sale for two months with no purchase offers so far. The realty agent says the market is slow in our town now. Last week, I received in the mail a solicitation to auction my house. At first I thought it was a joke. But then I called the company and found they are legitimate and have had considerable success selling houses. What do you think of auctioning my house?
A: Auctions are used primarily to sell distress property. Unless your home fits into that situation I would avoid holding an auction. If you are not in a situation where you absolutely must sell, I would forget about auctioning your home.
Another problem with auctions is financing. If the auctioneer can offer financing for prospective buyers, then you may want to reconsider. But most auctioneers do not offer financing. As a result, many sales confirmed at real estate auctions are never completed if the buyer cannot qualify for a new mortgage.
A better alternative, if you are satisfied with your realty agent, is to renew your listing for an additional 30 days. Get the agent’s written promise to actively market your house, such as with newspaper ads and weekend open houses. If you are not satisfied with your realty agent, switch to a better agent when you current listing expires.
Tax-Deferred Trades Are Alive and Well
Q: I have been unable to get any information if Congress changed the rules for tax-deferred exchanges before they adjourned. I understand they were planning on requiring exchanges to be limited to similar kinds of property and to require a 1- or 2-year holding period after acquiring a property in the exchange. Please clarify.
A: The good news is that Congress did not significantly change the tax-deferred exchange rules. Fortunately, the “like kind” rule was not changed. You can still trade, for example, land for buildings, apartments for commercial property and a warehouse for a parking lot. Neither was any minimum time limit set for holding property acquired in a tax-deferred change. However, exchanges of foreign property were eliminated and new limitations were placed on trades between relatives. Thankfully, tax-deferred exchanges survived Congress relatively unchanged.
Sales Commission Split Leaves Little
Q: So many people read your columns in our area I wish you would explain to home buyers and sellers how real estate sales commissions are split. As a realty salesman, I am often asked to cut my commission. But when I politely explain that I only receive about 25% of the total commission, the sellers back off.
The commission seems big in dollar amounts but when it is split four ways between my broker, myself, the other broker and the other salesperson there isn’t much commission to cut. Your help would be appreciated in explaining this to the public.
A: In my opinion, the only time to cut the sales commission that the seller agreed to pay to the realty agent occurs if the agent brings in a purchase offer substantially below the asking price recommended by the agent. Then I think the agent should share in the price reduction for misleading the seller as to the attainable price.
To illustrate how sales commissions are split, suppose you sell a $100,000 house and earn a $6,000 gross sales commission. If the purchase offer was obtained by an agent from another office, that firm receives $3,000 and your firm receives $3,000. Each salesperson then usually receives half of the broker’s share, or $1,500, in this example.
How High a Deposit Can Seller Expect?
Q: We live in a rural area where there aren’t many realty agents. The ones near us aren’t very good, so we have decided to sell our property without any agent. As a percentage of the sales price, how large an earnest money deposit do you think we can get?
A: In dollar amounts, $1,000 to $10,000 are typical earnest money deposits. As a percentage of your home’s sales price, you would be very lucky to get 5% to 10% at the time the purchase offer is made.
Include a Financial Contingency in Offer
Q: In a few months we will be ready to buy our first home. By then I should receive the inheritance from my late mother. However, it will only give us a down payment of about 10%. Although we have already talked with a S & L about getting a 90% mortgage and they are very encouraging, how can we be sure we will actually get the loan when we need it?
A: Just include a mortgage finance contingency clause in your home purchase offer. Be sure it is specific. For example, it might read “This purchase offer is contingent upon property and buyer qualifying for a new 30-year first mortgage of at least $100,000 with a fixed-interest rate not exceeding 9.75% and a monthly principal and interest payment of not more than $859.16.”
If the specified loan proves to be unavailable, then you can either accept the best available loan or cancel the sale and get your earnest money deposit refunded. Ask a real estate attorney to explain further.
When to Buy Foreclosed Property
Q: My wife and I would like to buy our first home. Recently, we attended a free 90-minute lecture at a local hotel about buying foreclosure houses. The speaker made it sound so easy and profitable. But he was from out of town, selling his $895 seminar, so he wasn’t exactly impartial. Do you think it is wise to buy foreclosed houses and how would we go about doing it?
A: Yes, you can make substantial profits buying foreclosed houses. I’ve bought quite a few and they all turned out well. Done correctly, buying foreclosed property is like paying the wholesale instead of retail price. However, in some towns, such as Dallas and Houston, the market is glutted with foreclosed houses, so it is very hard to make profits there.
There are three basic times to buy foreclosure houses: after the default notice is recorded but before the foreclosure auction, at the foreclosure sale and if there were no bidders, after the foreclosure sale when you can buy the REO (real estate owned) from the foreclosing lender.
The advantage of buying before the auction is that you can sometimes pay the defaulting owner a few thousand dollars for a quit-claim deed. However, this usually doesn’t work well if there are many mortgages on the property. But buying at the foreclosure auction wipes out the junior loans. The drawback is that you’ll need cash to buy at the auction.
I prefer to buy after the auction, if there were no bidders, at a good price from the foreclosing lender, who usually will finance the sale on attractive terms such as 5% or 10% down payment. However, I stay away from VA and FHA foreclosures because these houses are usually offered at full retail value.
Tax Pitfalls When Refinancing Home
Q: Did I understand your recent article correctly that if I refinance the mortgage on my home to take out some tax-free cash, I can only deduct the interest on an additional home-equity $100,000 maximum loan?
My first mortgage is paid down to about $18,652 and the house is worth at least $200,000. My bank will loan me up to $150,000, which would net me around $131,348. But are you telling me I can deduct interest only on $100,000 additional and I could not deduct itemized interest on $31,348?
A: I regret to report you understand the bleak picture perfectly. In 1986 and 1987, Congress reduced the maximum income tax rate but they also took away important tax benefits, such as full deductibility of home mortgage interest.
It Makes Sense to to Lease Your Home
Q: Some time ago, you wrote that it makes sense to rent the home where I live, but you also said I should own a rental house held for investment. You suggested that a reader move out of his house, rent it to tenants, and then rent a similar nearby house where he would live. Please clarify.
A: On an out-of-pocket basis, it is usually cheaper to rent a house than to own that same house. In most communities, the reason is that rents are lower than mortgage payments.
For example, I recently rented a house to a tenant for $1,500 per month. With a 10% down payment, the monthly mortgage payment on that same house, including property taxes, would be about $2,600. But I have owned that house for many years, so my payments are not that high.
My suggestion is to rent your home to tenants and move into the nicest rental house you can afford. Perhaps you would enjoy one with a swimming pool, tennis courts and four garages. You will be surprised how cheaply lavish mansions can be rented. Another benefit is that the owner pays for the maintenance.
Even if you have a modest negative cash flow from renting your old home, after computing the income tax savings from the loss and the depreciation deduction, you should come out about even. However, you will be making a profit if the house appreciates in market value.
I learned this concept from Jack Miller of Tampa and John Schaub of Sarasota, Fla. But they are quick to emphasize that although renting the house where you live makes financial sense, most people do not want to live in a home they are not buying. This is the big hang-up to renting the residence where you now live and owning other investment property to provide a cash-flow tax loss. I admit that while this concept makes sense, I prefer living in a home I own.
Road Easement Has to Be in Writing
Q: Several months ago, I bought some rural land which adjoins property I already own. When discussing the sale, the neighbor agreed to give me a road easement over the land he still owns. This will save me from driving several extra miles to get to the nearest town. However, in looking over the deed to the land I bought I don’t see anything about an easement. Should there be some mention of the road easement?
A: Yes. You not only purchased the land but a road easement over the neighbor’s adjoining land which he retained. Your deed should describe the land you bought plus the easement over the adjoining land, called the servient tenement. Consult the person who handled the transaction, such as a real estate attorney, title or escrow officer. I hope you bought an owner’s title policy. If so, you should be protected.
