A ‘Bargain’ House Is No Bargain If It Has Incurable Property Defects
QUESTION: We want your opinion on a bargain house we have been considering buying for the last two months. It is a two-bedroom house located on a small lot on a very narrow street in what we consider a lower-income neighborhood.
But the price is a “steal” and the seller will finance our purchase with only a 6% down payment to pay the realtor’s sales commission. We talked with several of the neighbors and they seem like very nice working-class people. Although we realize this house is not perfect and it needs some fix-up work, what do you think?
ANSWER: Keep looking. If you have been thinking about buying this house for two months, I think you are trying to tell yourself not to buy.
The problems you describe are known as incurable property defects. It is best to avoid these drawbacks unless there are overwhelming advantages. In most towns, the demand for two-bedroom homes is very limited. Most home buyers want at least three bedrooms and two bathrooms. But the location on a small lot in a congested lower-income neighborhood is another incurable defect.
The only advantage you listed is the low down payment with the seller financing. I suggest you prepare to sell on the original contract terms. Resisting the buyer who apparently really wants to buy your home could prove to be a costly experience. Ask your attorney to explain further.
If you can afford to buy another home without the incurable defects you listed, I suggest you keep looking.
Ways to Discover Amount Seller Got
Q: How can I find out how much a seller got for her house?
A: Ask her. But if you don’t believe the answer, request your realty agent to check for you. Most realty agents have access through their local Board of Realtors or Multiple Listing Service to recent sales prices and terms.
An alternative is to inquire at the customer service department of a local title insurance company for the free information you need. Or you can go to the county office where deeds are recorded and check the transfer tax paid. If it is based on the full sales price, rather than on just the equity transferred, the clerk will show you how to calculate the selling price.
Life Estate Sale Can Be Tricky; Get Advice
Q: The house next door to mine is occupied by a middle-aged man who told me he wants to sell his life estate because his job has been transferred out of town. Although he is only 42, I am very cautious. But I would like to acquire this house, which has no mortgage. He wants me to pay him only $10,000. Is this a good deal?
A: Maybe. Your first step should be to get a copy of the life estate document. It might specify that the life estate terminates if the resident vacates the house. I’m sure you are aware the life estate ends when the life tenant dies.
Although he is only 42 and has a long life expectancy, when he dies, your rights to use the home would terminate. He could have a heart attack or die in an auto accident any day, so don’t pay too much.
Paying just $10,000 for his life tenancy rights could be a bargain if you can rent the house for a substantial rent. Chances are, you are the only interested buyer for that life estate so don’t be afraid to bargain hard.
You might also want to contact the remainder man to see if you can buy out his rights, which have very little value until the life tenant dies. Once you own the life tenancy and the remainder interest, you own the property. Ask a real estate attorney to explain further.
Finding Sale Homes That Aren’t Advertised
Q: We want to buy a home in a specific neighborhood where homes rarely are advertised for sale. But we know homes are selling there. How can we learn about homes in that area before someone else buys them?
A: Contact several real estate offices near the area where you want to live. Talk with the managers. Explain that you want to work with the firm’s top agent who sells homes in that neighborhood.
Don’t be in a hurry. But be sure the agent knows you are well-qualified to buy and will act quickly when a home becomes available. You might also want to write personal letters to the homeowners in the neighborhood expressing an interest in buying their home if they should wish to sell. That technique might also produce results.
Rent Loss Not Valid Income Tax Deduction
Q: Last summer, I signed a one-year lease on a house. Then I got married last month and moved to my new husband’s house. Two of my girlfriends have agreed to take over my lease if I will pay them $200 per month, which I have agreed to do, to get out of my lease. Can I take an income tax deduction for my $200 per month loss?
A: Sorry, but your rent loss is a personal, non-deductible expense.
Let Buyer Obtain Own First Mortgage
Q: We own our home free and clear. It has been listed for sale for almost three months with no purchase offers. I am thinking perhaps we should obtain an assumable mortgage to make the purchase easier for the buyer. What do you think of this idea?
A: Not much. Although homes with large assumable mortgages usually sell easier than homes without assumable financing, obtaining a new mortgage for an unknown buyer is usually not a profitable idea.
The problem is that the buyer may have other finance plans, such as to foolishly pay cash for your home. The result would be that you wasted your time and money obtaining a new mortgage for your home. A better approach is to be flexible on your sale terms and let your realty agent know you’re willing to help finance the sale by carrying back a second mortgage. Let the buyer obtain their own first mortgage.
No Tax Deferral on Vacation Home Sale
Q: We hope to sell our winter ski cabin this year. Can we avoid the profit tax by reinvesting the sales proceeds in another vacation home, such as a Florida condominium?
A: Sorry, the Internal Revenue Code 1034 “roll-over residence replacement rule” only applies to the sale of your principal residence, not to the transfer of your vacation or second home. Please consult your tax adviser for further details.
Estate, Not Heir, Pays Federal Taxes, Debts
Q: My late aunt willed me a commercial property worth about $1 million. She left her other properties to different relatives. However, I am very concerned because I have no idea how I will pay the estate tax on this big building. What should I do?
A: Don’t worry. Payment of the estate tax is the responsibility of your aunt’s estate. The customary policy is to use the decedent’s cash and other liquid assets to pay estate taxes and other costs. However, if sufficient cash is not available to pay the taxes and debts of your aunt, then it may become necessary to sell the commercial property to raise cash. Of course, then you would receive whatever proceeds are left. Please consult the estate executor or administrator for further details.
Sue Seller Who Sold You Half a New Roof
Q: We were swindled. I know it was stupid, but we bought a house direct from the owner without the benefit of a professional inspection. When I asked her about the roof, she took us outside and showed us the good-looking new roof.
But that was the north side of the house. Less than a month after we moved in, my wife noticed the roof on the south side of the house doesn’t match the new roof on the north side. When I called the seller, she said she never told us there was a new roof on the south side, she just showed us the new north-side roof. I got an estimate to re-roof the south side and it will cost about $1,500. Do you think we should sue the seller?
A: Why not? You have everything to gain and nothing to lose. Anything can happen in a trial court, but judges are getting stricter all the time when dealing with home sellers who fail to disclose property defects to buyers. The old days of caveat emptor (let the buyer beware) are gone, and some states such as California now require home sellers to give buyers written disclosures of any known defects.
However, your problem will be proving that the lack of a new roof on the south side is a significant defect.
