Danger of a ‘Net Listing’ Is Seller May Agree to Price That Is Too Low
QUESTION: We live in a very desirable neighborhood where homes rarely come on the market. About the only time a home is sold occurs when the owner dies. Last week a local realtor knocked on our door. She claimed to have buyers interested in purchasing a home in our neighborhood and asked if we might like to sell “if the price is right.”
The agent asked how much we wanted to net for our home. When my husband named a price, the agent said if we would give her a listing at this price she could sell our home within a week. Nothing was mentioned about a sales commission. When the agent pushed us to sign a listing, I said, “We would like to think it over.” Is this type of net sales price for homes now customary?
ANSWER: No. The type of listing the real estate agent suggested is called a “net listing.” It is illegal in some states and very dangerous in every state. I’m glad you didn’t sign that listing, because your net price might have been too low.
Since the agent would receive any amount the buyer pays above your net price, the agent might obtain a higher than normal sales commission. Perhaps the reason the agent was so anxious was because your net price was too low.
Before any home seller signs a listing, the real estate agent should show the seller, in writing, a “comparative market analysis.” This form shows recent sales prices of similar nearby homes, as well as the asking prices of comparable neighborhood houses now on the market for sale. Only after you have this information are you in a position to determine the proper asking price for your home.
Some realty agents hate me for suggesting this, but I must advise you to interview at least three agents before selecting the best one. Competition for your listing prevents one agent from getting you to list at too low or too high a price.
Also, insist that each agent provide you with references of previous sellers. Phone those clients to ask: “Were you in any way unhappy with your agent and would you list your home for sale again with the same agent?”
In addition, a reader recently suggested asking each agent you interview: “With which insurance company do you have E&O; (errors and omissions) insurance and has your firm been sued within the last three years?” Beware of any agent who does not have E&O; insurance. You will soon know which agent should receive your exclusive (not net) listing.
How to Make Money in Real Estate Today
Q: Recently, I read the March 1990 issue of Playboy. I was especially fascinated with the long interview of real estate investor Donald Trump. Although he has earned many millions from his Atlantic City casinos, over and over he referred to his sound real estate investments. However, most of us are not in a financial position to buy the Plaza Hotel or other New York City properties. For the average investor, what do you think is the best way to earn big profits in real estate today?
A: Trump invests primarily in real estate-oriented businesses, such as hotels and casinos, which produce tremendous cash flow. However, such operations can be extremely risky, as Merv Griffin would undoubtedly tell us.
For average real estate investors who are not in Trump’s league, the best investments are properties that can be improved to increase their market value by more than the cost of the improvements.
I like to buy run-down fixer-upper houses that can be renovated. I specialize in the low end of the market because there will always be buyers for less expensive houses. Recently, I read about a fellow who bought a house, fixed it up and is complaining because he can’t find a buyer for it at its $1.2 million appraised value. That is not my idea of a fixer-upper house.
But the same principle of adding value to real estate by raising its market value by more than the cost of the improvements is not new. Home builders do it every day, as do builders of skyscraper office buildings. However, I feel the risk of upgrading the cheaper single-family houses is minimal and is within the reach of most investors. Another benefit is it is hard to make a mistake on a single-family house, but it is easy to make a big mistake on commercial properties.
Home Buyer Reports Warranty Valuable
Q: I know you are not a big fan of one-year home warranties, but I thought you should know of my favorable experience. Within a month after I bought my “bachelorette pad” home the water heater blew up. I came out to the garage and it was filled with steam from the water heater. After shutting it off, I called the home warranty company, which sent out a plumber with a replacement water heater. My only cost was the $35 service fee.
About a month later, the dishwasher began leaking badly. The serviceman said it was rusted out and he replaced the dishwasher for only the $35 service fee. Last September, when I had the furnace checked, I learned the firebox was cracked. The warranty company replaced the entire furnace for only a $35 service fee. I understand my one-year warranty policy cost the home seller about $300, but I thought you should know it was a major incentive for me to buy and I am glad I had the warranty policy.
A: Thank you for sharing your successful home warranty policy experience. However, I receive many letters complaining about these policies, which seem to have as many exclusions as they do inclusions.
These policies pay for repairs or replacements of plumbing, wiring, built-in appliances, furnace and water heater. Some companies charge an extra premium for including air conditioning, swimming pool and the roof. But most one-year home warranty policies do not cover the foundation, plumbing outside the home’s foundation, the roof and detached buildings such as a garage.
Since the seller paid for your one-year home warranty policy, you had everything to gain from such coverage. Many real estate agents buy these policies for their buyers because they know such coverage often avoids problems later.
Beware of Agents Who Ask for Advance Fee
Q: We own land in Arizona, which we would gladly sell. In the last few months we have been contacted by several real estate agents who claim they have buyers for our land. But they want six-month listings, plus a “listing fee” to pay for advertising and sales promotion. I can understand the six-month listing, but the listing fee makes me wonder. Is such a fee customary?
A: No. Advance listing fees or advertising fees are not customary. Most reputable agents do not charge advance fees. Their sole compensation comes from the sales commission, which is payable when they find a buyer for the listed property. Selling vacant desert land is not easy, but any agent soliciting your listing should have enough confidence in his ability not to have to charge an advance fee. Be very careful.
Should They Move or Remodel House?
Q: My husband and I have been discussing possibly buying a larger home. But we hesitate to move because our mortgage has a low interest rate and we like our neighborhood. An alternative is to add another bathroom and bedroom to our present home. What do you advise?
A: Before you decide, look at larger new and resale homes. Spend a few weekends visiting open houses held by home builders and realtors.
If you decide to buy, sell your old home before purchasing a replacement home. The reason is that you don’t want to be under pressure to accept the first offer that comes along for your old home. But an alternative is to make your home purchase offer contingent on the sale of your old home.
However, if you like your present home and its neighborhood, get cost estimates for adding the improvements you desire. Talk with several contractors to get their estimates. In case you haven’t noticed, the home remodeling industry is booming because many homeowners have decided it is wiser to upgrade their current homes than to buy another.
Should Near-Retiree Buy Seattle Rental?
Q: I am about six years away from retirement and won’t have much income except Social Security and a modest pension. My brother lives in the Seattle area and is encouraging me to buy a rental house there because he says the market is booming. Do you think I should invest in the Seattle area in hopes the property might go up in value by the time I retire? My brother would manage it for me.
A: Real estate booms rarely last more than a year or two. Seattle, Sacramento and a few other areas are doing very well today, but there is no guarantee that home prices will continue to rapidly appreciate in those areas.
Unless you live in an economically depressed area, you will probably do just as well investing close to home where you can watch your properties. Personally, I won’t buy more than a 30-minute drive from my home, because I want to be familiar with the communities where I invest. If you decide to invest far from your home, please only use cash you can afford to lose.
How Newlyweds Can Avoid Tax on Sales
Q: I recently married a beautiful lady. She owns a condo and I own a townhouse where we now live. We would like to sell the condo and townhouse so we can buy a single-family house where we can begin raising our family. Her net sale profit will be about $8,000 and mine will be around $18,000. If we both go on the title to the house we buy together, is there any way we can avoid having to pay taxes on our sale profits?
A: Yes. You can both defer the profit taxes on the sale of your principal residences if within 24 months before or after the sales you buy a replacement principal residence that costs more than the total sales prices of the two homes. IRS Revenue Ruling 75-238 approves such tax deferral.
Inherited Property Is Subject to Estate Tax
Q: A few weeks ago, you ran a letter about a lady who received a house as a gift from her mother, but she had to take over her mother’s low cost basis for the house. You said it would have been better for her to inherit the house, because then the daughter’s basis would be stepped-up to market value on the date of the mother’s death. If the daughter had inherited the house, wouldn’t its value have been subject to estate tax?
A: Yes. However, there is a $600,000 federal estate tax exemption, and many states have no inheritance tax. If the property has substantially appreciated in market value, it is usually better to inherit property than receive it by gift before death. Please consult your tax adviser for more details.
Are Mobile Homes a Good Investment?
Q: What do you think of mobile homes as investments? I have read in your articles about the profits of renting mobile homes to tenants. But what about investing in mobile homes? Do they appreciate in value like houses? What are the pros and cons?
A: Mobile homes usually do not appreciate in market value. Instead, they depreciate much like your automobile loses value.
Mobile homes usually are not as well built as typical single-family homes. Also, their surroundings are often not as attractive as detached houses. However, mobile homes usually rent for a high rent as a percentage of their market value. Most owners of mobile homes report excellent rental profits. But the maintenance costs can be substantial. If you own the mobile-home park, of course you can earn additional income from renting lots to mobile-home owners.
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.
