How Much Less Than Asking Price Should Careful Home Buyer Offer?
QUESTION: My wife and I decided we should buy a home now while the real estate market is slow. We are in no hurry to buy a home (because we have a bargain rent on our apartment), but we are learning by inspecting lots of realtors’ open houses every Sunday. Is there any rule of thumb as to how much below the asking price a buyer should offer for a home?
ANSWER: Before making a purchase offer, insist that the real estate agent prepare for you a written “comparative market analysis” form. It will show recent sales prices of nearby comparable homes, as well as the asking prices of similar neighborhood homes now on the market. Then add and subtract value for the features and drawbacks of the home you want to buy.
Incidentally, this is the same form the listing agent prepared for the home seller when the home was listed for sale. Of course, if you are buying the home a month or two after it was listed there will be more recent comparable home sales which will indicate a price trend up or down. With the help of multiple listing service computers, preparing a comparative market analysis takes most agents only a few minutes.
After you have this information, you can arrive at an intelligent first offer on the house you want to buy. Try not to fall in love with the house, so you won’t be too disappointed if you don’t buy that house. Don’t say stupid things to the realty agent such as “We love this house and will pay whatever it takes to buy it.” Instead, be prepared to walk away if the seller won’t negotiate.
Try to find out why the seller is selling. If there is high motivation, such as a job transfer or a foreclosure sale next week, you can negotiate pretty hard. However, if the seller is retiring and will sell only if he gets his price, chances of negotiating a bargain price are slim. But don’t always believe the sales reason you are told, because some sellers aren’t telling the agent the real reason they are selling.
Once you know the market value of the home, based on the comparative market analysis form, you can make a fair offer. A bid 5% to 10% below the asking price won’t insult the seller. If your offer isn’t accepted, the seller will probably make a counteroffer. Remember, you can always offer more money, but once you have made an offer you can’t offer less.
Finally, be patient. For example, just a few weeks ago, I bought a fixer-upper house at just $4,000 above my original offer price which was substantially below the seller’s asking price. But when my offer was presented, the seller wouldn’t accept, reject, or counteroffer. I learned later the seller was “shopping” my offer to see if he could do better. But after two weeks of waiting, I asked the agent to phone the seller and tell him I wanted to know by Friday if we can make a sale. The next day the seller made a counteroffer at $4,000 above my initial offer. I accepted. Patience pays when buying a home.
No Minimum Term for Multiple Lists
Q: We are in the process of interviewing real estate agents to list our home. The first agent we interviewed told us there is a 90-day minimum listing term to get into the multiple listing service.
From reading your columns, I know we want to be in that MLS book. But we are concerned that if we sign a 90-day listing we might get stuck with a lazy agent. Do we have to sign a 90-day listing to use the MLS?
A: No. I am not aware of any local multiple listing service that has a 90-day minimum listing term. If you are concerned about signing a 90-day listing, ask the agent to insert in the listing a clause allowing you to cancel the listing any time after 30 days without cause and without cost. If the agent refuses to allow such a clause, that agent doesn’t have confidence in his or her ability.
Of course, before signing any listing, be sure to phone the agent’s references of previous sellers to ask: “Were you in any way unhappy with the agent and would you list your home for sale again with the same agent?”
No Extension of Replacement Rule
Q: We are nearing the end of our 24-month period to buy a home if we are to avoid paying tax on the sale of our former home. The problem is our new home, which is under construction, is not completed. We are renting an apartment. What should we do?
A: Sorry, but Internal Revenue Code 1034, the roll-over residence replacement rule, does not have any provision for extending the 24-month replacement period unless you join the military service or reside overseas.
If your new home is not yet completed, perhaps you can make arrangements to move in to part of the home. The tax law says you must own and occupy your entire replacement home within 24 months if you are to defer the tax. But it doesn’t say how long you must live there if it is not yet completed. Please consult your tax adviser for full details.
Home Seller Changes Mind on Replacement
Q: I am 64, sold my home in 1988 at a profit of about $95,000, and planned to buy another home of greater cost to defer my profit tax. On my IRS form 2119 I deferred my profit tax by saying I plan to buy a qualifying replacement home of greater cost.
But my plans have changed. I met a “younger gentleman” of age 49 and we plan to get married. We are living in his beautiful home, so I now have no need to buy another home. I called the IRS and was told I cannot use my “over-55 rule” $125,000 exemption because I did not claim it at the time of sale. Is this true?
A: No. The “over-55 rule” $125,000 home sale tax exemption can either be elected at the time of principal residence sale or within the three-year statute of limitations period for amending your income tax return.
Consult your tax adviser for information on how to amend your 1988 tax returns to claim your $125,000 home sale tax exemption.
Don’t Sign Contract If Planning Default
Q: What is the best way to tie up property to decide if it has investment potential? I have two speculative houses under contract to buy. However, I can only afford to buy one. But my earnest money deposit is only $500 on each, so I can forfeit one if I decide to buy the other. Is there some cheaper way of tying up property?
A: Shame on you for being so unethical and dishonest. If you don’t plan to complete a real estate purchase contract, don’t sign it.
While there are often situations where you need to investigate a property further and where contingencies are legitimate, if you don’t plan to complete a property purchase don’t make an offer to buy. Sorry, I have no tolerance for speculators who do not plan to complete their property purchases.
Tenant Improvements Become Landlord’s
Q: I own an apartment building where one of my tenants has made significant improvements to her apartment without my permission. She plans to move out next month and asked me to pay her for these items, including wall-to-wall carpets, mirrors, lights and wood paneling. They can’t be removed without damaging the apartment. Do you think I should pay?
A: No. Since there was no agreement about the improvements, when the tenant vacates, the improvements, which cannot be removed without damaging the building, become the landlord’s property and you have no obligation to pay the tenant for them. You do not owe any tax on their market value, but you can’t depreciate them.
Slight Loan Delay Probably Not Harmful
Q: We are buying a home, but the lender is most uncooperative. Our loan was approved three weeks ago. Our contract says the sale is to close by next Friday, but the loan agent has informed us the papers won’t be ready by then. The seller is adamant the sale must close by the deadline or the deal is off. What should we do, as we don’t want to lose the house?
A: Please consult your attorney. A delay of a few days usually will not result in forfeiture, even if the contract says time is of the essence, should court action become necessary.
However, it might be wise to put as much pressure as possible on the lender to speed things up.
In addition, perhaps a friendly talk with the seller by the real estate agent will remind the seller of the advantages of being patient for a few extra days.
Lender Greedy About Automatic Payments
Q: I asked the S&L; where I have my mortgage about deducting my payments each month from my savings or checking account. They said I must maintain at least a $5,000 minimum balance, otherwise I will be charged a $10 service fee each month for automatic withdrawal from my account at the same S&L.; Since they only pay me 5% interest on my savings account don’t you think this is a rip-off?
A: Yes. Most mortgage lenders are glad when their borrowers agree to automatic mortgage payments from an account at the same institution. I’ve never heard of a service charge for automatic payments, but many lenders offer a reduced interest rate if the borrower allows automatic withdrawal of monthly mortgage payments.
Time-Shares Are Not Real Estate Investments
Q: I read about a time-share auction where time-shares were sold at less than 50% of their original price. Do you think time-shares like this at top-quality resorts are good real estate investments?
A: No. Time-shares are not real estate investments. They are advance purchases of future vacations. I have yet to hear of any buyer who makes a profit on a time-share resale. Most time-share owners who decide to sell take big losses. The resale market for vacation time-shares is very limited and very disorganized. If you buy a time-share, please use money you won’t mind losing, because you will probably never see it again.
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.
