Auctions Pose Problems for Some Home Sellers

Robert J. Bruss is a San Francisco-area lawyer, author and real estate broker

QUESTION: Our home has been listed for sale for about three months with only one offer. We accepted that offer, but the buyers were unable to qualify for a mortgage. Last week we received a solicitation letter from a company that auctions homes. Their brochure points out advantages of auctioning a home. What do you think of this idea?

ANSWER: Not much. Auctions may be fine for cattle, art and autos, but not for homes. The big drawback of a home auction is financing. Unless the auctioneer can offer ready financing, your big risk is that the top bidder won't be able to get a mortgage. Then you will have to start all over again.

Real estate auctions have been successful where a large number of properties are being sold and a lender is standing by to offer easy financing terms. For example, lenders who foreclose on condo projects can profitably auction individual condos at bargain prices with built-in financing available. But as an individual home seller, your auctioneer doesn't have that ability to offer the buyer a mortgage lender eager to make a loan.

Instead of an auction, I suggest that you reevaluate your home. Check its physical condition to be certain it is in tiptop shape. Then check your asking price to be certain it is not out of line with recent neighborhood sales prices. If necessary, hire a professional appraiser to estimate its market value. Also, take a close look at the available financing. Perhaps you can offer a low-interest second mortgage or a lease option as a sales inducement.

Finally, evaluate your real estate agent. Ask why your home hasn't sold. Perhaps the problem is the agent. Don't let him or her blame the lack of a sale on a "slow market." The top agents are making sales even in the current buyer's market. If necessary, when your listing expires switch to a more aggressive agent.

'As Is' Home May Be Bargain or Nightmare

Q: I know you advocate buying fixer-upper houses to make profits. My problem is I found such a house in a choice area. It is, by far, the worst house on the block. The asking price is firm, but it is a bargain. The problem is the house is being sold by an estate "as is" and the executor refuses to make any repairs. Do you think I should skip this house?

A: It is very common for probate properties to be sold "as is." That means the seller makes no warranties or representations and refuses to pay for any repairs. This is quite logical for an estate since the executor probably is not familiar with the house.

An "as is" property can be an excellent bargain. However, as a contingency in your purchase offer you should insist on a complete professional inspection. If you don't have the property inspected it could turn out to be a nightmare of unexpected problems.

Lender Discerning About Bankruptcies

Q: Congratulations for using that letter a few weeks ago from the home buyer who declared bankruptcy over just $3,500 of debts and now is having trouble getting a home loan.

As a loan officer for a major S&L;, we constantly receive home loan applications from people who have taken either Chapter 7 straight bankruptcy or Chapters 11 or 13 bankruptcy reorganization.

Whenever we see a Chapter 7 bankruptcy we want to know the circumstances. Sometimes the debtor had no alternative, such as unemployment due to illness.

But when we see no good reason for bankruptcy and big losses for creditors, we know that applicant doesn't take his obligations seriously, and we want nothing to do with them.

However, in Chapters 11 or 13 we admire a person who paid off their debts as agreed and we are only too happy to make home loans to these people.

But we won't loan to Chapter 11 and 13 debtors who didn't meet their obligations as agreed in the bankruptcy reorganization plan. I thought you should know most lenders don't automatically reject a loan applicant who has been through bankruptcy.

A: The policy of each mortgage lender differs as to applicants who have filed bankruptcy, but your letter should help discourage people who file unnecessarily.

As an attorney, I find it shocking how some of my fellow lawyers encourage people to file bankruptcy. I wouldn't be able to sleep at night if I had been the bankruptcy attorney for that lady who filed bankruptcy just because she couldn't pay $3,500 of bills.

I hope her letter and yours will be important lessons for prospective home buyers to avoid filing bankruptcy if at all possible.

New Job Site May Qualify for Tax Break

Q: Some time ago you said it is possible to use the "roll-over residence replacement rule" more than once every 24 months to avoid paying tax on the sale of a home. That is my situation.

My wife and I sold our old home about a year ago and bought a fixer-upper house that we have now completely renovated. We can sell it to a relative at a considerable profit.

Our problem is we have only lived here about 14 months. Four months ago I became self-employed. Does that qualify us to roll-over our profit again?

A: There is an exception allowing more frequent use if the sale involves a job site change which qualifies for the moving expense deduction. To qualify, your new job location must be at least 35 miles farther away from your home than was your old job site.

For example, if you drove five miles to your old job, but you now drive at least 40 miles, then you qualify for the moving expense deduction and you can use Internal Revenue Code 1034 sooner than once every 24 months. Please consult your tax adviser for details.

Big Deposit Helped Getting Low Price

Q: I thought you and your readers might enjoy a strategy my wife suggested when we recently offered to buy an overpriced house. She is a labor negotiator, so I let her handle the negotiations. After careful shopping, we found a home we wanted to buy. But it was vastly overpriced.

My wife insisted that the realty agent give her written details of recent nearby home sales. After obtaining this information, my wife announced the price we were willing to offer.

At first the agent refused to write up the offer, but when my wife threatened to make a complaint to the real estate commissioner she complied. Then my wife insisted on accompanying the agent to deliver the offer to the seller. When the agent resisted, my wife said, "Well, then I'll deliver the offer to the sellers myself." The agent quickly backed down.

Although I wasn't there when our offer was presented, my wife said she showed the sellers why their house was worth only the price we offered. After about an hour, the seller accepted our offer without any change. But when my wife came home, she said it was our $10,000 earnest money deposit that convinced the seller that we were serious even though our offer was pretty low. What do you think of this strategy?

A: I agree you have a terrific negotiator for a wife. A big earnest money deposit can often persuade a seller to accept a low purchase offer. But your wife's preparation with the data on recent nearby home sales also probably played an important role in getting your low offer accepted.

Refinancing Has No Effect on Cost Basis

Q: My husband and I are considering refinancing our home. It is worth at least $125,000 more than we paid for it. If we refinance and pull out about $50,000 cash above our current mortgage balance, how will our cost basis be affected?

A: The tax-free mortgage money you will receive has no effect on your home's cost basis. For further details, please consult your tax adviser.

Replacement Rule Bars Earlier Acquisition

Q: About six years ago I bought a summer vacation home. My employer, a bank, just gave me notice I had better take early retirement (at only age 58) or I will be laid off indefinitely.

Although I don't want to retire, I know my chances of finding another job with good pay are slim. My wife and I are considering selling our home (which we bought last year) and moving to our vacation home which we would winterize. We can add enough improvements to the vacation home to bring its cost up to the net sales price of our primary residence.

Since we are not eligible for the "over-55 rule" $125,000 home sale tax break because we bought our home only a year ago, can we use that "roll-over residence replacement rule" if we move to our vacation home?

A: No. IRC 1034 says you can defer your profit tax when you sell your principal residence and buy a replacement home of equal or greater cost within 24 months before or after the sale. Since you purchased your vacation home six years ago, it clearly won't qualify. For further details, please consult your tax adviser.

Prequalify for Loan Before Home Shopping

Q: We want to take advantage of the current buyer's market for homes, but we are uncertain how large a mortgage we can obtain. Is there any easy way to determine the maximize mortgage we can get?

A: Yes. Most mortgage lenders will gladly prequalify you for a mortgage. Just fill out a mortgage application and the lender will tell you the maximum mortgage you can obtain from that lender. Some give you a fancy certificate you can show to the realty agent and home seller, so they know you have mortgage money available, subject to appraisal of the house.

However, please be aware not all mortgage lenders are equal. Some say you should not spend more than 28% of your gross income on mortgage payments. But others will allow you up to 33% of your gross income. However, I recently sold a home to a nice couple and the lender qualified them even though their mortgage payment will take 40% of their gross income. The moral is shop around among many mortgage lenders.

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