If the Neighborhood Is Desirable, Don’t Move but Remodel Instead
QUESTION: We own a three-bedroom, one-bathroom home in a nice neighborhood where the schools are excellent. Our problem is we have three children and our home is too crowded now that they are getting older and each wants their own bedroom. We have looked at larger homes but they seem so expensive in the school district where we want our kids.
The larger new homes are out in the boondocks and the schools there are overcrowded, so we have ruled out a brand-new house. Our alternative is to add on a bedroom, bathroom, and family room to our present home. But we realize the construction would be very inconvenient, and the cost estimates seem so high. If we add on to our present home, any suggestions on the best way to finance the improvements?
ANSWER: Perhaps you’ve noticed the boom in home remodeling. Many other homeowners have come to the same conclusion that it is usually best to remodel and add on to a presently owned home rather than buy a larger one. Since you like the location and school district of your current home, I agree you will be making a wise decision to upgrade it.
Yes, there will be considerable inconvenience during construction. But an experienced and thoughtful contractor can minimize the disruptions. Be sure to get bids and client references from at least three remodeling contractors.
Don’t necessarily go for the lowest bid. Check the quality of their work and talk to their previous customers to see what they liked best and least about each contractor.
As for financing the construction, you can either use a home equity loan or refinance your current mortgage with a new first mortgage after the work is completed.
The cheapest and easiest finance choice is usually to obtain a home-equity credit line to finance construction. After the work is finished, then you can decide if you want to refinance the first mortgage with a new one, possibly at a lower interest rate.
‘Over 55’ Exemption Can’t Reduce New Basis
Q: I want to sell my expensive home and buy a less costly property, and I want to use the “over 55 rule” $125,000 tax exemption to reduce the basis of my new home. I can sell my current home for about $350,000 and I want to buy a replacement for around $300,000. Can I use the $125,000 exemption to reduce the basis on my new home?
A: No. I am not aware of any method of doing so. You can use your once-per-lifetime $125,000 exemption by subtracting it from the net (adjusted) sales price of your old home. That would bring your $350,000 sales price down to $225,000. If you buy a replacement home costing at least $225,000 in this example, then your profit tax is deferred. But the basis of your replacement home is not reduced by the amount of your $125,000 exemption. Please consult your tax adviser for further details.
Elderly Can Minimize Down Payment Too
Q: You constantly harp on making a small down payment and getting a big mortgage when buying a home. Does that advice also apply to old folks? I am 74 and my husband is 79. We are both in good health and plan to buy a small home in central Florida near Orlando. Is there any place we can get a 20-year mortgage at our ages?
A: Yes, even retirees should make a minimum down payment and obtain a maximum home loan. Mortgage lenders cannot discriminate on the basis of age. They must judge your loan application on your income and credit history.
Even though you are unlikely to live to pay off a 30-year mortgage, if your income and credit justify it, you can obtain such a loan. Florida mortgage lenders are especially savvy to the merits of making loans to older people because the default rate is practically zero.
Aunt’s Conditional Gift of Deed Proves Void
Q: In 1982 my aunt gave me the deed to her house. She told me to have it recorded after she died. Last month she died. I then recorded the deed at the court house. But the attorney for her estate says my deed is void because it wasn’t recorded before she died. Is this correct?
A: To be valid, a deed must be delivered to the grantee unconditionally before the grantor’s death. It appears the deed you received in 1982 was conditional in that you could not record it until your aunt died. That means the estate’s attorney is correct and the house still belongs to your late aunt’s estate.
However, if the deed had been delivered to you unconditionally and you had recorded it before your aunt died, then title to the house would be yours. Please consult a local real estate attorney for further details.
Cash Not Required to Retain Tax Deferment
Q: We were very fortunate to sell our home last year for cash. Now we want to buy a new house. The builder offers a plan with as little as 10% down payment. However, I am wondering if we have to reinvest the cash we received from our home sale if we are to avoid paying tax on our sale profit. Please clarify.
A: Internal Revenue Code 1034, the “rollover residence replacement rule,” does not require you to reinvest any cash from your home sale into your replacement home. All that matters is you must buy and occupy the replacement principal residence within 24 months before or after the sale and its cost must equal or exceed the net (adjusted) sales price of your old home.
To use an extreme example, you can sell your old home for cash and buy a replacement home of equal or greater cost for nothing down, as with a VA mortgage, and spend the tax-deferred cash from your home sale as you wish. For further details, please consult your tax adviser.
When Hints Fail, Have Neighbor’s Grass Cut
Q: My next door neighbor has let her home run down badly. It hasn’t been painted in years and the lawn is never mowed. In a nice way I have talked with her about this, and she realizes the problems, but refuses to do anything about them.
The lady is quite wealthy, owns her home free and clear, drives a fairly new car and dresses nicely, but she refuses to keep up her house. As a result, I am afraid if I sell my house the value will be impaired. Is there any solution to this problem?
A: The best you can do is keep up your home and ask your other neighbors to do likewise. I once had a similar problem with a neighbor across the street. One day while she was away I mowed her front lawn and made her yard look sharp. She got the message and kept up her yard after that. Realizing such action may be an illegal trespass, you may want to consider a similar tactic or volunteer to mow the neighbor’s lawn with her permission.
How Safe Are ‘Seller- Financed’ Home Sales?
Q: Just a quick thank you note for your advice last year to carry back the mortgage when we sold our home which had been on the market about six months. The first week our realty agent ran an ad for “seller financing” we received two offers.
Everything worked out very well. We enjoy earning 10% interest which is higher than we can get elsewhere. Thanks to this installment sale our retirement income is higher than we planned. But my husband keeps saying he hopes our buyers default, so we can foreclose and get the house back to sell for a second profit. What are the odds of that happening?
A: Less than 1% of home mortgages go to foreclosure sales each year, so your chances of foreclosing are virtually nil.
Use Credit Check to Repel ‘Sharks’
Q: About two years ago we decided to sell our home without a real estate broker. A young “shark” buyer took advantage of us because we didn’t know what we were doing. He got us down in price and convinced us to carry back a second mortgage. Foolishly, we didn’t check his income or credit. He made only a $4,500 down payment, but never paid a single mortgage payment to us.
After we started foreclosure, the day before the foreclosure sale he filed bankruptcy. That stopped the sale. Then he used every trick in the book. Finally, we hired a lawyer who got the bankruptcy “automatic stay” removed, so we could foreclose. Nobody bid at the sale, so we got the house back. It was a wreck.
The police tell us it was used for selling drugs. I suggest you advise readers who carry back a mortgage for their buyers to check out the buyer’s income and credit. Had we done so we would have learned of our buyer’s very bad credit.
A: Thank you for that excellent advice. There are many advantages of seller financing, but only if the home buyer has adequate income and a good credit history.
Tax Assessments and Real Property Value
Q: I am considering buying a large run-down home. The seller is asking $175,000, but the house is only assessed for $92,500. Is there any rule of thumb as to how property tax assessments relate to a property’s true market value?
A: No. In most communities the property tax assessment has no relationship to a property’s fair market value. A possible exception occurs where the property is reassessed shortly after it is sold.
Valuing an old house in bad condition can be very difficult. You may want to hire a professional appraiser recommended by your bank or other local lender. Or you can talk with several local real estate agents familiar with the neighborhood to get their opinions of the home’s market value.
Protect Against Your Builder’s Bankruptcy
Q: Almost a year ago we bought a new home from a small builder who recently declared Chapter 7 “straight” bankruptcy. We should have known there was trouble when he failed to take care of problems, such as a cracked garage floor slab, doors that don’t close properly, plumbing trouble and circuit breakers that frequently go off even without an overload. Is there some type of builder’s trust fund to help pay for repairs to our home?
A: If you obtained a 10-year warranty policy from a third-party new home warranty company, such as Home Owner’s Warranty Corp. (HOW), then the warranty company is responsible for your home repairs when the builder goes broke.
However, if you did not insist on such warranty protection, your only recourse is to get in line with all the builder’s other creditors and file a claim with the Bankruptcy Court. It is shocking how often home builders file bankruptcy to get out of taking care of their obligations.
Many of the major builders even form a separate corporation for each new subdivision, and when that project is finished they either fold the corporation or put it into bankruptcy. Either way, the builder can escape liability for continuing obligations, such as repairing defects in new homes. For further details, please consult your attorney.
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.
