Be Careful When Using a Friend to Sell Your Most Valuable Asset
QUESTION: In January I listed my home for sale on a six-month listing with a good friend who is a real estate agent. She said it should take only about two months to get my home sold, but “six-month listings are standard.” Since she has only shown my home to two prospects, I called her to inquire why real estate agents from other firms haven’t shown my house.
She told me she doesn’t believe in cooperating with other agents or in using the multiple listing service. I thought this friend was a good real estate agent, but now I have learned from other agents she isn’t liked by the other local agents and she isn’t even a member of the Board of Realtors. If I had known this, I never would have listed my home with her. What can I do to get out of this bad situation?
ANSWER: I’m sure you realize the mistakes you made including signing a six-month listing agreement, not checking the agent’s references of previous recent home sellers, not making certain your listing would be submitted to the local multiple listing service, not listing your home for sale with a member of the local Board of Realtors and doing business with a friend who refuses to cooperate with other agents.
Incidentally, six-month listings are not standard. You can sign a listing for any term you and the agent agree upon. In today’s slow buyer’s market, a 90-day listing gives the agent time to market your home and prevents you from getting stuck for a long time with an inept agent. If the listing expires with the home unsold, but the agent is doing a good job, you can always renew the listing.
Since your current agent badly misled you, such as by implying a six-month listing is required and not informing you she does not cooperate with other local agents, in my opinion you have cause to cancel the listing for lack of due diligence. For further details, please consult a local real estate attorney.
No Extension for Rollover Tax Rule
Q: We planned to use that “rollover residence replacement rule” you often discuss to defer tax on the sale of our old home. Construction began on our new home last June, and we expected it to be completed long before now. But we ran into many delays, mostly the fault of the builder and partly the fault of the city for not carefully checking the plans before issuing the building permit.
After construction began, the inspector found numerous building code problems that were part of the approved plans. The latest problem is the height, and we can’t get a variance from the city. We are now suing the city. Our problem is that the 24-month deadline for buying and occupying a replacement home expires in May, and our home won’t be completed by then. What can we do?
A: Unfortunately, if you are to defer your profit tax there is no provision in Internal Revenue Code 1034 for extending the 24-month deadline. Your only alternative is to buy and occupy, before the deadline, another qualifying principal residence with a cost equal to or exceeding the adjusted (net) sales price of your old principal residence. Ask your tax adviser for further details.
Home Buyer’s Loss Is Not Tax-Deductible
Q: I was ill and fell behind on my mortgage payments. Since the house was mortgaged to the hilt and I couldn’t refinance due to my inability to work, I decided to deed the house to the mortgage company to avoid a bad credit report. But I lost about $10,000 in equity. Where do I deduct my $10,000 loss on my income tax returns?
A: I am sorry to learn that you lost your home. However, losses on your personal residence are not tax deductible.
Currently Best Buyer’s Market in Last 10 Years
Q: My wife and I are receiving conflicting advice from our relatives. We are both 26, have stable jobs and live in a nice apartment. But we realize there is no logic in renting forever. My mother says we should wait to buy a home until economic conditions improve. But my mother-in-law thinks we should buy a home now, if we can get a bargain. She is willing to lend us the down payment at zero interest. Do you think today is a good or bad time to buy?
A: Listen to your mother-in-law. Now is the best time to buy a home in the last 10 years. Mortgage interest rates are down. There is an abundance of homes for sale. It is a very strong buyer’s market because many potential home buyers are holding back.
But the masses are usually wrong. For example, they aren’t buying cars now, so this is a good time to buy an automobile because you can bargain hard with auto dealers who are desperate for sales. The same principle applies to home purchases.
List of Improvements That Are Profitable
Q: We are thinking of fixing up our home. You have often said you aim for $2 of increased market value for each $1 spent on improving run-down homes. More specifically, what type of improvements are most profitable and unprofitable?
A: Based on my experience, I find the most profitable improvements include painting, carpeting, landscaping, new light fixtures, adding a second bathroom to a one-bathroom home, kitchen remodeling with new appliances, bathroom remodeling and adding a deck or patio.
The list of unprofitable improvements, which usually do not add as much value as they cost, include new roof, foundation repairs, adding a swimming pool, building an outdoor spa, adding a family room, concrete work such as a new driveway and adding a sauna.
Offer Can Be Canceled Before It’s Accepted
Q: About a week ago we made a written purchase offer to buy a home. The agent asked us to make the offer valid for four weeks because the seller is on an overseas trip. But we decided we don’t want that house after all. How can we get out of this offer?
A: Cancel it. Immediately notify the real estate agent in writing that you are revoking your purchase offer. Be sure to get your earnest money deposit back immediately.
Any offer can be revoked before it is accepted by the offeree. Since your offer has not yet been accepted, you can revoke it and no sales contract can then be created. For further details, please consult a local real estate attorney.
Wraparound Mortgage Can Pay for Seller
Q: I am selling my home and want to carry back a large second mortgage for retirement income. My real estate agent suggests I take a wraparound mortgage instead. Is that a good idea?
A: Yes. But a wraparound mortgage should only be used if your existing first mortgage does not have a due-on-sale clause and if its interest rate is lower than the rate on your wraparound mortgage.
To illustrate, suppose your home sells for $100,000 and it has an existing $50,000 VA or FHA assumable first mortgage at 8% interest. Rather than carrying back a $25,000 second mortgage, you can instead carry back a $75,000 wraparound mortgage at perhaps 9% interest. You will earn 9% on your $25,000 loan plus a 1% differential on the underlying first mortgage.
More important, the buyer will make one monthly payment to you and you will use part of this money to keep up payments on the old first mortgage. Then you are sure the payments on the first mortgage are current.
Don’t Make Deposit Payable to the Seller
Q: We are looking for a home to buy. Last weekend we almost bought a house we saw at a realtor’s open house. The agent prepared the contract and we were ready to sign. When we got out our checkbook and asked whom we should make our deposit check payable to, the agent said it should be payable to the seller. We felt this wasn’t proper, since the sale isn’t a sure thing until we get our mortgage and the house is checked by a professional inspector. So we decided to “think about it.” Were we wrong not to make our deposit check payable to the seller?
A: You did the right thing. An earnest money deposit check should never be made payable to the property seller. Since so many things can go wrong before the sale closes, it’s best to keep the deposit out of the seller’s hands.
Although each area has different customs, your deposit check should usually be payable to either the realty agent’s trust account or to the firm that will be handling the sale closing, such as an attorney, bank, S&L;, title company, or escrow agent. Please consult your attorney for further details.
Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to P.O. Box 280038, San Francisco, Calif. 94128.
