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Surprise in Lawyer’s Office Follows Verbal Deal Made With a Friend

Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to P.O. Box 280023, San Francisco, Calif. 94128

QUESTION: We verbally agreed to buy a house from a longtime friend. His attorney was to handle the title closing. When we arrived at the lawyer’s office, we were informed our friend had decided not to sell. Meanwhile, we have sold our condominium and were planning to move within a week. Needless to say, we are steamed at our former friend. What can we do to force him to honor his sales agreement with us?

ANSWER: Real estate sales contracts are not enforceable unless they are in writing. The statute of frauds requires a written contract to prevent misunderstandings such as occurred in your situation. Without a written agreement, you have an unenforceable contract. For further details, consult your attorney.

Who’s Right on Loan Fee Taxation?

Q: I thought you said mortgage loan fees paid to get a home loan are tax deductible. When I bought my home a few months ago I elected to pay a three point loan fee to get a lower interest rate. But now a friend at work told me the IRS says he can’t deduct the one point loan fee he paid to get his VA mortgage. Who is right?

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A: All of us are correct. Loan fees paid to obtain an acquisition mortgage at the time a home is purchased are tax deductible as itemized interest. However, your friend paid a one point VA loan origination fee which the IRS correctly told him is not tax deductible because it is an origination fee, not a loan fee.

To further clarify loan fee tax deductions, loan fees paid to obtain a loan other than a principal residence acquisition mortgage or an improvement loan on your home must be amortized over the life of the mortgage. For further details, consult your tax adviser.

Buyers Get Hot Over Heating Bill Jump

Q: Last November we bought our home. Before purchasing it we asked to see the seller’s utility bills. We should have been suspicious when she had photocopies easily available on her desk. This past winter our heating bills were at least $100 per month higher than the seller showed us and this summer our air-conditioning bills are running about $50 per month more than the seller paid. Should we sue the seller for misrepresentation?

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A: Although utility costs are very high, proving the seller misrepresented the heating and cooling costs could be a waste of time. She might have set the thermostat low in the winter and high in the summer.

Who Freddie Mac Is, and Fannie and Ginnie

Q: I often see little items in the business news section of the newspaper about Freddie Mac announcing home mortgage interest rates. Who or what is Freddie Mac?

A: Freddie Mac is the nickname for the Federal Home Loan Mortgage Corp., located in Reston, Va. This firm is a major buyer of conforming home loans up to $191,250 in the secondary mortgage market from local loan originators such as banks, S&Ls; and mortgage bankers.

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Washington, D.C.-based Fannie Mae, legally the Federal National Mortgage Assn. is another major secondary mortgage market buyer of conforming home loans. Both of these organizations are chartered by Congress, but they operate like private corporations.

Still another major secondary mortgage market player is Ginnie Mae, the Government National Mortgage Corp., which buys only VA and FHA home loans. All these firms sell mortgage-backed securities on Wall Street to raise cash to buy more mortgages.

Retirement Village May Not Fit Rollover Rules

Q: A little less than two years ago we bought our current home. We moved here due to a job transfer from another town where we sold our old home and “rolled over” our profit into our current home without paying tax on our profit. Now my husband has decided to take early retirement.

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Last week, we paid the $85,000 entrance fees at a retirement village where we will have lifetime medical care. But when we talked with our tax adviser she told us we will owe taxes on the profit from the sale of our current home plus deferred profit taxes from the sale of our former home. We were counting on rolling over our profit tax again, but our tax adviser says retirement homes don’t qualify. Is this true?

A: Yes. Your tax adviser is correct. The reason you don’t qualify for the “over 55 rule” $125,000 home sale tax exemption is it requires you to have owned and lived in your principal residence for at least three of the five years before its sale. Since you have lived in your current home less than two years, you are ineligible.

As for using the Internal Revenue Code 1034 “rollover residence replacement rule” again to defer your profit tax by purchasing a replacement principal residence of equal or greater cost, your payment of entrance fees for lifetime retirement home care doesn’t qualify, since you are not purchasing a replacement principal residence. Instead, you are buying medical care with the right to lifetime occupancy, but not ownership, of a specific residence.

Show Current Value of Land on Statement

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Q: Many years ago I inherited my farm from my parents. It is worth several hundred thousand dollars more than it was worth when I received it. Every year when I prepare a financial statement for the bank to obtain crop loans, I have been valuing the land at its value when I inherited it. Thankfully, I own it free and clear. A friend told me I should list this land at its current market value rather than its lower value at the time of inheritance. Who is right?

A: Your friend is correct. Always use the current market value for real estate when preparing financial statements. It appears you have been understating your net worth by undervaluing your farm land. I am surprised your banker didn’t question your low valuation of your farm.

Is Vacation Home a Good Investment?

My husband thinks we should buy a vacation second home. This summer we rented one for a month and thoroughly enjoyed it. The owner is interested in selling it and will give us a good deal. But we talked to our banker and she says mortgage financing on vacation homes can be very difficult because most lenders don’t like these mortgages due to the high default rate.

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If we buy, we would look at the purchase as an investment, so we can rent the place except for a month each summer when we would use it. What do you think of vacation homes as investments?

A: Not much. The market for vacation homes is very cyclical, usually depending upon economic conditions. In most vacation areas there is a glut of homes for sale with few buyers in sight.

Your banker is giving you good information about the difficulty of financing vacation homes. When vacation home mortgages are available, they usually are not cheap.

As for looking at a vacation home purchase as an investment, you are guilty of wishful thinking. There is probably no worse investment, with the possible exception of vacant land, than vacation homes. The reason is they are luxuries, not necessities. As for renting the property when you can’t use it, that may be difficult unless you have a good rental agent and get very lucky finding reliable tenants who won’t damage the property.

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In summary, I suggest you forget the idea of buying that vacation home unless (1) the seller will finance your purchase, (2) you will be investing money you never need to see again (because that is probably what will happen), and (3) you look at the property only for personal use and not as a sound investment.

Comparative Analysis Tells What to Offer

Q: We finally found a home we want to buy. But the asking price is outrageous. Friends tell us we should make a purchase offer at least 20% below the asking price, but I am afraid that will insult the seller. My wife really wants this house. How much below the asking price should we offer?

A: There is no right or wrong answer to your question. Don’t hesitate to make a low purchase offer. But before making any offer, insist the realty agent prepare a written comparative market analysis. The CMA will show you recent sales (not asking) prices of similar nearby homes which sold recently. It also shows listing prices of comparable neighborhood homes now available for sale.

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To arrive at a fair offer price, you can then add and subtract value for the pros and cons of the house. The CMA also can be used as a sales tool to justify your purchase offer to the seller. Only by using a CMA as a guideline can you be sure you are not offering too much for the house.

How to Get Long-Gone Friend Off Title Paper

Q: About 10 years ago a friend and I bought a house together. She moved out and I lost track of her. I have been living in the house ever since, paying all the expenses. Now I want to sell it. But my friend’s name is still on the title. What can I do to clear her off, so I can sell the house?

A: If you can’t find your friend to get her to sign a quit claim deed, your legal alternative is to bring a quiet title lawsuit. Your missing friend will be served by publishing a legal notice in the newspaper. If she doesn’t show up, the court can order her name removed from the title. For further details, consult a local real estate attorney.

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