Low Rent From Mom Means Loss for Son
QUESTION: In 1989 I bought a one-bedroom condo for my mother who receives only Social Security income. My monthly cost for the condo is about $475, but my mother can only afford to pay $50 a month rent. I feel guilty taking it from her, but she is very proud and insists on paying something.
But my 1989 income tax return was audited because of the low rent. The IRS auditor denied my depreciation deduction for the condo because she said I wasn’t charging enough rent. I thought owners of investment property can deduct depreciation.
ANSWER: The IRS auditor is correct. A special tax rule applies to nonprofit rental of property to relatives and friends at below-market rents. In such situations the owner can deduct only mortgage interest and property taxes, but no other expenses that exceed the amount of rent collected. Since the rent is so low, you can’t depreciate the condo you rent to your mother.
Misrepresentation Difficult to Prove
Q: When we bought our home about six months ago the real estate agent bought us one of those one-year home warranty policies. We thought that was very kind of him, but now we know why he did it. We have had eight things go wrong, such as the water heater, dishwasher, furnace, plumbing, wiring and built-in stove. Each time we had to pay a $50 service fee. But the warranty policy doesn’t pay for repairs to the roof, which needs replacement. Do you think we should sue the real estate agent and the seller for our service fees and the cost of replacing the roof?
A: The answer to your question depends on what the seller and agent told you about defects in the house. If you asked what defects they knew about, but they misrepresented the house to you, then you may have a valid cause of action. However, if they disclosed all known defects to you and there is no evidence they hid any problems, then you don’t have any recourse.
The big problem in situations like yours is proving the seller and agent misrepresented the house to you. Since the type of defects you list can go wrong with any house, I think you will have a tough time collecting anything from the seller or realty agent. For further details, consult your attorney.
Transferee Would Be Wise Not to Buy Home
Q: I have just been transferred for a two- or three-year job assignment. My wife and our two children are anxious to buy a home, but I am not sure that is such a smart idea. What do you advise?
A: Don’t buy. If you are sure you will only be staying for two or three years, buying a home could be a financial mistake. A better alternative would be to lease a home with an option to buy. But don’t pay much of a rent premium to obtain a lease-option.
If you can negotiate a normal rent with a substantial rent credit toward the down payment, with a two-year lease-option, then you would have the best of both worlds. When the lease-option expires, you might make a modest profit if home prices in your area have appreciated. Or you could sell your lease-option.
VA Home Loans Are for Owner-Occupants
Q: I have never used my VA entitlement. My son, who is not a veteran, wants me to use my entitlement to buy him a home for nothing down. He has good income and good credit. Can I co-sign with him, so he can get a VA mortgage? One problem I see is I don’t live in the state where he wants to buy the house.
A: VA home mortgages require owner-occupancy. Unless you are planning to buy a home and live in it with your son, the VA will not approve your loan application. For further details, please consult a VA-approved mortgage lender.
Square Footage Error May Be Worth Suit
Q: We recently bought a house that the listing agent told us has 1,600 square feet. But when our insurance agent measured it, she said there are only 1,475 square feet, not including the garage. I feel we were cheated out of 125 square feet. At $50 a square foot for construction, that is $6,250 we overpaid. Does the seller’s agent have a duty to us as buyers to be honest? If so, can we expect the agent to pay us $6,250 for the 125 square feet she misrepresented?
A: Consult a local real estate attorney. Although the listing agent works for the seller, that agent also has a fiduciary duty to the buyer to be honest and not misrepresent material facts. Since the house was misrepresented to you, it appears the real estate agent and/or the seller owe you money for the misrepresentation.
Vacation Site OK but Forget the Rest
Q: I am considering buying a two-acre site adjoining a lake where I can build a nice vacation cabin for my family. There also is a nearby 10-acre parcel, which doesn’t adjoin the lake, that I can buy for an investment. The seller wants only $2,000 down for each parcel. Do you think I should buy?
A: As the seller has discovered, virtually the only way to sell vacant land today is with a low down payment and seller financing. The reason is most lenders refuse to make mortgage loans on vacant land because it is too risky.
If you can use the lakeside lot to build a vacation cabin for personal use within a few months, that might be a good purchase, if the price is right. But unless you also have an immediate use for the 10 acres, forget it.
The big drawback of investing in land is it must usually go up at least 20% a year just to break even, after considering the carrying costs such as mortgage payments, property taxes, sales commission upon resale and lost earnings on your dollars invested.
Lawyer Not Needed in Routine Purchases
Q: We are first-time home buyers and wonder if we should hire a lawyer to represent us when we find a home we want to buy. Do you think we need a lawyer to help us negotiate?
A: As an attorney, I hesitate to answer your question because I know real estate attorneys will not like my answer. They will write to say a home buyer always needs an attorney. Sorry, I don’t agree.
A real estate attorney can advise you on the legal aspects of your home purchase. However, most attorneys do not want to get involved in the negotiations. That is usually best handled by the real estate agents.
On your first home purchase you may feel more comfortable with a real estate attorney advising you as to the legal consequences of the purchase contract. Be sure to get your fee arrangement with the attorney in writing, so there is no misunderstanding as to the cost. In most routine home purchases, attorneys usually are not needed. However, in some communities it is customary for an attorney to handle the details of the sale closing.
Before Chucking Job, Take Real Estate Class
Q: I am a “wage slave” and am considering becoming a real estate saleswoman. A friend is encouraging me to join her brokerage where she earns well over $100,000 each year. I realize I wouldn’t earn that much at first, but I am bored with my job as an executive secretary. I would have to give up my excellent medical coverage for myself and my son. Is today a good time to enter real estate sales?
A: Except for my job, real estate sales is the best job in the world. You are your own boss. You decide how hard you will work. You can earn as much or as little as you wish. But you are an independent contractor with no salary, no guarantees and no health plan unless you buy it yourself.
I realize it is hard to give up the “golden handcuffs” of those employer benefits such as a steady paycheck, a health plan and possibly a retirement plan. My suggestion is, before you quit your job, in the evenings take the training classes you’ll need to become a real estate salesperson.
After you have this training and pass the real estate sales exam, then decide if you want to go ahead. Meanwhile, save up at least six months’ income, so you will be able to maintain your living standard while you get started.
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.
