Neighborhood Should Pass School Test

SPECIAL TO THE TIMES

QUESTION: We're moving to a new location, due to a job change, and are thoroughly confused about how to pick a neighborhood.

We're working with two Realtors in different parts of town. Each promotes his area as the best. What's the best way to evaluate a neighborhood?

ANSWER: Presuming you can afford both neighborhoods and they are within a 30-minute commute to your job, start with an evaluation of the public schools. Even if you don't have children, top-quality schools are good for home value appreciation. Bad-quality public schools prevent buyers with children from moving into the area, thus holding home values down.

Ask yourselves if you feel comfortable in the neighborhood. Talk with the neighbors near the houses you are considering buying. Ask what they like best and what they dislike about the area. Look for signs of decaying, neglected buildings. Also look for positive signs, such as homeowners remodeling their residences.

Don't be in a hurry to buy. If possible, lease with an option to buy so you don't buy the wrong house.

Misrepresenting House's Square Footage Is Fraud

Q: We bought our home in 1993 through a Realtor who represented us. The house was a foreclosure being sold by a bank. The square footage was represented to us as 4,770. However, we recently had a property evaluation done by our insurance company's inspector, who found only 4,022 square feet. Our purchase offer was based on $125 per square foot and 4,770 square feet. Based on our new knowledge, do we have any recourse after this length of time?

A: If you can prove the seller and/or the listing agent misrepresented the house's square footage, that is fraudulent misrepresentation. In most states, the statute of limitations begins running from the date of discovery of the fraud. Check with your attorney to evaluate if it is worth going after the bank for fraud.

Living Trust Won't Raise Capital Gains Tax

Q: Recently you answered a question from a son whose mother was dying of cancer. She had property she wanted to deed to him now, but you recommended that he obtain it by inheritance to get a new cost basis stepped up to market value on the date of death. Then you advised that, to avoid probate costs and delays, he tell his mother about putting title to the house and other major assets into a living trust. My question is, how would the capital gain be computed if the house is put into the living trust?

A: Deeding real estate into a revocable living trust is not a taxable event. Even in states that reassess property after title transfer, such as California, I am not aware of any that reassess when title is deeded to a living trust if the initial trustee and beneficiary is also the grantor.

The primary purpose of a living trust is to avoid probate costs and delays. It doesn't cause any change in the cost basis of the property. In the situation you described, the mother's cost basis for the house would remain unchanged after she transfers title into her living trust. If she wants to sell or refinance the house, she can still do so because she has complete control over living trust assets.

When she dies, the living trust becomes irrevocable, and its terms must be followed by the successor trustee, presumably the son. He will still get a new cost basis stepped up to market value on the date of her death. There will be no change in the capital gains taxation. If he sells the house for its market value on the date of death, he would not owe any capital gains tax because he has no profit. For details, please consult your tax advisor.

Foreclosed Property Can Be a Good Deal

Q: On a recent vacation in Palm Springs, I learned there are many nice foreclosed condominiums for sale there. As I am thinking of buying a vacation condo, how would I go about buying a foreclosure? Are foreclosures a good deal? What are the pros and cons?

A: Buying a foreclosure property can be a good deal if you purchase far enough below market value to compensate for the risks of buying the unknown. But getting a foreclosure bargain takes work, so don't expect it to be handed to you on a silver platter.

There are three basic foreclosure-buying opportunities. The first occurs after the lender records, depending on state law, a notice of default or a lawsuit against the defaulting borrower. During this time before the foreclosure sale, you can buy out the owner's equity, often for a few thousand dollars, and take title. Lenders will usually then let you reinstate the mortgage. But you might have to get new financing.

The second opportunity occurs at the foreclosure sale auction. If it's a below-market-price bargain with lots of equity, you might encounter competition from "the 40 thieves"--that is, professional foreclosure buyers. They usually insist on buying at least 20% to 30% below market value. The big drawbacks of buying at the auction are: (1) You don't get to see the inside of the home before the sale, and (2) you'll need cash (or cashier's checks) at or shortly after the auction.

The third foreclosure opportunity occurs after the foreclosure sale. If there were no bidders, the property goes back to the foreclosing lender. I've bought foreclosures at all stages, but I think buying from the lender with little or nothing down for the balance of the defaulted mortgage with the lender financing my purchase is best. However, you've got to get to the lender quickly, before the home is listed for sale at its full market value with a Realtor.

Set the Rent Based on Competitive Rentals

Q: I recently bought a $480,000 San Francisco condo with a rent-back to the seller. My down payment was $250,000. My agent said the rent should be based on my mortgage PITI (principal, interest, taxes and insurance).

But since I made a large down payment, on which I am losing interest income, shouldn't there be some other way of setting the rent?

A: Yes. That real estate agent was not looking out for your best interests. The rental value of your condo has absolutely nothing to do with your mortgage PITI payment.

Residential rental value is based on competitive rentals. You can determine what comparable condos rent for by checking the newspaper classified ads and asking your agent to check the local multiple listing service's condo rental listings.

Retirees May Not Want to Pay Off Mortgage Q: I think you should change your thinking about advising home buyers to make the minimum cash down payment. My wife and I got our mortgage paid off when I retired at 65. That was almost 10 years ago. It's wonderful not to have to make monthly mortgage payments.

A: We agree that having a free-and-clear home at retirement time can be wonderful. However, when buying a home, the biggest obstacle is the lack of a down payment. That's why VA no-down payment and the new 3%-down payment Fannie Mae and Freddie Mac mortgages are so popular.

However, retirees should not rush to rapidly pay off their home loans. I don't think it's wise to have all your eggs in one basket, because a free-and-clear home ties up a huge amount of equity. That's why many retirees are house-rich and cash-poor. Thankfully, they can now easily obtain reverse mortgages, which pay them monthly income.

Write to Credit Bureaus to Correct Errors

Q: A few years ago, my husband and I fell on hard times. After exhausting our savings, we got behind on our mortgage payments. We put our home up for sale. Just after the lender started foreclosure, we got an acceptable offer from a buyer. The judge ordered a stay of the foreclosure for 30 days to allow our sale to proceed. It closed, and we paid all the past due payments and penalties to our lender as well as several thousand dollars in fees to the bank's lawyers.

Our problem is that our credit report shows our late payments but also the word "repossession" in the comments section. We don't have a problem with the late payments, but the word "repossession" is incorrect and derogatory. It makes obtaining credit difficult. The bank never repossessed our home. But the credit bureaus refuse to correct the wrong information. What can we do?

A: One easy alternative is to place a statement of up to 100 words in your credit reports with the three major credit bureaus stating you paid your lender in full, there was no repossession, and the repossession credit report is wrong.

I presume you've already written to each credit bureau asking them to remove the wrong repossession information. Try again. They now have 30 days to correct their errors. If that doesn't work, you can sue each credit bureau in Small Claims Court for damages. Consult an attorney on how to prepare your case to prove actual damages for this incorrect information.

Home Equity Loan Helps Pay College Costs

Q: Next fall our daughter will be going to college. She has been accepted at two very expensive colleges, but hasn't qualified for any financial aid because our income is too high (actually we are quite middle-class). My wife thinks we should take out a $100,000 home equity loan and borrow $25,000 per year to pay her tuition. Is this a smart or dumb idea?

A: It's a very smart idea, because the interest on your home equity mortgage up to $100,000 is tax-deductible as itemized interest. Be sure to get the type of home equity loan with which you can write checks as you need the funds. The other type, with which you receive a lump sum, means you would pay interest on the entire $100,000 even though you need only $25,000 each year.

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