REAL ESTATE Q&A; : A Job Transfer Highlights the Downside of 125% Mortgages
Question: About a year ago, we took out one of those 125% mortgages at 11.25% interest on our home. We used the money to pay off our credit cards and other high-interest rate loans. The payment relief was wonderful, but now we must sell our home due to a job transfer.
Our problem is how to sell our home, which has a mortgage that’s way above its market value. There is no way we can pay the lender about $40,000 more than our house is worth. We considered renting our house, but we would then have a negative cash flow of about $400 a month. What should we do?
Answer: Those heavily advertised 125% mortgages, as you discovered, have their downside. Not only is your interest rate high, but the loan balance exceeds your home’s market value.
Your obvious first choice is to talk to your lender about your situation and to ask for an equitable solution. Explain that you do not want to have to file bankruptcy (just the word “bankruptcy” makes lenders much more reasonable).
One obvious solution is for the lender to accept whatever net cash you can get from your home sale and then to accept an unsecured loan for the unpaid balance. This is similar to a “short sale,” but the lender is not accepting the net cash as full payment.
Another solution is for the lender to “move the mortgage” to the home that you’re going to buy. Of course, you will need to add cash, from other sources, for the down payment.
Your situation is what I feared might happen when those 125% mortgages were introduced a year or two ago. They really are a combination of secured and unsecured loans at high interest rates, which are lower than alternative rates, such as those of credit cards.
You probably have excellent income and excellent credit; otherwise, the lender would not have approved your 125% mortgage. If you had stayed in your home, as it appreciated in market value, the problem would have been solved, and the lender would have had a profitable loan. But your “forced move” makes things difficult for you and the lender. Be reasonable. However, if the lender turns nasty, explain that you could just walk away (of course, you don’t want to do that and ruin your credit).
‘Weeknight Condo’ May Qualify for Exemption
Q: About eight years ago, my employer transferred me to New Jersey. Due to her job, my wife could not relocate. So we bought a condo near my job where I stayed four nights a week, and I returned home on weekends. I retired in late 1998 and am now profitably selling the condo. Will my four nights a week for more than seven years qualify me for the $250,000 exemption on the condo sale?
A: Your situation is so unique, nobody knows the answer for sure. Internal Revenue Code 121 says that to qualify for the $250,000 home-sale tax exemption, your aggregate ownership and occupancy of the principal residence must be at least two years out of the five years before the sale.
It appears you qualify; however, an IRS auditor could argue the condo was not your “principal” residence. But your response would be that it was your primary residence for the required “aggregate” two years out of the five years before the sale. For more details, please consult your tax advisor.
A Recommendation for Carleton Sheets Books
Q: I often see the TV infomercials for Carleton Sheets, who sells books and tapes about real estate investing. I’ve watched his shows for several years, and they’re fascinating. What do you think of him? Should I buy his books and tapes?
A: Not a week goes by when I do not receive questions similar to yours about Carleton Sheets. He has been advertising on TV for at least 15 years.
I’ve received so many letters about his materials that I bought them, read them and listened to his tapes. They are excellent. I can’t find any fault, except perhaps that he makes real estate investing sound a bit too easy. But his techniques are practical and realistic.
Last November, I took Carleton Sheets to dinner with a group of real estate investors during a visit to Sarasota, Fla. We were favorably impressed with him.
I have also read his recent book, “Real Estate: The World’s Greatest Wealth Builder” (Bonus Books, Chicago, $16.95). I can’t find any reason not to recommend his books and tapes. His book was one of my top 10 real estate books of 1998.
No Public Access to Listing Service
Q: I want to sell my home without a realty agent. How can I list it in the local multiple listing service?
A: Sorry, the multiple listing service is only available to member real estate brokers and agents. It is the most powerful marketing tool available, but it is not open to the public.
Use of Driveway Leads to Easement Claim
Q: For more than 50 years, our neighbors, who were like family to us, used our driveway--with our permission--to access the main road. They had enough land to build their own road but not enough money. In December, the surviving neighbor died.
We are in our 80s and want to sell our property, but the neighbor’s heirs claim the driveway is theirs to use by prescriptive easement. When they sell the property, which is now on the market, they claim the new owners can use our driveway.
Does this mean that because we gave permission to the neighbors all those years, they now have a prescriptive easement to use our driveway forever?
A: No. Please consult a local attorney who specializes in real estate law.
A prescriptive easement can only arise by open, notorious and hostile use without the property owner’s permission. Long use of another’s property with the owner’s permission cannot become a prescriptive easement. For example, a longtime tenant’s use of a landlord’s property with permission cannot constitute a prescriptive easement.
Your legal solution is to bring a quiet title lawsuit in court against the heirs who claim a prescriptive easement. If they cannot prove that the deceased’s use of your driveway was open, notorious and hostile for the required number of years in your state, they lose.
You can then block their continued use of your driveway by constructing a fence, for example.
Lender Won’t Care About Title Change
Q: A year ago, my husband and I bought our home. It has a conventional mortgage of about $50,000. We are both over 75, and we wanted to add our unmarried daughter to the title.
The lender said she couldn’t qualify on the loan papers, but we added her to the title anyway. When we die, we want to be sure the house goes to her. I hope we didn’t get our daughter in trouble. Should we tell the lender that we added her to the title even though she couldn’t qualify for a mortgage?
A: Stop worrying. As long as the mortgage payments are current and you, the original borrowers, still hold title, the lender doesn’t care. Even though you technically violated the mortgage due-on-sale clause by adding your daughter to the title without the lender’s permission, the lender probably won’t hassle you if the payments are current.
However, I’m concerned about how you, your husband and your daughter hold title. Is it in joint tenancy with right of survivorship? Or do you have it in a living trust? I hope you’ve chosen one of these methods because both will avoid probate.
If you hold title by another method, such as tenants in common, please consult a local real estate attorney about the adverse consequences, and straighten the title out now, before someone dies, to avoid probate costs and delays later.
