Misunderstandings about senior citizen reverse mortgages

DEAR BOB: I’ve read everything I can find about senior citizen reverse mortgages, including your articles. But I still have important unanswered questions. My understanding is the amount to be repaid to the lender can never be more than the value of the house. But what determines that value? Is it the tax assessor’s value? Or the market value of comparable houses? Also, can the lender put any restrictions on what the owner does with the house while living there? For example, suppose I want to tear down the garage to enlarge my backyard and install a carport over the driveway for parking? This would probably lower the resale value of my house – Jon C.

DEAR JON: When a reverse mortgage is originated with a senior citizen homeowner who is at least 62, the lender has the home’s market value professionally appraised. The local tax assessor’s valuation is irrelevant. The market value is usually determined by recent sales prices of comparable nearby homes.

Purchase Bob Bruss reports online.

Based on the lender’s appraised value, and the homeowner’s age (for a married couple, the youngest age is used), the lender sets the maximum reverse mortgage amount. The homeowner then can select a lump sum, a credit line (the most popular), or lifetime monthly payments.

Even if the homeowner lives to 120, and the reverse mortgage principal and accrued interest exceeds the home’s market value, or even if the home’s market value declines, the lender cannot foreclose as long as the homeowner lives in their residence.

However, if the homeowner violates the reverse mortgage terms and commits “waste,” such as tearing down the garage in your example, thereby decreasing the home’s market value, the lender can call the loan balance due. More details are in my special report “Senior Citizen Homeowner Reverse Mortgage Tax-Free Income Pros and Cons” available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com.

HOW CAN HOME SELLER BE SURE BUYER USES REPAIR CREDIT?

DEAR BOB: You recently suggested a home seller give the buyer a credit for repairs, rather than having the work done before the sale closes. Suppose I am selling my home, and I give my buyer a $1,000 credit at the closing for asbestos removal or some other item. How can I be sure the buyer will actually have the work done? Buyers and their professional inspectors can find lots of things wrong with homes. But, as a seller, I don’t want to hassle with repairs and would rather give a buyer credit – Robert G.

DEAR ROBERT: After you sell your home, it shouldn’t matter to you if the buyer has the corrective work completed or not. As a buyer, I’ve often received seller repair credits at the closing and, after shopping around, found a contractor to do the work for less than my credit. The result was I benefited from the difference.

Another alternative is for the home seller to (1) disclose all known home defects in writing but (2) sell the house “as is.” An “as is” sale means the seller will not pay for or give a credit for repair of the defects.

In an “as is” sale, the buyer will often be planning to remodel the house and really doesn’t want the seller to correct the defects. However, if the repairs are a condition in the mortgage lender’s loan commitment, then the funds for the repairs are usually held in escrow until the buyer completes the repairs after the sale closes.

SORRY, UNCLE SAM VALUES YOUR PERSONAL LABOR COST AT ZERO

DEAR BOB: I am retired and have made two major additions to our 40-year-old home. I did most of the work myself, such as framing, sheathing, wiring, sheet rocking and spackling, trimming, most of the ceramic tile work, and the cabinetry. I also totally remodeled our kitchen. When we sell our home, will the IRS allow me to add the value of my labor to the purchase price for determining the home’s cost basis? – Bill M.

DEAR BILL: No. You sound like a very talented worker. However, Uncle Sam will value your personal labor value at zero. But you can add to your home’s purchase price cost basis the cost of materials you added. I hope you kept all the receipts.

Your situation shows why homeowners and real estate investors, at resale time, are usually better off if they hired professional contractors rather than doing the work themselves. Of course, I realize you saved the labor costs and probably enjoyed fixing up your home to your personal standards. For more details, please consult your tax adviser.

DO DEED RESTRICTION CHANGES APPLY ONLY TO FUTURE BUYERS?

DEAR BOB: I live in a deed-restricted community. The deed restrictions were recently amended, as they have been periodically over the last 20 years. A resident claims to have a legal opinion that such amendments are valid only for those residents who purchase in the future. This sounds dumb! If true, almost every resident would have to abide by different restrictions, clearly an impossible task. Can this be true? – Earl H.

DEAR EARL: The answer generally depends on the topic of the changed restriction. For example, if a new CC&R (condition, covenant and restriction) prohibits rentals, any current existing rentals would have to be “grandfathered” to continue otherwise that would be an unconstitutional “taking” of property rights. But a one or two year amortization period for current rentals might be considered reasonable.

Although a CC&R change can’t be retroactive, it can apply in the future or after a date specified in the change. You are correct the CC&R change applies to all affected owners, whether current or future. Otherwise it would be very confusing for different CC&Rs to apply to each property. For more details, please consult a local real estate attorney.

CAN A LIEN BE PLACED ON PROPERTY FOR UNPAID DEBT?

DEAR BOB: My ex son-in-law owes me a lot of money. He owns his home, which is going to be put up for sale. Can I record a lien on his property for the money he owes me? My ex son-in-law’s home is worth quite a lot and I don’t think it is fair he hasn’t paid me the money he owes. Next time, I won’t be so trusting – Andrea B.

DEAR ANDREA: Unless you are a contractor who is entitled to record a mechanics’ lien for construction work performed on his house, before you can put a lien on someone’s property you must first obtain a court judgment for the amount of money owed to you.

Even if you have you ex son-in-law’s signed promissory note to you, until you have a court judgment stating the amount he owes you, you are not entitled to record a lien against his property. If you cloud the title to his property illegally, you could be liable to him for slander of title damages. Please consult a local real estate attorney for details.

IS SELLING REAL ESTATE TO PAY COLLEGE TUITION TAX-FREE?

DEAR BOB: My son is a 17-year-old high school senior. He will start college in the fall of 2004. To fund his education, I will be selling real estate valued at $45,000. Since the entire proceeds will be used for educational purposes, is there any way I can avoid paying tax on the capital gain from this sale? – Steven McG.

DEAR STEVEN: If you sell investment real estate, the capital gain is taxed at the new federal 15 percent maximum tax rate, perhaps less if you are in a low tax bracket.

The only way to avoid tax on the sale of investment real estate is to make an Internal Revenue Code 1031(a)(3) Starker tax deferred exchange for another qualifying property. However, since you want to raise cash to pay next fall’s tuition, I am not aware of any way to make that a tax-free real estate sale. For full details, please consult your tax adviser.

WHAT CAN BE DONE WITH AN UNBUILDABLE LOT?

DEAR BOB: My uncle died last year and willed me a city lot he owned. At first I was thrilled. But now I am very confused. Upon inquiry, I learned the lot is so small it is below the minimum size for building a house. But it is zoned for a single-family house. I contacted the adjoining neighbors, but none wants to buy my vacant lot. It has only 20 feet of street frontage, but the city minimum is now 30 feet in that area. I recently received the property tax bill and can’t believe they want me to pay tax on an unbuildable lot. What should I do? – Helen H.

DEAR HELEN: Your situation might qualify for a variance from the city. I suggest you contact an experienced real estate attorney in the city where the lot is located. He or she can guide you through the procedure. Although you can count on the neighbors to object to building a small house on your lot (since they probably enjoy the vacant open lot), if you provide plans for a modest affordable home on the lot, your variance application might get approved. If not, you can appeal through the courts.

The new Robert Bruss special report, “Today’s Five Best Real Estate Profit Opportunities,” is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com. Questions for this column are welcome at either address.