'Life estate' proves to be a nightmare for heirs

DEAR BOB: You helped me once before on a different real estate issue; I hope you can be as successful for me now. My father died about three years ago at age 78, leaving his estate to my brother and me. We divided the assets equitably with no problems, except for his house. Our father, who was “losing it” and becoming senile by the time he died, left the house to us, but subject to a life estate for his live-in girlfriend, now age 56. She lives in the house but is letting it badly deteriorate. We recently learned she hasn’t paid the property taxes, claiming that is our duty, as we will eventually receive the house. She is on the edge of bankruptcy. What can we do to preserve the house so it will be worth something when we eventually inherit it? – Todd W.

DEAR TODD: When a life estate is left to a person with a long life expectancy, that can be a major problem for the remaindermen (that’s you) if the life tenant fails to maintain the property and pay the property taxes.

Purchase Bob Bruss reports online.

A life estate tenant has a legal duty to maintain the property, pay the property taxes and mortgage interest (if any). Failure to do so is called “waste.”

When a life tenant commits waste, that is a legal basis for the remaindermen like you to sue to have the life estate terminated for waste. Please consult a local real estate attorney for details to prevent loss of the house due to the life tenant’s failure to pay the property taxes.

“AS IS” HOME SALE WON’T AVOID HOME WARRANTY POLICY LIABILITY

DEAR BOB: Last summer my son bought his first home “as is” in California. He didn’t even bother consulting “dear old mom.” Now he has a costly mess. He didn’t obtain a professional inspection. The seller insisted on selling “as is.” When the weather got cold, my son turned on the furnace. It wouldn’t start. He called the home warranty company, which charged him $60 for a service call. The furnace service man said the furnace hadn’t been used for a long time because (1) the starter “gizmo” was defective and (2) the firebox was cracked and very dangerous. The furnace needed replacement. But the warranty company, which charged my son $440 for a one-year policy arranged by the realty agent, said this was a pre-existing condition that is not covered by the warranty policy. As a result, my son had to buy a new $4,600 furnace for his house. The warranty company said when buying an “as is” house, my son should have hired a professional inspector. Does he have any recourse against the seller, realty agent and/or the warranty company? – Alphia S.

DEAR ALPHIA: Yes. At the huge National Association of Home Builders convention in Las Vegas last month, I asked your question to a long-time representative of one of the nation’s largest home warranty companies. He asked me not to use his name because he could get fired for being honest.

He told me it is standard procedure for many home warranty companies, including his, to deny coverage of large claims, stating the situation is a non-covered pre-existing condition. His candid off-the-record advice was for your son to sue the home warranty company in local Small Claims Court for breach of contract.

Fortunately, your son’s house is in California, which has a relatively high Small Claims Court limit of $5,000. Unless your son has solid evidence the seller and/or realty agent knew of the defective furnace, I suggest leaving them out of the lawsuit.

Don’t confuse the judge. If your son loses his lawsuit against the home warranty company, he could sue the seller later for failure to disclose a known home defect.

Your son should also notify the state insurance commissioner of the home warranty company failure to pay a legitimate claim. He has everything to gain and nothing to lose but his time by suing.

DON’T LOSE A GOOD MORTGAGE REFINANCE OVER JUST $473

DEAR BOB: I enjoy your articles and can’t believe some of the realty problems people encounter. Now I’ve got one. Thanks to the recent low mortgage interest rates, I recently refinanced (for the third time). At the loan closing, there was an unexpected $473 loan-processing fee on my cost list. When I asked the mortgage broker, he said it was imposed by the actual lender and he was also surprised by it. Not wanting to lose a “good deal,” I reluctantly signed the mortgage papers. But it irritates me how a major mortgage lender can get away with imposing what you call a “junk fee.” After the mortgage recorded, I wrote to the lender and received a nasty reply that since I signed the loan papers I agreed to the charge. Do I have any recourse? – Suzanna C.

DEAR SUZANNA: Yes. It’s the local Small Claims Court. But first send a demand letter to the lender, insisting on repayment of the $473 within 10 business days. Use FedEx to be sure the lender receives your demand letter (which will probably be ignored) but you will then have proof it was received.

But don’t threaten a lawsuit. Just very politely state why you believe you are entitled to the $473 refund.

Then, if you don’t receive payment from the lender, sue the lender in local Small Claims Court and let the judge decide if the lender imposed a previously undisclosed illegal $473 junk or garbage fee that you are entitled to have refunded.

I’ve received many wonderful e-mails and letters from other readers telling me how just filing a Small Claims Court lawsuit for breach of contract and fraud often works wonders to get payments from nonresponsive lenders.

CROOKED AND DISHONEST, YES; ILLEGAL, NO?

DEAR BOB: A few weeks ago my wife and I went to inspect an advertised new condo development now under construction. We found a nice sales office with mock-ups of what the units will be like. After spending more than an hour with a nice sales lady, she explained the most-desirable units we wanted have already been pre-purchased. Since this was the first weekend the new development was advertised, we were surprised. She said the best units were pre-purchased by local real estate brokers who expect to resell them at substantial profits after the complex is completed in about 10 months. Is this process legal? – Ryan H.

DEAR RYAN: The situation you describe sounds crooked and dishonest. But it’s not illegal. That’s why many smart pre-construction condo and house developers require buyers, who often put down only a modest deposit, to purchase for owner-occupancy and restrict resales within 12 months.

I am not aware of any state laws prohibiting someone from buying a pre-construction condo or house, tying it up with a small deposit, and then either assigning the purchase contract (unless assignment is prohibited by the contract terms) or selling the residence shortly after purchase at a profit. For more details, please consult a local real estate attorney.

THE SAFEST ADJUSTABLE-RATE MORTGAGE

DEAR BOB: My husband and I are shocked by the ultra-low interest rates for adjustable-rate mortgages. As we are now paying 6.25 percent fixed interest on our home loan, we are tempted to slash our monthly payment by switching to a five-year ARM offered at 4.25 percent. The interest rate is tied to the Libor Index. Is this good or bad? – Anna H.

DEAR ANNA: As you probably know, an adjustable-rate mortgage interest rate is the sum of an index rate plus a profit margin, such as 2 percent, for the lender. The Libor Index is the London Inter-Bank Offering Rate. Other popular indexes include the Treasury Bill Index, the bank CD (certificate of deposit) Index, and the 11^th District Cost of Funds Index (my personal favorite).

The drawback of the Libor, T-Bill, CD, and most other ARM indexes is they can be quite volatile. Ask the lender for a chart comparing the ARM indexes for the last 10 years to see what I mean.

But the 11^th District Cost of Funds Index (or the national cost of funds index) moves as slow as molasses, thus minimizing the borrower’s risk. That’s why I like it better than the other ARM indexes.

PLEASE CLARIFY $250,000 HOME SALE TAX EXEMPTION

DEAR BOB: In your recent article, you said a principal residence seller must have owned and lived in their home at least two of the five years before its sale to qualify for up to $250,000 tax-free profits (up to $500,000 for a married couple filing jointly). However, my son’s mother-in-law and her tax adviser are under the impression home sellers can make a tax-free career of selling their principal residences every two years and skipping away with $250,000 or $500,000 of tax-free capital gains every time. Is this true? – Stephen C.

DEAR STEPHEN: Yes. Internal Revenue Code 121 clearly says the principal residence sale tax exemptions can be used over and over again, without limit, but not more often than once every 24 months (with more frequent use partial use exceptions for sale due to job location change, health reasons, and specified circumstances). Your son’s mother-in-law and her tax adviser are correct.

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.