DEAR BOB: I recently found a first-floor condo that I was ready to make an offer on. However, when my buyer’s agent took me for a second viewing, we discovered water dripping from the ceiling in one of the bedrooms and a small pool of water in the second bedroom. The condo, in a completely renovated building, comes with a two-year builder’s warranty. The unit has not been lived in since the renovation was recently completed. Besides repairing the leaks, I expect replacement of the hardwood floors where the water damage occurred. With the current slow “buyer’s market,” I planned to make a “lowball offer.” But I worry the builder won’t want to lose any money and will refuse to replace the floors. I want to make a strong offer but am afraid I will lose bargaining power when making repair requests. Any negotiation advice on this? –Alexa S.

DEAR ALEXA: You can always raise your purchase offer, but you can’t lower it. Make a low offer with the repair conditions you want. If the renovator says “no,” you can then either raise your offer or choose not to buy.

Purchase Bob Bruss reports online.

However, if your first offer is high and the developer accepts, that means you probably overpaid.

Especially if the condo unit has been on the market for quite some time, the seller might be thrilled to receive any offer. Always remember his profit is in the sale of the last few units.

Be sure your purchase offer includes all the contingencies you want, including repair of the floors before you close the purchase. That two-year warranty is nice if you are dealing with a reputable seller, but your best protection is to get all known defects repaired before purchase.

LIVING TRUST IS BEST WAY TO AVOID PROBATE COSTS AND DELAYS

DEAR BOB: My mother has been hospitalized nearly three months. It is only a matter of time until her journey is completed. As the only remaining direct family member, there are some financial challenges to be faced due to her lack of planning. She has no written will. She owns real estate, investments and the customary bank accounts. Her house is paid for. What is the most efficient means of title transfer without interference by the state? –Brad S.

DEAR BRAD: If your mother is mentally competent and able to understand, you should arrange for her to transfer her major assets such as her home and investments into a revocable living trust to avoid probate costs and delays after her passing. Presumably she will leave you those assets and name you as her successor trustee.

After she passes on, as the successor trustee you can then pay any debts and transfer those assets to yourself, as provided by the living-trust terms. If you are the sole heir, this should not be a problem.

You will need an attorney who specializes in living trusts to prepare one according to your mother’s wishes. The attorney should also prepare a “pour-over will” for any assets she overlooked.

More details are in my special report, “24 Key Questions Answered: Living Trust Secrets Reveal How to Avoid Probate Costs and Delays,” available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010, or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com.

PITFALLS OF BUYING LARGER HOME BEFORE SELLING OLD HOME

DEAR BOB: We are in the process of buying a larger home and aren’t sure what to do with the home we now own. We can’t afford both. If we sell our current home, we will lose about $50,000 based on similar nearby home sales, compared to what we owe. If we rent it for about $2,000 per month, that isn’t enough to pay the $3,300 monthly mortgage payment. We have about $15,000 in savings, but that won’t last long with a loss each month. I’ve been told about a “short sale,” which is a step above foreclosure. But I’m not sure what that would do to our credit. Would a rent-to-own work so we could increase the monthly rent? What should we do? –Hillary A.

DEAR HILLARY: Why in the world would you contract to buy another house before selling your old home if you can’t afford both houses?

Unless you are in default on your mortgage payments (which will greatly harm your credit and probably disqualify you from getting a mortgage on the new home), your current mortgage lender won’t even consider a “short sale” for less than the mortgage balance. Yes, a short sale will ruin your credit.

A lease with option to buy, also called “rent to own,” could help if you can get a tenant to pay enough rent to come close to paying that $3,300 monthly mortgage payment. However, the tenant will expect part of that high rent to go toward the down payment when the purchase option is exercised.

If the home is worth $50,000 less than your mortgage balance, a lease option probably isn’t your best solution.

I suggest you cancel buying that larger home. Stay in your current residence. Your situation shows why it’s always best to sell your old home before buying another one (unless you are independently wealthy, which you don’t appear to be). I would like to be more sympathetic, but you got yourself into this mess and there is no easy way out.

CAN REAL ESTATE BE TRADED TAX-FREE FOR HAMBURGER FRANCHISE?

DEAR BOB: We own a property purchased in 1976, which has been rented since 1985 and is now fully depreciated. We want to do a Starker tax-deferred exchange to avoid profit tax. Can we exchange this investment property for an investment in a franchise? We have an opportunity to become an investor, with others, in a flourishing hamburger chain. Will this be tax-free? –Gene S.

DEAR GENE: Acquisition of a franchise is personal property so it is not eligible for a real estate Internal Revenue Code 1031 tax-deferred real estate exchange. That would be a fully taxable “unlike kind” trade of real property for personal property.

However, you could make an IRC 1031 tax-deferred trade of your investment property for another investment property of equal or greater cost, such as the real estate that is leased to the hamburger store. For full details, please consult a local tax attorney.

THANK GRANDMOTHER FOR MORTGAGE INTEREST INCOME

DEAR BOB: My grandmother sold her land to a friend and carried back the mortgage. When grandmother died, I inherited the promissory note and mortgage. Must I pay income tax on the interest I receive? –David C.

DEAR DAVID: Yes. Every time you receive a mortgage payment from the land buyer, say, “Thank you, grandmother.” Interest income is taxable as ordinary income. For further details, please consult your tax adviser.

DOES HOMEOWNER GET A DEED TO HIS NEW HOUSE?

DEAR BOB: We just finished building a house on our lot. We paid the builder cash. Do we need to obtain a deed to the house? The builder says we do not get a deed because we already have clear title to the land and the house is just an improvement to our lot. We have releases of liens from all the subcontractors. Our builder says it will cost us $2,000 to $3,000 to get a title clearance for a deed. Our custom home builder lives in the neighborhood and has been in business for several years, following in his father’s footsteps. He enjoys a wonderful reputation. –John and Mary H.

DEAR JOHN AND MARY: If you have an owner’s title insurance policy for your land, that is your best assurance you really own the property, including the new house built on it. If you don’t have an owner’s title policy, buy one from a title insurer.

The fact you received lien releases from the home builder, the subcontractors and the material suppliers is the best you can do to protect yourselves against mechanics’ liens.

I hate to say, “Never trust a home builder,” because I have known so many who are 100 percent honest. But there are also a few dishonest builders. Builders are notorious for filing bankruptcy to get out of paying debts. “Trust, but verify” should be your motto when doing business with contractors.

SHOULD BOTH SPOUSES HAVE THEIR NAMES ON HOME TITLE?

DEAR BOB: You often discuss “stepped-up basis” for a surviving spouse. When I married my husband almost two years ago, he already owned a house where we have been very happily living ever since. He tells me his will leaves the house to me if he dies first. But he won’t show me his will, so I am not sure. Should I insist he add my name to the title as “joint tenants with right of survivorship” just in case? –Sarah T.

DEAR SARAH: Although I recommend both spouses have their names on the title to their residence, if your husband is reluctant to add your name to his title you might not want to fight that battle. As the old saying goes, “Choose your battles very carefully.”

Presuming his will leaves the house to you, upon his demise you would receive a new “stepped-up basis” to the house’s market value on the date of his death. However, if you die first, he will not receive any stepped-up basis because he did not inherit any interest in the house from you.

Even if you are named in his current will to receive title to his house after his death, he can change that will at any time. For more details, you might want to consult a local real estate or probate attorney.

The new Robert Bruss special report, “2007 Realty Tax Tips: Eight Chapters of Tax Savings for Homeowners and Realty Investors,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010, or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.

(For more information on Bob Bruss publications, visit his
Real Estate Center
).

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