DEAR BOB: Thanks for your great advice about six months ago regarding the good-faith deposit amount a home buyer should include with his/her purchase offer. You said a big deposit check often makes up for a low purchase offer. Last month we offered to buy a house that had been listed for sale since November. Based on our experience inspecting other nearby homes for sale and having our bid on another house rejected by its seller, we knew the house we wanted to buy was priced far above market value. Remembering your strategy, we made a $25,000 good-faith deposit with our purchase offer, which was $65,000 below the home’s asking price. To our surprise, our offer was accepted without even a counteroffer. We later learned from the listing agent that the seller had rejected a higher purchase offer, which had only a $1,000 earnest money deposit. Thanks for your great advice, which helped us buy at a bargain price – Harold W.
DEAR HAROLD: Congratulations on remembering my advice to make a big good-faith deposit when making a low purchase offer price. Your substantial $25,000 earnest money deposit showed the seller you were serious buyers who really wanted that house.
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That other buyer who made only a $1,000 deposit might have been just as serious but the low deposit wasn’t convincing enough to the seller. Also, time was on your side because the seller was probably getting anxious because the home had been listed for sale several months without a sale.
IS ‘SEALED BID’ A GOOD WAY TO SELL HOME WITHOUT AN AGENT?
DEAR BOB: We are moving back to Texas and want to know if a “sealed bid” home sale is a good way to sell our home for maximum profit without involving a real estate agent? – Cathie and Bob L.
DEAR CATHIE AND BOB: It sounds like you read one of those “how to sell your home yourself” books. Unless your home is located in an extremely “hot” seller’s market (meaning there are more qualified buyers than homes for sale), selling without a professional realty agent to list your home for sale is not a smart idea.
Sealed bid home sales often work to sell distressed homes, such as at FHA or VA foreclosure sales. But those government agencies don’t care about maximizing net profit. They just want to get rid of their foreclosures. Selling your home to the highest bidder in a sealed bid sale could be a major mistake.
Before you decide to sell your home alone, please interview at least three successful realty agents who sell homes in your vicinity. Each agent will give you their listing presentation, including a written CMA (comparative market analysis).
This vital form shows the recent sales prices of comparable neighborhood homes, asking prices of similar nearby homes (your competition) and asking prices of recently expired listings like your home, which didn’t sell.
Based on the CMA, each agent will give you his/her opinion of your home’s market value. Even if you then decide to try selling alone, the agents won’t mind because they know most “for sale by owner” sellers usually list their homes for sale with a professional agent within 30 to 60 days and you’ll probably call one of those agents.
WHO DETERMINES ‘STEPPED-UP BASIS’ OF INHERITED PROPERTY?
DEAR BOB: You frequently mention a “stepped-up basis” for inherited property. Who decides the stepped-up value? – Charlene F.
DEAR CHARLENE: It’s up to the heir to document the inherited property’s fair market value at the time of receiving the property title. Although the IRS doesn’t require a professional appraisal, that is the best method.
Another alternative would be to obtain a market value opinion letter from a local real estate broker. An additional method is to use the local property tax assessor’s valuation if the property was recently reassessed at full market value.
PITFALLS OF A LAND CONTRACT SALE
DEAR BOB: We bought our home two years ago on a land contract. It was drawn up by a Realtor and recorded at the court house. Now the previous owners have filed bankruptcy. We are being told our last two years of ownership mean nothing. We want to take title to the house, but the mortgage company is tacking on the back payments our sellers didn’t make (although we made our payments to the sellers on time). Is there anything we can do? – Donald B.
DEAR DONALD: Run, don’t walk, to the office of the best real estate attorney in town. You need legal help.
Now you know why I do not recommend buying real estate on a land contract. For readers not familiar with land contracts, they are also called contracts for deed, installment land sale contracts, contracts of sale and a zillion other names.
The basic idea is the seller retains the legal title but the buyer holds the equitable title and is entitled to all the ownership benefits and burdens. The buyer makes monthly payments to the seller who then uses part of that money to keep up payments on any pre-existing mortgage.
However, as you discovered, in your situation the seller apparently kept your money and failed to pay the mortgage payments. To make matters worse, the seller filed bankruptcy.
Fortunately, the bankruptcy automatic stay will delay the foreclosure sale. But you need an attorney to file your claim in the debtor’s bankruptcy so you are not adversely affected.
IS HOME EQUITY LOAN BETTER THAN A REVERSE MORTGAGE?
DEAR BOB: My retired parents are 74 and 78. They need more income. But I am not in a financial position to help them. They are considering a reverse mortgage, which will pay them lifetime income. Or, they are considering a credit line alternative to have cash available, such as for a new roof, which is badly needed. But they showed me the papers prepared by a reverse mortgage salesman. I was shocked by the high up-front fees. Wouldn’t a home equity credit line be better for them? – Gregg H.
DEAR GREGG: How will your retired parents qualify for a home equity credit line if they have limited income and they want to increase their income? Even if a bank is foolish enough to grant them a home equity credit line, how will they make the monthly payments, even if the bank charges just interest only?
We agree the reverse mortgage up-front loan charge profits are steep. The reason is the lender’s loan costs, which are included in the reverse mortgage balance and need not be paid out of your parents’ pockets, won’t actually be paid until the loan “matures” when the home is sold or both of your parents die.
The longer your parents live in the home and receive their reverse mortgage payments, the lower their annual percentage cost for the amortized up-front loan fees.
If your parents expect to stay in their home at least five years, a reverse mortgage can be a very good deal because it doesn’t require monthly payments. 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 PDF download at www.bobbruss.com.
PROS AND CONS OF SIGNING HOME SALE ARBITRATION CLAUSE
DEAR BOB: We plan to sell our home in a few months. The realty agent who will probably get our listing has given us blank sample forms, including the listing contract and the sales contract. In the sales contract there is an optional arbitration clause in case a dispute arises. Do you recommend we sign the arbitration clause? – Bryce H.
DEAR BRYCE: If you and the buyer sign the arbitration clause in the sales contract to resolve any disputes that might later arise, that means both parties give up their right to a jury trial, a judge overseeing the case, and a right to appeal the arbitrator’s decision, even if it is contrary to law.
My advice is home buyers and sellers should not agree in advance to binding arbitration of any dispute, such as for misrepresentation, which might arise in the future. If a lawsuit develops, at that time the parties can then agree to binding arbitration. But why give up your legal right to a court trial at the time of selling your home?
The new Robert Bruss special report, “2004 Realty Tax Tips: Eight Chapters of Tax Savings Benefits for Homeowners and Realty Investors,” 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 PDF download at www.bobbruss.com. Questions for this column are welcome at either address.
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