DEAR BOB: My home has appreciated in market value far beyond my wildest dreams. But I will soon be moving to Fairbanks, Alaska, and cannot decide whether to sell my home or rent it to tenants. If I rent, I can get about $300 per month above my mortgage payment. If I sell, I can take the tax-free profit and buy a dream home in Fairbanks. However, homes there are not appreciating very quickly. Without a big down payment, I would have to buy a less desirable home. But I want to be prudent. I’d hate to sell now and see my home go up in value even more. Should I sell or rent? – Brian R.
DEAR BRIAN: Homeowners all over the U.S. share your situation. Most of our homes have appreciated in market value far above our expectations. It’s a great challenge and opportunity to own homes that have highly appreciated.
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The key question to ask yourself is, “Do I expect to return to this area within the next three years?” If your answer is “no,” then I suggest you sell your principal residence now while the market is good and you are entitled to the Internal Revenue Code 121 tax exemption up to $250,000 profits (up to $500,000 for a married couple filing jointly).
To qualify for this fantastic tax break, you must have owned and occupied your principal residence an “aggregate” two of the five years before its sale. Your tax adviser has full details.
If you move out now, and rent the house, you can rent it for up to three years before losing this tax exemption (presuming you owned and occupied it the prior two years).
Please be aware managing a long distance rental might cause big trouble if you don’t have a trusted local friend, relative or property management firm to collect the rent and supervise the tenants and maintenance. I suggest you sell now unless you plan to return to the area within three years.
HOW TO HANDLE AN INEFFECTIVE LISTING AGENT
DEAR BOB: I am very unhappy with my real estate agent. She listed my home for sale but has not done any marketing, not even advertising it. I want to cancel the listing. What is the best way to do that? – Bipin S.
DEAR BIPIN: Before canceling your home sale listing for the agent’s lack of due diligence, as required by the listing contract, please consult your listing agent’s broker or office manage to discuss the situation. I find it shocking your listing agent isn’t using any effort to get your home sold.
The best remedy in situations like yours is to transfer the listing to a better agent in the same brokerage office. Then your listing agent will receive a referral fee when your house sells and you will get a better agent who knows you are a very demanding seller who expects hard work from your agent.
THE IMPORTANCE OF HAVING A LOCAL INSURANCE AGENT
DEAR BOB: Thank you for that item at least six months ago about the lady in Florida who had trouble with her homeowner’s insurance. At the time, I was insured with one of those “mail order” discount insurance companies with an 800-phone number. Their rate was low but, after reading your article, when my policy came up for renewal I decided to switch to an insurer with a local agent. I’m so glad I did. Following your advice, I interviewed three local insurance agents. They all came out, inspected my home, measured it, and two even took outside photos. Their bids were far apart for similar coverages. I chose the agent recommended by a friend. When a neighbor’s tree fell over on my detached garage, ruining my car, my insurance agent was fantastic. She resolved the problem with my neighbor’s insurance company, hired a superb contractor to rebuild my garage, and arranged for replacement of my car. Thanks for your great advice to insure with a company that has a local agent – Brett W.
DEAR BRETT: I must admit I’ve been tempted to insure with those discount insurance companies with 800-phone numbers when a claim occurs. However, I haven’t had an insurance claim for many years, but if I ever have a claim, I know where to find my agent. I even know where he lives.
DAD WANTS TO PROVIDE MORTGAGE FOR DAUGHTER’S PURCHASE
DEAR BOB: I would like to provide a mortgage for my daughter’s home purchase. What papers need to be prepared to make everything legal? Does the mortgage need to be recorded? – Richard N.
DEAR RICHARD: You are making a very smart business decision to finance your daughter’s home purchase. Not only will you be creating a superb investment, but you will be helping her buy the home without any lender hassles and extra costs.
I suggest you retain a local real estate attorney where your daughter is buying her home. Either a mortgage or deed of trust must be recorded against her title for your security protection so she can deduct the mortgage interest on her income tax returns.
Also, a promissory note must be prepared, signed by her, and held by you (just in case she doesn’t pay, runs off to Tahiti with a surfer, and you have to foreclose for nonpayment). The note will not be recorded. Keep it in a safe place so, when the loan is paid off, you can return it to her, proudly marked “paid in full.”
Depending on the state where your daughter buys her home, there might be recording fees, mortgage tax, and other costs that she should pay when your mortgage is recorded.
WHERE TO FIND “INTEREST-ONLY” HOME MORTGAGES
DEAR BOB: Where can I find one of those new “interest-only” home mortgages you mentioned a few weeks ago? I want to buy my first home, perhaps a condo, and interest-only payments appeal to me because I want to keep my costs as low as possible while maximizing my income tax deductions – Cindy C.
DEAR CINDY: Virtually every home mortgage lender now offers interest-only home mortgages. Lenders love them because it keeps all their money working to earn interest. Just start “dialing for dollars” by reading the home loan newspaper ads and checking the phone book yellow pages under “real estate loans.”
However, you should understand that you won’t be building any equity in your home from paying down your mortgage balance, as you would with an amortized mortgage.
But interest-only mortgages are ideal for home buyers who (1) want minimum monthly payments and (2) don’t expect to stay in their homes more than 10 years (when most interest-only mortgages either have a balloon payment or switch to amortization).
CONTROVERSY OVER ADVICE NOT TO BUY HOME FOR CASH
DEAR BOB: As a sales agent for a major real estate developer, I very strongly disagree with your recent advice for home buyes not to pay all-cash. Many of our home buyers have sold their large homes for cash and want to downsize to a smaller new home they can purchase for cash without any concern about mortgage payments. Of course, we offer mortgage financing. But I think you’re wrong to suggest buyers get a mortgage when they can afford to pay cash – Alexandria H.
DEAR ALEXANDRIA: I presume you are responding to the letter from the condo buyer who was so thankful for not paying all cash after discovering his condo association management problems.
Although I’m sure your developer’s new homes are perfect and never have any serious defects, you would be amazed how many home builders have built houses with major defects. I can cite you major court decisions against famous nationwide builders, but I won’t bore you.
The reason I suggest buyers of new condos and houses obtain a mortgage, with a modest cash down payment, is to avoid risking all their cash nest egg in their residence. After a few years, if all goes well, it’s smart to pay off the mortgage to save interest.
Perhaps you recall one of the worst reader letters I ever received. It was from a widow who bought her condo for cash.
After moving in and discovering the condo complex was mostly occupied by renters she didn’t like, she wanted to sell. Then she learned her condo was virtually unsaleable because mortgage lenders wouldn’t loan in a complex with more than 30 percent renters.
The new Robert Bruss special report, “Pros and Cons of Earning Big Profits from Foreclosures and Bargain Distress Properties,” 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.
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