DEAR BOB: What is the logic that some states require the buyer of property to purchase title insurance for the acquisition? It would seem the seller should be required to guarantee title and provide the title insurance – Elam F.
DEAR ELAM: You are mistaken. Title insurance is not required by law in any state.
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However, virtually every mortgage lender requires a lender’s title insurance policy or the buyer won’t be able to get the mortgage. In addition, smart buyers always insist upon an owner’s title policy to protect their equity.
Local custom usually determines whether the property buyer or seller is expected to pay the title insurance cost.
For example, in the county where I live it is customary for the home buyer to pay for the title insurance. But in the adjoining county to the south, the custom is for the home seller to pay for the buyer’s title insurance.
But, as famous negotiator Herb Cohen said, “Everything is negotiable.”
Regardless of custom, if you are the buyer and are short of cash, specify in your purchase offer that the seller is to pay for your title insurance. Unless it’s a local “seller’s market” for homes, if the seller wants to accept your offer, the seller will probably agree to pay for your title insurance.
Or, if the local custom is for home sellers to pay for title insurance, but if it’s a strong “seller’s market” (meaning there are more qualified buyers than homes for sale), as a seller you can specify in the sales contract the buyer will pay for their title insurance.
Whether the home buyer or seller pays for the title insurance, the seller is obligated in the sales contract to deliver “marketable title.” If the title isn’t insurable, with exclusions for known exceptions such as an easement, then the title isn’t marketable. For more details, please consult a local title insurance company.
HOW LONG CAN PRIMARY RESIDENCE BE RENTED BEFORE LOSING $250,000 TAX EXEMPTION?
DEAR BOB: We have owned and lived in our house more than 25 years. Soon we will be moving to another house. But we plan to rent our current house, instead of selling it, for a few years. However, we don’t want to lose that tax exemption you often discuss when we eventually sell. How long can we rent our house without jeopardizing the tax exclusion benefit? – Prim P.
DEAR PRIM: To qualify for the Internal Revenue Code 121 principal residence sale exclusion up to $250,000 of capital gains (up to $500,000 for a qualified married couple filing jointly), you must have owned and occupied your primary home an “aggregate” two of the last five years before its sale.
In your situation, that means you can rent the house to tenants up to three years before losing your IRC 121 entitlement. For more details, please consult your tax adviser.
DON’T BE MISLED BY REVERSE MORTGAGE AGENT
DEAR BOB: I am a senior citizen homeowner, age 77, who has been considering the reverse mortgages you often discuss. Recently, I received a fancy mailer from a company offering reverse mortgages. But I am puzzled. It says, “Did you know that the U.S. government has a program that pays off the balance of your home mortgage and pays you to live in your home for the rest of your life?” The words “reverse mortgage” are used throughout the brochure. Is this a new type of reverse mortgage? – Hedie W.
DEAR HEDIE: No. Thank you for sending me that misleading brochure. I was shocked to discover that reverse mortgage broker is a member of the National Reverse Mortgage Lenders Association, an excellent organization.
As you probably know, there are three nationwide reverse mortgage lenders: FHA, Fannie Mae, and Financial Freedom Plan. Each program is different. FHA is the most popular.
While technically correct, the brochure statement you quote is misleading. FHA (Federal Housing Administration) insures and regulates FHA reverse mortgages. But it is not government money which funds FHA-insured reverse mortgages.
I suggest you consult a reverse mortgage originator who offers all three loan types so you can compare their pros and cons. More details are in my special report, “Secrets of Tax-Free Reverse Mortgage Income for Senior Citizen Homeowners,” 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.
IS HAVING A WRITTEN WILL SUFFICIENT TO AVOID PROBATE?
DEAR BOB: We are concerned because our elderly parents own an expensive house free and clear but they do not have it in a living trust. They seem to think having their home included in their written will is sufficient to avoid probate. What is the best way to avoid probate in a situation like this? – Merle D.
DEAR MERLE: The exact answer depends on state law where your parents’ home is located. Some states have probate-avoidance procedures for small estates, such as those below $50,000 to $100,000.
But in most states, when the decedent’s assets pass according to the terms of their written will, local probate court proceedings are required. Delays can range from a few months to a few years.
For example, when my mother died a few years ago, her Minnesota attorney told her not to put her condominium title into her living trust. That turned out to be bad advice.
But it passed upon her death according to the terms of her will. That meant it had to go through probate court. Although there were no problems, it took almost a year to clear the title to her condo. Thankfully, she didn’t leave any large debts requiring sale of the condo.
You should recommend your parents consider transferring title to their home and other major assets into their living trust to avoid probate costs and delays.
Another living trust advantage occurs if an owner becomes incompetent, such as due to a severe stroke or Alzheimer’s disease. Then the alternate or successor living trust trustee can manage the assets, even selling the property if necessary.
MORTGAGE BROKER SAYS DON’T BLAME HER FOR JUNK FEES
DEAR BOB: I’ve been a successful mortgage broker for the last 11 years. Before that, I was a loan agent for a major nationwide bank. The reason I went “independent” was when I worked for that bank (which is one of the best and I still broker their loans), I could only offer that lender’s mortgages. Now I represent about 50 mortgage lenders. I can offer dozens of home loans to meet virtually every homeowner need. I could probably even arrange a mortgage for that “bankrupt arsonist” you jokingly mention occasionally. However, please let your zillions of readers know it is usually the actual lender, not the mortgage broker, who imposes unnecessary “junk” or “garbage” fees. I am shocked at the dirty tricks some dishonest major lenders often impose as last minute surprises. Of course, I discontinue doing business with those crooked lenders. But don’t blame the mortgage brokers for all those junk fees – Jeanie C.
DEAR JEANIE: Thank you for sharing. There is plenty of blame for unexpected junk or garbage fees to share among mortgage brokers and the actual mortgage lenders.
I must hasten to explain a legitimate mortgage fee is an actual cost that is paid by the borrower to a third party. Examples include the appraisal fee, title insurance fee, escrow or attorney fee, credit report fee, and courier fee.
But 100 percent pure-profit unnecessary junk or garbage fees paid to the actual lender, or the mortgage broker, include underwriting fee, documentation fee, loan review fee, warehouse fee, and even a miscellaneous fee.
Instead of charging these fake fees, mortgage lenders should fully disclose their loan fee (usually called “points” – each point equals one percent of the amount borrowed) and any yield-spread premium paid by the actual lender to the mortgage broker.
IS “FLIPPER” OR “KEEPER” PROPERTY BEST FOR INVESTORS?
DEAR BOB: Thank you for recently recommending that superb new book, “How to Be a Quick Turn Real Estate Millionaire,” by Ron LeGrand. I read it twice and discovered new ideas each time. However, for about 10 years I have been a “buy and never sell” investor. My property portfolio of rental houses has appreciated to well over $2 million in net equity value. I periodically refinance each house to take out tax-free cash. Am I missing the boat by not being a “flipper” instead of a “keeper?” – Shirley T.
DEAR SHIRLEY: Congratulations. You’re doing great. As you know from reading LeGrand’s excellent book, he doesn’t “flip” and sell all his properties.
He keeps some of his more than 1,500 property acquisitions for long-term investment. But he sells others for “fast cash.”
My long-time real estate investor friend Jimmy Napier often says, “Don’t eat the seed corn.” By that he means keep most of your properties (your seed corn) and periodically sell (or refinance) others to produce cash flow.
More details are in my brand new special report, “Pros and Cons of Flipping Houses and Investment Properties for Fast Cash Flow Profits.” It is 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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