DEAR BOB: My husband and I, ages 74 and 77, respectively, live in our home worth about $900,000 for which we paid $125,000 in 1978. We have a remaining mortgage of $44,000 at 5.25 percent interest with $330 monthly payments. But we dislike sitting on all that “dead money” in our home equity. We’ve been investigating a reverse mortgage to pull out some of that money to either invest or help our daughter buy a house. However, we are not interested in additional monthly income. Is a reverse mortgage the way to go? –Darlene MacP.
DEAR DARLENE: My question for you and your husband is: “Are you in reasonably good health and do you plan to stay in your home at least five years?” If your answer is “yes,” then a reverse mortgage could be ideal for your situation.
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Sitting on about $850,000 of “dead money” (also called idle equity) must be frustrating. Giving your daughter the money to buy her house is like an “advance inheritance” if you are certain you will never need your home equity for personal use.
However, I do not recommend obtaining a reverse mortgage to use the cash for investments because chances of your earning at least as much as the money costs are very slim.
Because a senior-citizen reverse mortgage must be recorded as a first mortgage, $44,000 of the proceeds will be used to pay off your current first mortgage.
I suggest you consult a reverse mortgage originator who represents FHA, Fannie Mae and Financial Freedom Plan to compare their offerings. Due to your home’s high market value, the Financial Freedom Plan will probably be best for your situation. You can find reputable reverse-mortgage lenders at www.reversemortgage.org.
WHERE TO LEARN ABOUT FLIPPING PROPERTIES
DEAR BOB: I am new to real estate and am interested in “flipping” properties. Where can I learn about getting rid of purchased properties and how can I sell them for fast profits? How can I be sure I won’t get stuck and have to pay the taxes plus property maintenance? –Daniel R.
DEAR DANIEL: I suggest you study a great new book “Find It, Fix It, Flip It” by Michael Corbett. Read it twice so you thoroughly understand how to profitably flip houses. It is available in stock or by special order at local bookstores, public libraries and www.Amazon.com.
ANY RECOURSE FOR BUYING A “MONEY PIT” HOUSE “AS IS?”
DEAR BOB: Last October we bought a house in Minnesota. We love the neighborhood. But after moving in, we realized we purchased a “money pit.” The house was offered for sale “as is.” About a month after moving in, we had to replace the furnace for $6,000. Recently, our basement was flooded and we had to spend over $10,000 replacing drain tiles and re-drywalling. Our contactor said the existing drywall was not installed to building code, as it had no insulation. The sellers were obviously “house flippers.” But surely our house inspector should have caught the defective furnace. Is the seller liable for the defective drywall they installed? –Brian G.
DEAR BRIAN: When a house is sold “as is” that doesn’t excuse the seller from disclosing known home defects. An “as is” sale means the seller must reveal defects but doesn’t have to pay for any repairs.
Your big problem is proving the seller knew about the defective furnace and the incorrect drywall installation.
If you hired a professional home inspector, hopefully a member of the American Society of Home Inspectors (ASHI), he or she would have inspected the furnace and discovered any dangerous condition such as a cracked firebox heat exchanger. Local ASHI inspectors can be located at www.ASHI.com.
The professional inspector’s contract with you, however, probably limits liability so don’t count on holding the inspector liable unless you can prove the inspector was negligent and should have discovered the furnace defect. As for proving the sellers knew about the defective drywall, that is a difficult matter of proving that the seller knew.
ADDING NEIGHBOR TO HOME TITLE MIGHT BE A MAJOR MISTAKE
DEAR BOB: I added my neighbor and his wife as joint tenants with right of survivorship to my home, intending to leave it to them when I die. Will this create a tax problem for them? –Don W.
DEAR DON: Why would you do a crazy thing like that? Yes, it was a major mistake.
You gave up control over your property in case you need to sell it to pay for your care at the old folks home. If you decide to sell it, they can demand their share of the sales proceeds. Worse, they can refuse to sell and you would have to bring a partition lawsuit to force a sale, with them getting two-thirds of the sales proceeds.
Still worse, as gift donees, their basis in the property becomes your probably very low adjusted cost basis. When they eventually decide to sell, they will owe a substantial capital gains tax.
Even worse, by deeding part of your property away, the local tax assessor will probably reassess the property value, forcing you to pay much higher property taxes.
Instead, you could have created a revocable living trust and named your neighbors to receive your title after you die. Meanwhile, you would maintain 100 percent control, including the ability to sell if you desire.
More important, after the neighbors inherit your property they get a new stepped-up basis to market value on the date of your death and will owe little or no capital gain tax if they sell shortly thereafter.
Sorry to bring such very bad news. You should have consulted a local real estate or tax attorney before making that major mistake.
SILLY QUESTION HAS A VERY SERIOUS ANSWER
DEAR BOB: Here is a silly question for you. You mentioned several times that when a group of individuals owns and occupies a house, such as three roommates buying a house together, they each will be entitled to a $250,000 principal-residence-sale tax exemption if they each meet the 24-out-of-last-60-months ownership and occupancy test. Would the same condition apply if I place my 7-year-old son on the deed to my home? Will each co-owner then be entitled to $250,000 tax-free capital gains after living in it for 24 of the 60 months before the sale? –Richmon T.
DEAR RICHMON: Yes. But there are major pitfalls of adding a minor’s name to a real estate title.
When you and your wife decide to sell your home, unless your son is then 18 or older, you must have a court-appointed guardian to represent his interests.
Perhaps that guardian might decide his share of the sales proceeds should be held in trust until he becomes 18 (or 21, or some other age). I do not recommend doing what you contemplate.
Please remember the rule is minors can receive real estate title, but they cannot convey title until they become 18.
IF YOU DON’T PAY THE BILLS, YOU DON’T GET THE DEDUCTIONS
DEAR BOB: My life partner and I bought our home as tenants in common. But I make all the mortgage payments, as I earn most of the income. Can I deduct all the mortgage payments or do they have to be split between the two of us? –Michael S.
DEAR MICHAEL: Itemized income tax deductions for principal-residence mortgage interest and property taxes depend on who actually paid the payments.
If you pay 100 percent of those expenses, only you can deduct those costs you paid. However, if you pay 75 percent and your co-owner pays 25 percent, then you each get to deduct only the amounts you each paid. For more details, please consult your tax adviser.
NO WAY TO GET A MORTGAGE ON HALF A HOUSE
DEAR BOB: My boyfriend and I want to buy a piece of land where we might wish to someday build a retirement home. We both live in a house my boyfriend owns. I want to buy half the house from him. Then he would have the cash to buy the land. Will a reputable bank extend me a mortgage for half a house? I have excellent credit and the house is now worth triple what my boyfriend bought it for some years ago? –Lily R.
DEAR LILY: Nice try. But no institutional lender will make a mortgage loan secured by half a house.
Both you and your boyfriend must be co-owners holding title. Then a mortgage lender can make a loan secured by the house and signed by both co-owners.
Work with an experienced mortgage broker to see if it is possible to accomplish what you and your boyfriend want so you can buy that land together.
The new Robert Bruss special report, “Five Easy Ways to Buy Your Home and Investment Property for Nothing Down,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 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.
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