DEAR BOB: My wife and I are considering the sale of our home. We have noticed the median sales prices of houses where we live have declined about 3 percent in the last 12 months. However, before that, home prices were going up anywhere from 5 percent to 11 percent annually. We would hate to lose our equity by not selling now. But then she brought up the question “Where would we move?” as we are not yet ready for “the old folks home.” How important are these sales price statistics and trends? –Gabe R.
DEAR GABE: Please don’t be misled by the median sales price statistics. They can be very misleading. Median price means an equal number of homes sold above and below the median sales price in your area.
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Equally important, don’t confuse median sales price with the average sales price. Average sales price means the number of home sales divided into the total sales prices of all homes sold during a specific time period.
Lastly, when you hear home sales are down, be sure to check what that means. Are actual sales prices down? Compared to what? Or is the volume of home sales down? Compared to sales volume last month or a year ago?
Both median and average sales prices are meaningless unless they apply to your specific neighborhood. It is very easy for the median and average sales prices for a city to be skewed by a few very expensive or very inexpensive home sales.
The higher-priced luxury home sales prices tend to fluctuate wildly because there are few sales in that price range so one or two expensive sales can have a major effect on median sales price statistics.
Also, you need to know who supplied the numbers. Do they reflect just the home sales involving homes listed in the local MLS (multiple listing service)? Or do they include all local home sales, including FSBO (for sale by owner) where no realty agents were involved?
In other words, be sure you are comparing apples to apples, not apples to oranges. That means you need to know recent home sales (not asking) price trends for comparable homes like yours in your neighborhood. Don’t consider similar homes more than a mile away from your home unless there are no closer comparable sales.
WHAT IF HOMEOWNER ASSOCIATION WON’T ENFORCE RULES?
DEAR BOB: I bought into a deed-restricted gated community. But the homeowner association won’t fix the gates or enforce the CC&Rs (covenants, conditions and restrictions). What are my options? –Mary S.
DEAR MARY: One alternative, of course, is to sell your home and move to an area you like better. However, if you like the community but it isn’t been maintained up to standard, selling your home should be a last choice.
The easiest solution is for you and other like-minded neighbors to become involved with the homeowner association. Volunteer to be on a committee, perhaps the buildings and grounds or the long-range planning committee. Participate in the homeowner association meetings by politely suggesting better maintenance and enforcement of the CC&Rs.
If that doesn’t work to your satisfaction, get together with your neighbors to run a new slate of board-of-director candidates at the next annual election. The new directors can then see that the premises are maintained properly and the CC&Rs are enforced.
As a last resort, another alternative is to sue the homeowner association for an injunction to enforce the CC&Rs. But I do not recommend this because lawsuits usually are very expensive, take a long time, and they often don’t resolve anything. If you lose, you may have to pay the attorney fees for the homeowner association defending your lawsuit. More details are available from a local attorney specializing in homeowner association law.
PROS AND CONS OF DEEDING HOUSE TO CHILD
DEAR BOB: My father, 77, is slowly “falling apart” and he knows it. His doctor says it is not Alzheimer’s disease but probably just plain old dementia. Dad lives alone in his house for which he paid about $37,000. Today it is worth at least $500,000. My husband thinks I should ask him to deed his house to me now, as I am his only offspring. But I am concerned I would own a house without any rental income to pay expenses (dad is on a very limited income so I pay his property taxes and other major expenses). If he has to go into a convalescent home, he would probably have to go on welfare. Friends tell me to get the house out of his name so the state can’t attach it. What is your advice? –Audrey H.
DEAR AUDREY: If your dad has to go into a convalescent or other type of care paid for by the state, such as Medicaid, depending on the circumstances there are provisions for the state to attach his assets or those he gave away without adequate consideration.
If your dad gives his house to you now, subject to a life estate so he can remain living in it, your basis will be the same as your father’s $37,000, plus the cost of any capital improvements he added.
However, if you instead inherit the house when your dad dies, you will receive a new “stepped-up basis” to market value on the date of death. If that stepped up basis is $500,000, your capital gains tax will be only on the sales price exceeding that amount. Ask your tax adviser to explain further.
DOWN-TRADE WILL BE PARTIALLY TAXABLE
DEAR BOB: Can I do an Internal Revenue Code 1031 tax-deferred exchange by selling my investment property for $700,000 with $350,000 in equity to purchase a new investment property for $689,000, using my $350,000 equity to buy it? –Lucas L.
DEAR LUCAS: To qualify for an IRC 1031 tax-deferred exchange, all properties in the trade must be “like kind.” That means held for investment or use in a trade or business and you must trade equal or up in both price and equity.
A Starker tax-deferred exchange requires the sales proceeds from your old investment property must be held by a qualified third-party intermediary, you must designate the replacement property within 45 days after the sale, and the acquisition must be completed within 180 days.
If you trade down from your $700,000 investment property to a $689,000 investment property, but with equal $350,000 equity in both properties, you will be receiving about $11,000 in taxable “boot” cash. For full details, please consult your tax adviser.
CAN A REVERSE MORTGAGE BE USED TO BUY A HOUSE?
DEAR BOB: My wife and I want to sell our townhouse and buy a single-family home. I am 62, and she is 59. Can we use a reverse mortgage (instead of a normal mortgage) to buy the new house? Or must we buy with a conventional mortgage and then refinance with a reverse mortgage? Will our other assets (three or four times the cost of the new house) or our ages prevent the use of a reverse mortgage? –Walter L.
DEAR WALTER: You can use a reverse mortgage to buy a house. However, because your wife is not yet 62, the minimum age to obtain a reverse mortgage, she cannot be on the title with you.
Because of your relatively young age and long life expectancy at 62, you will have to make a large cash down payment. The amount of your other assets or your credit rating doesn’t affect your reverse-mortgage eligibility. For details, please consult any reverse-mortgage representative who offers Fannie Mae reverse mortgages for home purchase.
NOT MUCH OF A MARKET FOR HALF OF A HOUSE
DEAR BOB: My partner and tenant-in-common co-owner died about a year ago. The probate court recently cleared his estate. What a mess! Now I know why you constantly harp about putting realty titles into a revocable living trust to avoid probate. But my problem is his will left his half of the house to his mother who lives in Ireland. She wants me to buy her out. But I don’t have the money or credit to do so. I talked with several local Realtors about selling her half interest in the house. They all said they would keep it in mind but they weren’t optimistic about finding a buyer. Any suggestions? –Scott W.
DEAR SCOTT: The obvious solution is to sell the house, dividing the sales proceeds between yourself and your late partner’s Irish mother. But I presume you want to stay in the house.
Even if a buyer for her half of the house could be found at a below-market price, that buyer might then bring a partition lawsuit to force the sale of the house. Again, that probably isn’t what you want.
If there is any way you can buy out your new co-owner’s share of the house, that appears to be your best choice. Perhaps you might suggest she sell her half to you, secured by a second mortgage on the house. That would give her monthly income from your payments and you can then remain living in the house.
The new Robert Bruss special report, “Pros and Cons of Investing in Rental Houses and Condominiums,” 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.
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