Editor’s note: Robert Bruss passed away on Sept. 26, 2007. This was one of the last real estate columns he wrote. Inman News is publishing Bob’s last work as a final salute to the nation’s most well-known real estate writer.
DEAR BOB: I have a negative-amortization mortgage on a new house in Naples, Fla. It is now worth $140,000 less than when I bought it in January 2006. I am losing about $23,400 each year and will have to take out a $60,000 second mortgage to sell or refinance. Should I stop making mortgage payments and allow a foreclosure to occur? I feel that is my only choice. –Susie T.
DEAR SUSIE: As you knew when you obtained that “negative am” mortgage, you had a very low monthly payment. The unpaid interest portion of each payment was added to your mortgage balance. The result is you owe more than you originally borrowed.
Purchase Bob Bruss reports online.
Just because a property has lost market value after purchase doesn’t mean its owner should walk away. When you bought the property you could afford the payments. That hasn’t changed.
Keep making the mortgage payments as you agreed to do. If you default and stop making payments, your credit will be ruined and you will lose the property by foreclosure in a highly desirable city.
SPOUSE WITH DEMENTIA UNABLE TO SIGN CONDO SALES PAPERS
DEAR BOB: My wife and I own our condominium mortgage-free. I would like to sell. But my wife has dementia and is unable to sign the condo listing and sales papers. I am able to manage our affairs, but I do not have a power of attorney for her. What would I need to do to sell our condominium? –Terry P.
DEAR TERRY: I am sorry to learn about your wife’s dementia. If both of you had placed your major assets, such as your condo, stocks and bonds, and bank accounts into a revocable living trust when she was in good health, then you could sell the condo today as the trustee without the need for her signature now that she is incapacitated.
Since you don’t have a durable power of attorney from your wife or a revocable living trust, the only alternative is to have a court-appointed conservator represent her interests. To have a conservator appointed by the local probate court you will need to hire a probate attorney.
WHAT TO EXPECT WHEN FINAL MORTGAGE PAYMENT IS MADE
DEAR BOB: In May 2008 we will make the final payment on our 30-year mortgage. Is there any advice you can give us since we will no longer have an escrow impound account for homeowners insurance payments and property taxes. What should we expect when we make that final mortgage payment? –Travis C.
DEAR TRAVIS: Congratulations on planning for your final mortgage payment. After you mail that final payment to the lender, be sure to contact the local property tax collector and your insurance agent to have the bills sent directly to you. It will be a big change for you to make those payments directly, as millions of other homeowners do, but I’m sure you can adjust.
After making your final mortgage payment, be sure the lender records either a Satisfaction of Mortgage or a Deed of Reconveyance. Some lenders automatically do this for their borrowers. Other lenders send the notarized document to the borrower and let the borrower record it.
Either way, follow up to be certain this very important document gets recorded with the local recorder of deeds so your property title will be clear of that mortgage.
THIS IS NOT A GOOD TIME TO BE A “FOR SALE BY OWNER” HOME SELLER
DEAR BOB: What do you think of homeowners selling without a real estate agent to save on the sales commission if they are already “upside down” on their mortgage? –Kevin J.
DEAR KEVIN: It’s hard enough for experienced listing agents to sell a home in the current buyer’s market. But “for sale by owners” have virtually no chance of selling without a professional agent in a slow home-sales market.
Worse, when the home seller is “upside down,” meaning the mortgage balance exceeds the home’s market value, there are only two ways to sell that home.
One is for the seller to pay cash at the closing to make up the deficit on the mortgage. This would be done by a conscientious seller who wants to preserve his good credit rating.
The other method is to get the mortgage lender to agree to a “short sale” for less than the mortgage balance. Some lenders will do this to minimize their loss because a foreclosure sale usually results in a bigger loss than a short-sale loss.
An experienced listing agent is your best hope of getting the mortgage lender to agree to a short sale. The agent can show the lender why a short sale is needed, based on recent sales prices of nearby comparable homes.
To qualify for a short sale, you must be in default because lenders want to be certain you can’t afford the monthly payments. Also, the lender will be sure you won’t receive any money from the short sale.
If your lender agrees to a short sale, please be aware you will receive an IRS Form 1099 showing the amount of mortgage debt forgiveness, which will be taxable income to you on your 2007 income-tax returns.
WHERE TO FIND LISTS OF FORECLOSURES
DEAR BOB: You recently recommended the new book, “Making Big Money in Foreclosures Without Cash or Credit, Second Edition,” by Peter Conti. But you said the book disappoints because it doesn’t give details on how to find local foreclosure lists. Can you recommend a good source for locating preforeclosures? –Richard B.
HOME SELLER MUST DISCLOSE WATER DAMAGE
DEAR BOB: I am interested in purchasing a house in Flagstaff, Ariz. Last winter this house was completely flooded due to a broken frozen water pipe. Although the house has been repaired and redecorated, could there still be unseen damage below the structure or behind the walls? Must the seller reveal this? –Ina McA.
DEAR INA: Although the seller made repairs, he must reveal the serious water damage to prospective buyers. There could be unseen damage under the structure or behind the walls, such as toxic mold, which would be very expensive to remedy.
NO TAX-DEFERRED TRADE FOR PROPERTY YOU ALREADY OWN
DEAR BOB: I own a vacant lot held as an investment. Can I sell it and use the money to build a rental house or duplex on another lot I already own? I really hate to goof up and have to pay capital gains tax. –Walter P.
DEAR WALTER: Sorry, your situation cannot qualify for an Internal Revenue Code 1031 tax-deferred exchange. The reason is you already own the replacement property.
However you could make an IRC 1031 tax-deferred trade for a lot you don’t yet own and then build a structure on it to be held for rental. Or you can trade for any property to be held for investment or for use in a trade or business.
Please be aware you can defer the capital gains tax only when you trade equal or up on both cost and equity. If you take any cash (called “boot”) out of the exchange, that portion of your capital gains will be taxable to you. For full details, please consult a tax adviser who is familiar with tax-deferred exchanges.
CAN MOM CLAIM $250,000 TAX EXEMPTION ON TWO CONDO SALES?
DEAR BOB: My mom owns two condominiums. She has owned both about five years and has lived in one all that time. I rent the other condominium from her. If she sells these condos, can she use that $250,000 exemption to avoid capital gains tax? –Andrea T.
DEAR ANDREA: Because your mother has owned and occupied her principal-residence condo for at least 24 of the last 60 months before its sale, she appears to be eligible for the Internal Revenue Code 121 capital gains tax exemption up to $250,000. If she is married and her spouse also meets the principal residence occupancy test, then that sale is eligible for an additional $250,000 exemption.
However, your mother is not eligible for any special capital gains tax exemption on the condo you rent from her. The reason is it is not her principal residence. Of course, she could move in for 24 months before selling it, thus making it eligible for the IRC 121 exemption.
Or she can make an Internal Revenue Code 1031 tax-deferred exchange of that rental condo for another investment or trade or business property of equal or greater cost and equity. For full details, she should consult her tax adviser.
SHOULD HOME BUYER PAY $245 “APPLICATION FEE” TO AGENT?
DEAR BOB: I am in the process of buying a house, using a buyer’s agent. He is asking me to pay a $245 “application fee” to his brokerage. This is on top of the 2.5 percent sales commission the firm will be paid by the home seller. Is this fair? Should I pay an application fee to a broker who is getting more than $9,000 in sales commission? –Kwame A.
DEAR KWAME: You should not pay a $245 “application fee” (whatever that is) to your buyer agent’s brokerage. A $9,000 sales commission, which you are indirectly paying, is enough.
Real estate brokers should not charge their buyers any extra fees. The sales commission, usually split equally between the listing agent and the selling agent, is sufficient.
Unless you signed a buyer’s agency contract agreeing to pay that fee, you are not required to pay. Tell the buyer’s agent to pay that fee from his own pocket if his brokerage insists on charging that unnecessary junk fee.
The new Robert Bruss special report, “17 No-Down-Payment Formulas for a Buyer’s Market,” 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.
(For more information on Bob Bruss publications, visit his
Real Estate Center).