DEAR BENNY: In August 2009, we sold an investment property (without a Realtor) located next door to our primary residence. We did this because the three real estate agents we talked to felt the property would sell quickly at or near $235,000. Previous sales of comparables were in the mid-$220,000s to mid-$250,000s. By selling it ourselves for $226,000 we saved more than $5,000 in commissions and sold the property in three weeks.

We recently received a contract on our primary residence next door for $237,000, but the appraisal came back at $228,000 (down from $242,000 just nine months ago). We think if we had listed the property and sold it through a Realtor at the higher price our appraisal would be higher. This doesn’t seem right to me. Did selling the investment property next door without a Realtor contribute to this? –David

DEAR BENNY: In August 2009, we sold an investment property (without a Realtor) located next door to our primary residence. We did this because the three real estate agents we talked to felt the property would sell quickly at or near $235,000. Previous sales of comparables were in the mid-$220,000s to mid-$250,000s. By selling it ourselves for $226,000 we saved more than $5,000 in commissions and sold the property in three weeks.

We recently received a contract on our primary residence next door for $237,000, but the appraisal came back at $228,000 (down from $242,000 just nine months ago). We think if we had listed the property and sold it through a Realtor at the higher price our appraisal would be higher. This doesn’t seem right to me. Did selling the investment property next door without a Realtor contribute to this? –David

DEAR DAVID: A couple of years ago, I might have thought that selling your house on your own — without a real estate agent — might have been the cause of the lower appraisal.

However, as you well know, in recent years property values throughout the country have gone down — and unfortunately, in some parts of the nation, values have actually plummeted dramatically. In some communities, they are still going down.

There are many factors that may have caused your appraisal to go down. Appraising requirements have been significantly tightened; mortgage lenders can no longer use their "friendly appraiser" to give them the price they need. Appraisers are often members of the Appraisal Institute, a national trade association.

Have there been foreclosures or short sales in your neighborhood? That may also be a factor that reduced your appraisal.

I am not in any way belittling your lower appraisal, but you should be happy that in today’s economy it did not go down more.

DEAR BENNY: We are a small, 20-year-old, gated community of 100 townhouses, some on small lots and others with just the ground under the unit. There are some common areas, but no amenities such as a community center or pool.

We take care of our own homes, inside and out. The association collects dues (currently $150) and takes care of ground maintenance, water and sewer for the entire community, the gate, a small fish pond, road if necessary, and the budget. One of the owners is the salaried manager (who earns $1,000 per month and has his dues waived).

The board is striving to have a reserve of $100,000, which would be nice if it were not at the expense of beautification. Common grounds are often neglected with monies going to repair water leaks, and pond and gate malfunctions.

So how much do we need in reserve? We currently have about $90,000, and I would like the board to allocate at least $3,000 for fall and spring flower planting. The board seems to think that I am unreasonable, but most homeowners agree with me. –Micette

DEAR MICETTE: The issue of reserves is extremely important nowadays, in light of the economic problems this country is facing. Recently, for example, the Federal Housing Administration (FHA) — which currently is the primary force in mortgage lending — issued a regulation to the effect that community associations need a minimum reserve account of at least 10 percent of their operating budget. And if this minimum is not met, potential buyers (or owners seeking to refinance) will not be approved for a mortgage loan.

I believe that at least once every five years, the board of directors of a community association (which includes condos, co-ops and HOAs) must hire a licensed structural engineer to conduct a reserve analysis study. The engineer will inspect every component of the common areas and submit something that looks like this:

1. Private roads will need paving in 10 years at an estimated cost of $50,000, or $5,000 per year; 2. Elevator needs to be replaced in five years at cost of $20,000, or $4,000 per year. And so on and on.

In other words, the reserve analysis will project what the various components will cost to repair or replace over time, and determine how much money the association will be required to fund into a reserve account on an annual basis.

You should strongly suggest to your board of directors to have such a study done as soon as possible.

As to your second question, your board disagrees with you (and other owners) about beautification. I agree that in order to make properties in your community salable, you need to have it look nice. First impressions can make or break a sale.

However, if your board disagrees, you really have only three alternatives: (1) get elected to the board; (2) move out of the community, or (3) accept the fact that the elected board has the right to make basic decisions about your community.

DEAR BENNY: In a recent column you answered a question about taxes due on the sale of a commercial building. Are commercial taxes the same that would be due on the sale of a personal residence? We have been living in our home for the past 22 years. –Barbara

DEAR BARBARA: No. The sale of commercial property is taxed differently than that for a principal residence. If you are married and file a joint tax return and have lived and owned the property for two out of the five years before sale (which obviously you have done) you can exclude up to $500,000 of any profit. The IRS calls this the "use and ownership" test. However, if you believe you may have made more than $500,000, you should consult with a tax accountant.

In order to reduce your capital gains tax — which has to be paid for any gain over $500,000 — you want to increase your tax basis. Oversimplified, the basis of your house is what you originally paid for it. You then have the right to increase that basis by any capital improvements you have made over the years. While there is no good, clear definition of "capital improvements," I generally take the position that if an improvement has a useful life for more than one year, it qualifies.

There is a good discussion of all this in IRS Publication 523, entitled "Selling Your Home." It is available directly from the Internal Revenue Service (go to www.irs.gov and click on "Publications").

DEAR BENNY: I know that you recommend paying extra money on the principal of mortgages. Does it matter if an extra payment is made once a year as opposed to extra money monthly? –Jennette

DEAR JENNETTE: I am not an accountant, and my math skills are not the greatest. However, I would think that making an extra payment every month would be more beneficial than just making one extra payment per year.

When you make an extra payment every month, that reduces your outstanding balance. Accordingly, the interest for the next month is calculated on that lower balance.

Furthermore, it’s usually easier to make small payments every month than having to come up with a larger sum at the end of the year.

I welcome any input from any math gurus who read my column.

DEAR BENNY: In 2002 we bought an acre of land sitting on a pond for $15,500 with all intentions of building a retirement home. Due to health and other issues, our plans have changed. I offered to sell the lot for $30,000 to a couple who own the adjoining property. (It is assessed for tax purposes for $25,000 and was appraised last month for $40,000.) They thought my price was too high.

To get water and cable to the lot requires going along the easement road to the property, which is owned by the couple’s son. Out of spite, he has threatened to deny access to run water and cable lines if I sell the lot on the open market. Can he legally do this? –Ben

DEAR BEN: You or your attorney should carefully review the terms and conditions of that road easement. It may contain the answer to your question.

Otherwise, you are in the legal arena known as "easements by necessity." It’s a complicated legal issue, and state law differs.

Oversimplified, however, if it is absolutely necessary to have access to water, a court of law will require the son to provide you with that access. Clearly, one needs water in order to live in a house. But cable is, in my opinion, not a necessity. Here, you may be able to get a judge to give you an easement by implication.

The basic difference: An easement by necessity requires you to prove that the water is "absolutely necessary," whereas an easement by implication requires you to prove that the cable is "reasonably necessary."

You should consult legal counsel. Hopefully, an amicable resolution can be reached.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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