Q-Almost a year ago we bought a new home from a small builder who recently declared Chapter 7 ”straight” bankruptcy. We should have known there was trouble when he failed to take care of problems, such as a cracked garage floor slab, doors that don`t close properly, plumbing trouble and circuit breakers that frequently go off even though there is no overload. Is there some type of builder`s trust fund that will help pay for repairs to our home?
A-If you obtained a 10-year warranty policy from a third-party new home warranty company, such as Home Owner`s Warranty Corp. (HOW), then the warranty company is responsible for your home repairs when the builder goes broke.
However, if you did not insist on such warranty protection, then your only recourse is to get in line with all the builder`s other creditors and file a claim with the Bankruptcy Court. It is shocking how often home builders file bankruptcy to get out of taking care of their obligations. Even many of the major builders form a separate corporation for each new subdivision and when that project is finished they either fold the corporation or put it into bankruptcy. Either way, the builder can escape liability for continuing obligations, such as repairing defects in new homes. For further details, please consult your attorney.
Q-Due to illness and unemployment we are unable to make the payments on our condo. The mortgage balance is about what the condo is worth. We have tried to sell it, but the complex is badly built so nobody will buy. Our lender has offered to take a deed in lieu of foreclosure. Is there anything we should be wary about?
A-Yes. Before you give the lender a deed in lieu of foreclosure, be sure the lender gives you a written release of liability and a promise not to report the problem to the credit bureaus. Since you have paid the mortgage in full by deeding the property to the lender, you are entitled to such consideration from the lender. By signing the deed to the lender, you are saving the lender thousands of dollars in costs, so, in return, the lender owes you some favors, too.
Q-I recently read a magazine article that said about 50 percent of adjustable rate mortgage lenders are charging the wrong interest rates. How can I calculate the interest rate on my ARM to see if my lender is right or wrong?
A-Get out your ARM loan documents to learn (1) the index used and (2) the margin percentage. For example, suppose your ARM uses the popular 11th District Cost of Funds Index and your loan has a 2 percent margin. As I write, this 8.09 is the cost of funds index, so adding 2 percent would produce a curent 10.09 percent interest rate.
However, the problems on most ARMs occur if your loan has a maximum annual interest rate increase, but the index increases faster than your interest rate can increase. To illustrate, suppose in the next year the Cost of Funds Index goes up 2 percent, but your ARM allows only a 1 percent maximum increase and then the next year the index drops 2 percent. According to the terms of most ARMs, the unused 1 percent increase can be added by the lender in the second year even though the index was then decreasing. I think you can see the mess ARMs can create for lenders and borrowers.
Q-Last summer we sold our vacation home for a net profit of about $62,000. Since we plan to buy a winter ski condo in a few months, can we avoid the profit tax if we invest at least $62,000 in the condo?
A-No. Your profit on the sale of your second home is fully taxable. There is no way to avoid the tax, as there is on the sale of your principal residence, by purchasing a replacement primary home of equal or greater cost within 24 months before or after the sale (Internal Revenue Code 1034). Please consult your tax adviser for further details.
Q-I am considering buying a large rundown home. The seller is asking $175,000, but the house is only assessed for $92,500. Is there any rule of thumb as to how property tax assessments relate to a property`s true market value?
A-No. In most communities the property tax assessment has no relationship to a property`s fair market value. A possible exception occurs where the property is reassessed shortly after it is sold.
Valuing an old house in bad condition can be very difficult. You may want to hire a professional appraiser recommended by your bank or other local lender. Or you can talk with several local real estate agents familiar with the neighborhood to get their opinions of the home`s market value.
Q-We own a three-bedroom, one-bathroom home in a nice neighborhood where the schools are excellent. Our problem is we have three children and our home is too crowded now that they are getting older and each wants his own bedroom. We have looked at larger homes, but they seem so expensive in the school district where we want our kids. The larger new homes are so far out in the boondocks and the schools there are overcrowded so we have ruled a new house out. Our alternative is to add a bedroom, bathroom, and family room on to our present home. But we realize the construction would be very inconvenient and the cost estimates seem so high. If we add on to our present home, any suggestions on the best way to finance the improvements?
A-Perhaps you`ve noticed the boom in home remodeling. Many other homeowners have come to the same conclusion that it is usually best to remodel and add on to their current home rather than buy a larger one. Since you like the location and school district of your current home, I agree you will be making a wise decision to upgrade it.
Yes, there will be considerable inconvenience during construction. But an experienced and thoughtful contractor can minimize the disruptions. Be sure to get bids and client references from at least three remodeling contractors. Don`t necessarily go for the lowest bid. Check the quality of their work and talk to their previous customers to see what they liked best and least about each contractor.
As for financing the construction, you can either use a home equity loan or refinance your current mortgage with a new first mortgage after the work is completed. The cheapest and easiest finance choice is usually to obtain a home equity credit line to finance construction. After the work is finished, then you can decide if you want to refinance the first mortgage with a new one, possibly at a lower interest rate.
Q-We are considering buying a home where we can assume the existing first mortgage and the seller will carry back a large second mortgage. However, she insists the second mortgage have a balloon payment due in 10 years. Do you think this is dangerous?
A-No. A 10-year balloon payment is perfectly safe. By then you will probably either have enough equity in the house to refinance the first mortgage or perhaps you will have sold the home by then. Incidentally, if you think you might sell the home within 10 years, it would be a good idea to make that second mortgage assumable, thereby increasing the saleability of the home. To be sure the second mortgage is assumable, just be sure it doesn`t contain a due on sale clause.
Q-I have been an absentee landlord for the last nine years. A neighbor was supposed to be looking after my house for me and selecting good tenants, but she didn`t do a good job and the last tenants trashed the place. Since I live about 400 miles away, I have decided to sell. Do you think I should fix up the house, at a cost of about $5,000, or should I sell it in its present badly rundown condition?
A-Fix it up. A rundown house appeals to few prospective home buyers, mostly bargain hunters such as myself who expect a purchase price far below the market value of a house in good condition.
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Please note: Real estate laws differ from place to place, and laws of your area should be checked before making decisions on real estate problems. Robert Bruss will answer inquiries addressed to Tribune Real Estate Features Service, P.O. Box 280038, San Francisco, Calif. 94128.
