Q-We have about $45,000 equity in our home that we would like to use for a down payment on a second home. Our problem is we have a first mortgage at 7.25 percent fixed interest and we can’t get a second mortgage for more than $25,000.
How can we get at least $35,000 cash for a down payment on a vacation home?
A-The easiest way to squeeze equity out of your home, or any property, is to create a mortgage secured by that property.
To use an extreme example, you could write a $45,000 second mortgage on your home and use it as the down payment on your vacation home. However, the chances of a seller accepting such an offer, which leaves you no equity in your primary residence, are not good.
A better alternative is to borrow the $25,000 cash secured by a second mortgage on your residence and then create a third mortgage for the balance of the down payment on the second home. The seller will then receive some cash plus a third mortgage on your residence.
Adding cash plus a mortgage for a down payment is a technique called “lemonading.” It won’t work for every property you want to buy, but all you need is one seller who says yes.
Q-I am considering buying a 10-unit apartment building that has an asking price of eight times the gross income. The realty agent tells me this is a very good buy. Is it?
A-I don’t know. When buying rental property, never buy on the basis of its gross rent multiplier; that is a seller’s marketing device that does not consider the property expenses.
A far better approach is to buy rental property on the basis of its net income. The only expenses which are not considered are (1) the mortgage interest (because financing will vary from zero to 100 percent depending on the owner) and (2) depreciation which is a non-cash expense.
Divide the property’s net operating income by an appropriate capitalization rate, based on recent sales of comparable nearby rental properties. Your realty agent can show you the local “cap rate,” probably 8, 9 or 10 percent, which will give you a valuation for the income property after considering its expenses.
Q-We finally closed the sale of our home. All was going well until two days before the closing the pushy buyers insisted on reinspecting our house. They found several little items, which we consider normal wear and tear, such as a tiny window crack, a carpet stain that will probably be covered by their furniture, and a wall crack above a doorway.
Having these items repaired took several days so the closing was delayed. I’m still mad at our Realtor for allowing the buyer to reinspect our home. Do you think she should pay for these unnecessary repairs?
A-No. Smart home buyers reinspect a day or two before the scheduled closing date to be certain (1) the seller hasn’t removed items included in the sales price and (2) there is no need for repairs, as occurred in your situation.
Home sellers should anticipate buyer reinspections just before the sale closes. Any realty agent who doesn’t suggest the buyer reinspect is not looking out for that buyer’s best interests.
Q-I want to buy a house in 1995 but don’t want to make a mistake like my friend who bought a “lemon” house last year. What’s the best way to avoid buying a house with hidden defects the seller forgot to disclose?
A-There are two significant steps to accomplishing your goal. Step one is to avoid offering too much for the house. When you find a house you want to buy, fore making your purchase offer ask your realty agent to prepare a written CMA (comparative market analysis). This form shows recent sales prices of similar nearby homes. To arrive at an intelligent offer price, you can then add and subtract value for the pros and cons of the house you want to buy.
Step two is to include an inspection contingency clause in your purchase offer. Such a clause might read, “This purchase offer contingent upon buyer’s good faith approval of a professional inspection report on the home to be obtained at buyer’s expense within five business days.” For further details, please consult your attorney.
Q-We are considering selling our house in a few months. Should we set our asking price a little higher than our property tax assessed value?
A-No. In most communities, the assessed value for property-tax purposes is not the market value. It is usually lower, often by thousands of dollars, depending on state and local assessment practices.
After your home is in tip-top condition ready to sell, interview at least three successful realty agents who sell homes in your neighborhood. Each agent should prepare a CMA (comparative market analysis) showing recent sales prices of comparable neighborhood homes and the asking prices of other nearby homes currently for sale. Then each agent will give you their opinion of your home’s market value.
Before listing your home for sale with the best agent, be sure to check references of their last three home sellers.
Q-I sold my home in May 1993 at a net profit of about $55,000. Because of illness, I have been out of work since then. I have spent the home sales proceeds on medical bills and living expenses. There is no way I can buy a replacement home by May 1995 to defer my profit tax.
When I phoned the Internal Revenue Service to get an extension of my 24-month home replacement limit, the woman with whom I spoke didn’t know what I was talking about. How can I get a hardship time extension for buying another home?
A-I regret to inform you Internal Revenue Code 1034 has no provision for extension of the 24-month period for buying a replacement home. If you don’t buy and occupy a principal residence of equal or greater cost within 24 months, you owe tax on your home sale profit, plus interest. Please consult your tax advisor for details.
Q-Last fall, you told another reader, “All lenders are not created equal.” I learned how true that is.
I bank with a major national bank so I thought they would welcome my application to get pre-approved for a mortgage.
But they approved me for much less than I requested.
Then I saw a newspaper ad for a large S&L so I applied there and received pre-approval for $45,000 more with no loan fee.
As a result, I was able to buy an ideal townhouse.
A-Your letter will convince more prospective home buyers than I ever can that (1) all lenders are not the same and (2) it is vital for home buyers to get pre-approved for a mortgage before buying a home.
It is not unusual for pre-approved home buyers to continue mortgage shopping.
Mortgage lenders are very eager to make loans (although most still act like they are doing a big favor to approve a loan) and are very competitive on loan terms.
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Robert Bruss’ report “1995 Realty Tax Tips: 12 Chapters of Tax Saving Ideas for Realty Owners” is available for $4 from Tribune Media Services 435 N. Michigan Ave., Suite 1408, Chicago, Ill. 60611. Allow six to eight weeks for delivery.
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. Letters should be addressed to Tribune Real Estate Features Service, P.O. Box 280038, San Francisco, Calif. 94128.
