Homes that have been foreclosed by their lenders are often good bargains, but they’re not always easy to find. Many banks prefer to deal with professional investors.
Q-I don’t have much money for a down payment, so I would like to purchase a foreclosure property from a bank or savings and loan. Can you tell me how to go about it?
A-I can point you in the right direction, but you should not get your hopes too high. Although most banks and S&Ls have foreclosure properties that they would like to sell and some of those properties present great bargains, many lenders like to deal only with professional investors and won’t give little guys like you and me the time of day. The fact that you don’t have much money for a down payment might also work against you because lenders are understandably wary of selling a home that they have already foreclosed upon once to a new buyer who admittedly does not have a lot of money to make ends meet.
That said, there are a few ways to find foreclosure properties. First, you can simply call up lending institutions in your area and ask for the person who handles foreclosures. If you’re lucky, the officer in charge of the foreclosure department will send you a list of the homes that the institution has for sale.
Also check to see if there are private companies in your area that sell comprehensive lists of foreclosures held by all the local financial institutions. You can probably get the name of one or two of these firms by checking with real estate agents, local bankers or mortgage brokers, or by looking under the “Foreclosure” heading in the yellow pages of the phone book. Newspapers also publish foreclosure advertisements.
Still, some veteran investors say the best way to locate bank-owned properties is to drive through neighborhoods and look for homes that are unkept or appear abandoned. Tall grass, old newspapers in the yard and piles of junk mail on the front porch are just a few signs that an owner has defaulted on his loan and the lender has initiated foreclosure action. You should be able to find the original owner or the lender that now owns the property by checking with neighbors or by looking through records on file at the local office of the county recorder or tax assessor.
Since these types of homes are usually in the early stages of the foreclosure process, you have a much better chance of picking one up at a bargain-basement price than you would if the lender had already spent thousands of dollars to put the property back in top shape and had hired a real estate agent to sell it.
Q-I have two questions for you. I am planning to sell my home and buy a new one. First, can you tell me how I calculate the net resale profit from the home I am going to sell? And second, how is that calculation affected by the $17,000 I spent two years ago to add an extra bedroom?
A-Determining your net profit-in other words, the amount that Uncle Sam is able to tax-involves three steps.
First, you must determine your home’s “adjusted cost basis.” The two main components are the price you originally paid for the home, plus the cost of any improvements you have made. So, if you paid $100,000 for the house a few years ago and have since spent an additional $17,000 on remodeling, your adjusted cost basis would be $117,000.
Next, you must calculate your “adjusted sales price”-the price the buyer actually pays for your home, less sales expenses such as commissions and transfer fees. If you sell the home for $150,000, pay a $9,000 sales commission and $700 in transfer fees, your adjusted sales price would be $140,300.
Finally, you subtract your adjusted cost basis from your adjusted sales price-in this case, the result would be $23,300-to determine your net taxable profit.
Of course, you could defer paying taxes on your profit if the home you plan to purchase costs at least as much as the home you sell. Or, if you’re over 55, you could keep the entire profit away from the Internal Revenue Service forever by claiming the one-time exclusion that allows older sellers to keep up to $125,000 of their profits tax-free. An accountant or other tax professional could address your particular situation and provide more money-saving tips.
Q-I am 74 years old and my husband is 72. Although I am in good health, my husband is very sick and will probably have to move to a nursing home soon. Since we don’t have a lot of money, we will have to depend on Medicaid to pay for his nursing-home stay.
Will we have to sell our home and use up all our profits before Medicaid will start paying my husband’s nursing-home bills?
A-No. The federal government will not force you to sell your family home before your husband can qualify for Medicaid payments. Although the government requires most married couples to deplete their checking accounts and most other assets before one spouse can move into a nursing home and have Medicaid pay for the stay, it generally cannot require the sale of the couple’s home as long as the healthy spouse continues to live in it.
Q-When we bought our house two years ago, we set up an account with a company that offered to convert our monthly mortgage to a biweekly plan, saying it could cut 10 years of the length of our 30-year mortgage. We signed papers that allowed the biweekly company to debit our bank account every two weeks, and the money was then forwarded to our mortgage lender.
This worked fine until the biweekly company recently went bankrupt, and now the lender says we owe it $3,700 for payments it never received. How can we get our money back?
A-I’m sorry to hear of your misfortune, and even sorrier to tell you that you probably won’t get much, if any, of your money returned. Since the biweekly company has filed for bankruptcy, you will have to wait until the bankruptcy court closes the case and hope that it has at least some cash left over to allow the judge to order a payout. Worse, you will have to immediately make up for the $3,700 in payments that the biweekly company failed to send to your lender, or else face the prospect of foreclosure.
Your sad story serves as a reminder that homeowners who want to pay their mortgage off early and slash their borrowing costs should skip the middleman-and his fees-and simply add a little extra to each of their future payments. If you took out a $100,000, 30-year loan today, you could trim about 10 years off the life of the loan and save $70,000 in interest by adding $85 a month to your monthly payment.
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Write to David Myers at P.O. Box 2960, Culver City, CA 90231-2960.
