Q–My husband and I are looking for a home to buy. We are not in any hurry and are thoroughly enjoying spending Sunday afternoons inspecting the Realtor open houses.
I often think we know more about neighborhoods and market values than do the agents we meet at the open houses. Some agents are superb. But we’ve met our share of dunces, too.
Last weekend, we almost made an offer to buy a house, but we weren’t sure how to protect ourselves against buying a “lemon.” We once bought a bad car, so we don’t want to buy a bad house.
As we prefer to buy an older home in an established neighborhood with “charm,” how can we be sure we’re not buying trouble?
A–Congratulations on taking your time and enjoying the home purchase process. You have the right attitudes and I’m sure you will make a smart purchase.
Of course, before making a purchase offer, be sure to ask the realty agent to prepare a written CMA (competitive market analysis). This form shows recent neighborhood sales prices of comparable homes, as well as asking prices of nearby houses currently listed for sale. Then you can add or subtract value for the pros and cons of the home you want to buy, as compared to the recent sales prices.
Please remember you can always raise your offer, but once the seller accepts you can’t lower your offer. Frankly, there is nothing worse than having your first offer accepted, unless you’re sure you didn’t offer too much.
As for avoiding a “lemon” house with significant defects, just include a contingency clause for a professional inspection. Such a clause might read: “This purchase offer is contingent upon the buyer’s approval of a professional inspection report to be obtained at the buyer’s expense within five business days after acceptance of this offer.”
Be sure to accompany the inspector to discuss any defects discovered. Upon receiving the written inspection report, the seller will often pay to have them corrected. Most home sellers won’t lose a sale over minor costs of repair.
However, if the seller won’t pay, you don’t have to approve the report and your purchase is cancelled. For further details, consult your attorney.
Q–I recently listed my home for sale. The Realtor very strongly recommended I include a one-year home warranty as a sales inducement. But the cost will be about $450 to include pool and air conditioning coverage.
I’ve never heard of this warranty idea before. The $450 seems like an awful lot of money and I won’t be receiving any benefit. What should I do?
A–Include the one-year home warranty as a sales inducement. Paying $450 to help get your home sold is very inexpensive.
More important, a one-year home warranty policy protects you and the realty agent from the buyer’s misrepresentation claim when something goes wrong, as it often does, shortly after the home sale.
One-year home warranty policies pay for repairs to plumbing, wiring, furnace and built-in appliances after the home sale. For an additional fee, the roof, air conditioning, pool and plumbing outside the house’s perimeter can be included. Your Realtor can give you details.
Q–I plan to put my home up for sale, hoping to sell it within three months. As you often suggest, I have already interviewed three local agents who sell homes in my neighborhood. They all seem equally incompetent.
However, one charges only a 4 percent sales commission. This will save me several thousand dollars. Do you think I should list my home for sale with this cut-rate discount broker?
A–The best way to check out any real estate agent is to ask for the names and phones of their last three home sellers. Then phone those sellers to inquire, “Were you in any way unhappy with your agent and would you list your home for sale with the same agent again?” You will soon know which agent should get your listing.
My special advice about discount or cut-rate brokers is to investigate especially carefully. Some are excellent. Others are new in the realty sales business and probably won’t last very long.
The big drawback with these agents is many other local agents won’t cooperate with them because of the low commission rate.
Another problem is they often can’t afford to put your listing into the local Multiple Listing Service where the selling agent gets at least a 3 percent commission, leaving only 1 or 2 percent for the cut-rate listing agent. Realty agents can’t survive on such small commissions.
I like the concept of discount brokerage but the implementation has not been successful over the long term in most communities. There are a few local exceptions of which I am aware, but most cut-rate brokerages usually don’t make many home sales.
In any event, whichever agent you select, please don’t sign a listing longer than 90 days unless it has an unconditional cancellation clause.
Q–I am getting ready to sell my home. As I am 82, I figure it’s time to listen to my children (ages 57 and 54) and move to a retirement home even though I am in excellent health for my age.
My daughter, a CPA, suggests I ask my buyer for a 20 percent cash down payment and carry back an 80 percent first mortgage for extra income. That sounds like a good idea to me because I’ll need more income to keep up with the lifestyle at the fancy retirement home where I will be living.
But my daughter says I will have to pay tax on the interest income. Because all my sale profit will be tax-free, thanks to that “over 55 rule” $125,000 exemption, how can I avoid paying tax on the interest income?
A–It sounds like you’re going to have a great time at that retirement home. By carrying back the mortgage on your home sale, you’ll have plenty of money to spend dating those wealthy widows you will probably meet there.
However, your CPA daughter is correct that the interest portion of the monthly mortgage payments you receive will be taxable as ordinary income. Sorry, I don’t know any way to avoid tax on such interest income.
Q–About two months ago, we bought our first home. Since then, we have been deluged with letters, phone calls and even postcards from insurance agents wanting to sell us “mortgage insurance” to pay off our home loan if one of us dies. Is this something we should have?
I have a $300,000 life insurance policy and my wife has a $200,000 life insurance policy. Our mortgage balance is about $175,000.
A–It looks like you are well-protected in case either you or your wife dies prematurely. In my opinion, mortgage insurance is a rip-off, much as credit life insurance is also a rip- off. Carrying adequate term life insurance is a far better choice.
The reason you received so many mailings from insurance agents is they know new homeowners are an excellent source of business. Because you already have adequate life insurance, I see no reason to waste money on mortgage insurance which you probably won’t need.
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The new Robert Bruss special report “How to Maximize Your Tax Deductions from Your Home” is available for $4 from Tribune Media Services, 435 N. Michigan Ave., Chicago, IL 60611. Please allow 6-8 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, 435 N. Michigan Ave., Suite 1400, Chicago, Ill. 60611.
