Q–My husband and I just started looking for a home to purchase. We’ve been visiting Sunday afternoon open houses. Several of the realty agents have asked us, “How much do you have for the down payment?” and “Have you been prequalified for a mortgage?” We evade answering because we figure it’s none of the agent’s business. Our fear is that if the agent knows how much we can afford, we’ll be overcharged. Also, we thought we should find the house first and then get the mortgage. Are we going about home buying the wrong way?
A–The first step for home buyers should be to get preapproved (not just prequalified) for a home loan. Your bank or other home mortgage lender will be glad to preapprove your mortgage, usually at no charge. Then you will know the maximum price, including down payment, you can afford for a home.
As for the realty agents inquiring about your down payment and mortgage amounts, they’re just trying to avoid wasting their time with unqualified home buyers. Many prospective buyers aren’t qualified; the real estate agents want to work with only serious buyers.
After you are preapproved for a mortgage, then you will know your price range and can honestly tell the realty agents “Don’t worry. We’re already preapproved for a home loan.” This makes you a hot prospect for a home purchase. But you don’t have to disclose the maximum mortgage you can get if you don’t want to.
Q–My son and daughter-in-law are talking about buying a home, but they can’t afford a decent house in the area where they want to live. Would a mobile home be a good investment for them as a first home until they build some equity?
A–No. Mobile homes can be comfortable, economical places to live, but they have not proven to be great investments. They usually depreciate in market value, much like your car depreciates as it gets older.
In rare circumstances, such as where there is a shortage of mobile home spaces available, existing mobile homes appreciate in value. Another problem can be financing the sale of older mobile homes. They definitely are not great investments, as are most single-family houses.
A better first home alternative for your son and daughter-in-law might be a sound, well-located, well-managed condominium.
Q–My mother is dying of cancer. Her doctor gives her about six months to live. She owns her house and a small apartment building, which I manage for her. Her will says these properties will go to my sister and me. We’ll probably sell them. Our mother keeps asking if we want her to sell the apartments now. You said something once about not giving away property before death, but I don’t recall the reason. Please clarify
A–When real estate has appreciated in market value, it is usually best to inherit the property rather than receive it as a lifetime gift before the owner dies. The reason is the heir receives real estate by inheritance with a new market value stepped-up to market value on the date of death.
For example, suppose your mother’s basis for that apartment building is $100,000, but it is now worth $200,000. If she deeds it to you and your sister, you take over your mother’s low $100,000 basis. However, if you inherit that building with a $200,000 basis and sell it for $200,000, you’ll owe no capital gains tax. Please consult your tax advisor for details.
Q–In April 1993, I moved from New Jersey, where I’d owned my home since 1961. In May 1996, we bought a house in another state. How does the new tax law affect me, since I haven’t lived two out of the last five years in the New Jersey house I’m now selling? I continue to pay its mortgage from a New Jersey bank account, maintain voter registration in that state and make frequent visits there. I am over 65. The house should sell for $155,000. I paid $17,000 for it in 1961.
A–If that New Jersey house is no longer your principal residence, you are committing voter fraud by still voting there. I presume it is a rental house or vacant. It definitely is not your principal residence.
Your age makes no difference for the 1997 Tax Act’s home sale tax exemptions. Since your New Jersey house has not been your principal residence since April 1993, you clearly flunk the 1997 Tax Act’s requirement of owning and living in it at least two out of the last five years.
Therefore, you can’t qualify for the $250,000 ($500,000 per qualified married couple) home sale tax exemption. Your sale profit will be taxed at the new 20 percent long-term capital gains tax rate. Please consult your tax advisor for full details.
Q–You’re probably tired of questions about the new tax law. Can you stand one more? Several years ago we sold our home and carried back a $60,000 second mortgage. We’ve declared the interest income and paid tax on it as ordinary income each year. In December, the principal balance balloon payment comes due. Can we use the new 20 percent capital gains tax rate on our profit or do we have to pay tax at the 28 percent tax rate?
A–In the last six weeks, about 80 percent of my mail has been about the 1997 Tax Act. It’s a fresh topic. I love those tax questions, but will try not to bore readers by using too many of them.
Yes, the tax law in effect when an installment sale principal payment is received is the one that applies. When you sold your home, your tax advisor probably made an installment sale calculation. It determines how much of each principal payment received is taxable capital gain. The balance is tax-free return of capital investment.
Apply this percentage to your $60,000 principal payment when you receive it. For example, if your profit was 40 percent, then $24,000 of your $60,000 payment received is capital gain taxed at the new 20 percent rate. The balance is tax-free. Ask your tax advisor for details.
Q–Several years ago, I moved away from Washington, D.C., where I own an apartment building. Thinking I might move back to the area someday, I kept the building and hired a so-called professional property manager. Since then, I’ve had four different companies manage my building. The latest was doing a good job keeping the building full at good rents. But the August check to me bounced. When I called the firm, I got a recording. Fortunately, my check cleared on redeposit. Nobody responds to my messages. What should I do?
A–It’s time for you to pay a personal visit to your property manager to find out what’s happening. A professional property manager’s check should never bounce because rents must be placed in a trust account, which should always have sufficient funds.
If the property manager is not returning your phone calls, he or she probably isn’t properly managing and maintaining your building. Only a personal visit will enable you to discover the facts. Your situation shows why I do not recommend absentee ownership.
Q–My husband and I just started looking for a home to buy. We’re expecting our first child in January; we’re motivated home buyers because we don’t want to raise a baby in an apartment. But how can we avoid overpaying for a home? We’ve looked at several homes in the same neighborhood and found vast differences in asking prices. How much below the asking price should we expect the seller to sell?
A–Forget the asking price. That’s the seller’s “dream price.” The true market value of the home you want to buy is determined by the recent sales prices of comparable nearby homes.
Before you offer to buy a home, ask your real estate agent to prepare a written CMA (comparative market analysis). This is the same form the listing agent probably gave to the seller at the time the home was listed for sale.
A CMA shows recent sales prices of comparable nearby homes, the asking prices of similar neighborhood homes currently listed for sale, and asking prices of recently expired listings of nearby homes. Armed with this information, you can arrive at an intelligent offer price on the home you want to buy.
There is no rule of thumb as to how much below an asking price a home can be purchased. I’ve seen homes sell far below their asking prices. But I’ve seen others sell for their full asking price, sometimes even above their asking price.
———-
PLEASE NOTE: Real estate laws vary from place to place. Be sure to check the laws of your state and municipality before making decisions on real estate matters.
Write to Robert Bruss at Tribune Media Services, 435 N. Michigan Ave., Chicago, Ill. 60611.
