Q–I’ve heard several radio ads for 125 percent “bill consolidation” home loans. They sound very attractive. What’s the catch?
A–These new mortgages are made both on the basis of your home’s market value and your credit history. They are really combination real estate and personal loans.
Since they are very high-risk mortgages for the lenders, the interest rates are high, too. The lowest interest rate I’ve seen is 11 percent and the highest is 16 percent.
Overfinance, high-ratio mortgages are advertised as “bill consolidation” loans so they sound more affordable than the 18 to 22 percent interest rates credit cards and department stores charge. But the catch is that these new loans are long-term, for 15 to 30 years, so the borrower will pay more total interest than for shorter-term credit card financing.
The big unknown with these high-risk loans is how many homeowners will take out these overfinanced mortgages and later “walk away.” To minimize this risk, borrowers must have very good credit, so their probability of default is low.
Q–I am considering purchasing a beautiful 40-acre land parcel near a major highway. It is zoned agricultural, but can probably be rezoned to commercial for a strip shopping center. My problem is that the only mortgage I can obtain is for just 55 percent of the purchase price. The bank that foreclosed on the land is the seller. What do you think of a situation like this as an investment?
A–Of course, I can’t give an opinion on a specific investment. But in general, vacant land investments are considered very high risk, for many reasons. These include: little or no income production, high carrying costs, the expense of development to produce a profit, and limited buyer demand.
There’s probably a good reason the previous owner defaulted and let the bank foreclose on its mortgage. Since the lender will only loan 55 percent of the sales price, that tells you the lender realizes the land you are considering is a high-risk situation. Unless you can financially handle such a risk, and have experience developing strip shopping centers, I suggest you buy less risky realty investments such as rental houses.
Q–As a mortgage broker for the last 11 years, I fear you paint too negative a picture for home buyers who have bad credit. Today, we can finance virtually any home buyer, no matter how bad his or her credit history. Of course, those with poor credit will pay higher interest rates than those with excellent credit. But there are now lots of mortgage lenders seeking the B, C and D quality mortgages, because they are willing to take the higher risk in return for high interest rates, currently 10 to 15 percent.
A–Thank you for reminding us that mortgage money was never more abundant than it is today. As I often suggest, home buyers should get preapproved (not just prequalified) for a home loan before they shop for a home to purchase. By knowing the maximum mortgage available, buyers can shop with confidence they can finance their home purchase.
Q–Last year I bought 15 acres. There were two entrances. One is a dirt road that’s flooded much of the year. The better dirt road has a utility easement over a neighbor’s land, but he recently erected a fence across it because he doesn’t like the neighborhood teens drinking and leaving beer cans there. He refuses to remove the fence so I can reach my land where I want to build a house. What should I do?
A–Consult a local real estate attorney. When you bought your land, did it include an easement to use that utility easement road over your neighbor’s land? Check the deed. If you own such an easement, you may have to get an injunction stopping the neighbor from erecting a fence to block your access.
If your deed did not include such an easement, and your landlocked property is not otherwise reasonably accessible, you may have legal rights to an easement by necessity. However, you’ll need to prove past common ownership with the parcel over which you claim an easement by necessity. That’s why you need a real estate attorney.
Q–When we obtained our new mortgage, we were given the option of paying our property taxes directly or having an escrow account, whereby we pay one 12th each month. We were told we could discontinue the escrow account with no problem. We found the lender was overcharging us about $100 per month and we now want to cancel the escrow account, but the lender refuses to do so, claiming we can’t terminate the account. This is not only infuriating but unfair. What can we do?
A–If you have a VA, FHA or PMI (private mortgage insurance) mortgage, it is virtually impossible to cancel an escrow impound account for property tax and fire insurance payments.
I’ll presume you don’t have such a mortgage. Lenders hate to let go of escrow accounts. A few states require very low interest “petty cash” payments to borrowers on those funds.
Speak to a loan service supervisor. If necessary, write and phone the lender’s president until you get results. You might even need to retain a real estate attorney to get that escrow impound account canceled.
A–I’m negotiating the purchase of a commercial property that the seller is offering for sale “as is.” What protections can I get to avoid surprises such as plumbing, wiring and structural problems? Is there a warranty policy available for commercial properties like there is for homes?
A–An “as is” real estate sale means the seller makes no warranties or representations and will not repair any defects. In most states, “as is” sellers must still disclose known defects.
Ask a real estate attorney to prepare your commercial property purchase offer. Be sure it is contingent on your approval of a professional inspection report. After the seller accepts your offer, you then have an opportunity to use “due diligence” to discover any defects in the property, since “as is” really means “buyer beware.” I am not aware of any commercial property warranty policies like those on houses.
Q–Your illuminating comments about the 1997 Tax Act and the abolishing of the “over 55 rule” $125,000 home sale tax exemption were of special interest. We took advantage of this tax break about nine years ago. Since we may profitably sell our current home soon, can we also use the new $250,000 ($500,000 for married couples) home sale tax break in the new law?
A–Yes. Forget the past. If you used the old, now repealed “over 55 rule” $125,000 home sale tax exemption, you are still eligible for the new exemption.
However, you must own and live in the home at least two of the last five years before its sale. Uncle Sam doesn’t care that you previously claimed the $125,000 tax exemption on a prior home sale. But the new tax break can only be used once every 24 months.
Q–In November 1996, two months after we got married, my husband and I bought a new home. Each of us owned and lived in our own houses before marriage. To qualify for our new mortgage, the lender required us to sell or rent our houses. We rented his house to tenants. My house finally sold in March. His is rented at a $25 per month loss. The lease is soon up for renewal. If he sells his house, can he use the new $250,000 home sale tax exemption? Can I use it on the sale of my house?
A–Since your house sold in March 1997, well before the 1997 Tax Act’s retroactive effective date of May 6, 1997, your sale is not eligible for the new $250,000 home sale tax exemption. However, your home sale is eligible for the old “rollover residence replacement rule” of Internal Revenue Code 1034 if you bought a replacement home of equal or greater value within 24 months before or after the sale.
As for your husband’s house, since he presumably meets the two-out-of-five-year principal residence ownership and occupancy test, he can claim up to $250,000 tax-free profits on the sale of that house. Be sure to consult your tax advisor because, as you can see, there is nothing simple about the 1997 Tax Complication Act.
Q–Can I make a tax-deferred exchange of two (or more) rental houses I own for one more expensive rental house? I can’t find anything in Internal Revenue Code 1031 about this.
A–Yes. There is no limit to the number of qualified business or investment properties on either side of a tax-deferred exchange. However, you’ll need to meet the basic requirements of trading equal or up without receiving any taxable “boot” (unlike-kind personal property), such as cash or net mortgage relief.
But chances of finding a seller who will take your two rental houses in trade are virtually zero. A better alternative is to make a Starker IRC 1031(a)(3) tax-deferred “delayed” exchange. That means you sell the houses, have the sales proceeds held by a third-party intermediary beyond your constructive receipt, and use the proceeds to buy the qualifying larger rental house. You have 45 days to designate the property to be acquired and 180 days to complete the purchase.
Q–I paid about $100,000 for my house. It should sell for around $250,000. Am I correct that, under the 1997 Tax Act, I do not have to fool with declaring the capital improvements I added since my profit is obviously less than $250,000? Will I need to declare the approximate $10,000 tax-deferred profit rollover from the sale of my previous home? This still will not push me into a taxable amount. Why do I think you’re going to tell me to save everything because one never knows when the tax laws will change again?
A–As of this writing, the new IRS Form 2119 for reporting the 1997 Sale of Residence is not yet available. There are so many possible tax consequences, depending on the sale date and the seller’s decision whether to use the pre- or post-Aug. 5, 1997 tax breaks, or the aspects of the new law that are retroactive to May 6, 1997.
Although it appears you will not owe any tax on the sale of your principal residence, you will probably have to report the sale anyway on new IRS Form 2119. Please consult your tax advisor after the new tax forms are printed by the end of 1997.
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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.
