Q–We bought our home with a 95 percent mortgage and a 5 percent cash down payment. The mortgage company charged us an up-front mortgage fee, plus we pay $68 per month for mortgage insurance. Now we are getting bombarded with letters and postcards from insurance companies wanting to sell us mortgage insurance. Can we switch to a firm that has lower premiums than the $68 we are currently paying?
A–No. You appear to be a bit confused. The type of insurance your mortgage lender insisted upon, for the lender’s benefit in case you default on the mortgage, is called private mortgage insurance (PMI). I’m presuming you don’t have an FHA mortgage that involves a similar type of FHA mortgage insurance.
The $68 you pay each month for PMI insures the loan amount exceeding 80 percent of the home’s market value if you default. This 15 percent is the riskiest part of the mortgage for the lender. When the loan-to-value ratio drops below 80 percent in a few years, you can ask the lender to drop your PMI based on a new appraisal of the home’s value.
The mailers you are receiving are from life insurance companies that want to sell you life insurance to pay off your mortgage if you die. This mortgage insurance policy amount declines as you gradually pay down the mortgage. It is usually very expensive as compared to term insurance, which is the least costly. If you need life insurance, shop carefully because rates vary wildly among insurance companies.
Q–Unlike most of the nation, homes in my town are not selling very quickly. We lost our major employer about two years ago, so there are more homes for sale than there are buyers. I am selling mine due to declining health. Since I own the house free and clear, my Realtor suggests I carry back a second mortgage to help a buyer finance the sale. Is this a good or bad idea?
A–Most home sellers prefer to sell for cash. When that isn’t possible, due to a local economic situation such as you describe, carrying back a mortgage can help sell a home.
The larger the buyer’s down payment, the safer your carryback mortgage will be. If the buyer should default, be prepared to foreclose and either get paid off at the foreclosure sale or get the house back to resell for a second profit. A local real estate attorney can advise you.
Q–About 10 years ago we bought some commercial-zoned land as an investment. We thought it would be good for a shopping center, office building or industrial park, but now the area has been rezoned for only residential use. Since the nearby town is not growing very fast, chances of a residential developer wanting our land are remote because sewer lines have not yet been extended to the area. Do we have grounds to sue for the down-zoning of our land?
A–No. There are no vested rights to existing zoning. The local government can change the zoning, after a public hearing, at any time. No payment to the affected property owners is required unless all reasonable economic use is taken away by rezoning. Ask a local real estate attorney for more details.
Q–Several weeks ago, you mentioned a new tax-deferred exchange method called a Starker exchange. When I phoned the IRS to get more information, they said they never heard of it. It could be perfect for my situation. I moved away from Washington, D.C., about two years ago but still own a small rental building there. Even after hiring a nearby property management firm, I find managing it long distance is a pain. A neighbor wants to buy my building, but I don’t want to pay tax on my profit. Would a Starker exchange work? How can I get more details?
A–Yes, a Starker delayed tax-deferred exchange is perfect for your situation. You can sell your Washington, D.C. rental property (personal residences are not eligible), have the sales proceeds held beyond your constructive receipt in trust by a third party and then use those funds to acquire a replacement business or investment property near your new location. You must designate the replacement property within 45 days after the sale of your old business or investment property and complete the acquisition within 180 days after the sale.
Internal Revenue Code 1031(a)(3) is where you’ll find the Starker exchange rules, but you won’t find the name “Starker exchange” in the tax code. These exchanges are named after T.J. Starker, who, back in the 1970s, was the first taxpayer to successfully complete such a delayed exchange. More details are in my special report, “How To Profit from Starker Delayed Tax-Deferred Exchanges,” available for $4 from Robert Bruss, 251 Park Road, Burlingame, Calif. 94010.
Q–We moved out of our principal residence in November 1997 and rented it since then to tenants. They recently skipped out, so we decided to sell the house because it is too much work to manage it. If we sell now, can we get that new $250,000 tax exemption you often discuss even though we are not living in the house?
A–Yes. The property need not be your principal residence on the date of its sale.
New Internal Revenue Code 121 says a qualified home seller can claim up to $250,000 tax-free sale profits for having owned and occupied the principal residence any aggregate two of the last five years before the sale. If husband and wife file joint tax returns in the year of home sale, they can claim up to $500,000 tax-free profits. Consult your tax adviser for details.
Q–We have sold our home to a buyer who qualifies for a low-income mortgage finance program. His loan has been approved, but it can’t be funded until July 1. Meanwhile, he wants to move into our vacant house and pay us rent. We are cautious about letting him in just in case something goes wrong. Should we let him in?
A–No. Home buyers who are allowed to move in before the title is transferred often find real or imagined home defects. Before the sale closes, the buyer has maximum leverage over the seller to demand repairs or other concessions. The buyer loses that leverage after the sale closes.
Since I’ve heard of so many problems that arise after letting a buyer move in early, without corresponding benefits except the rental income, I cannot recommend letting your buyer move in before the mortgage is funded and the title is transferred. If you do, be sure you have a written rental agreement and that he prepays the rent and a security deposit. A local real estate attorney can provide further details.
Q–We recently bought our first home. Although we reinspected the house with our Realtor two days before the title transferred, when we got the keys we were shocked to discover the sellers took the beautiful dining room and entrance chandeliers. We immediately phoned our Realtor, who then called the seller’s Realtor.
The sellers say they told their agent the chandeliers were not included in the sale since they wanted them for their new house. But nothing was said in the listing or sales contract about the chandeliers not being included. Since the sellers refused to return the chandeliers, we had to buy some for almost $3,000, although we can’t match the quality or desirability. Were we entitled to the chandeliers? If so, what should we do?
A–The law of real estate fixtures is that any permanently attached personal property is included in the sale of real property, unless specifically excluded in the sales contract. For example, drapery rods are bolted or screwed into the wall and are included in a home sale. But the drapes hanging from the rods are not included because they are not permanently attached to the structure.
The same principle applies to your dining room and entrance chandeliers, which the sellers “stole” from you. Since you bought replacements and the sellers refused to return your chandeliers, if a settlement cannot be arranged with the help of the Realtors, take the sellers to Small Claims Court and let the judge decide.
Your situation occurs too frequently. Although you and your Realtor did everything right by reinspecting shortly before the title transfer, your dishonest sellers took unfair advantage of you. If they wanted to take the chandeliers with them, they should have specifically excluded them in the sales contract. Ask your real estate attorney for further details.
Q–I own a commercial building that I recently leased to a new restaurant tenant. With my permission, the restaurant owner is extensively remodeling the building. But he got into a dispute with the electrician he hired and hasn’t paid some of the electrician’s bills. When I saw the electrician yesterday, he said if my tenant doesn’t pay, he’ll put a mechanics’ lien on my building. Can he do this?
A–Please immediately consult a local attorney who is experienced in mechanics’ lien law. In most states, it’s possible for a landlord to avoid responsibility for construction ordered by a tenant. For example, in California where I live, a landlord who learns of construction ordered by a tenant can avoid liability by posting and recording a Notice of Nonresponsibility within 10 days. Since mechanics’ lien laws are different in every state, a local attorney can best advise how to avoid liability in your situation.
Q–I’ve read in your column about land contract property buyers faithfully making their payments to the seller but, after paying the final payment, the seller can’t deliver good title. My problem is just the opposite. I sold some land to a buyer on a land contract. Since he only paid me $1,000 down, I kept the title. He made the monthly payments and paid the property taxes for about a year, but now he’s three months behind due to illness and unemployment. He promised to make up the payments. But I’m still waiting. I finally told him to get out. However, he refuses to leave. What can I do to get him off my property?
A–Your situation shows another pitfall of land contract sales. They are also called contracts for deed, agreements for sale, contracts for sale and a zillion other names. The basic idea is that the seller keeps the title until the buyer makes all or an agreed number of payments to the seller (who keeps up payments on any existing mortgage).
Please consult a local real estate lawyer. Getting a defaulting land contract buyer out of the property is often difficult. Court action is usually required. Exact procedures vary in each state. Because there are so many potential land contract pitfalls, when the seller carries back financing, I recommend using a mortgage or deed of trust instead.
Q–I am planning to sell my apartment building. A local Realtor tells me I should price it at seven times the gross rent. But when I bought it years ago I paid eight times gross rent. What is a fair gross rent multiplier for apartments today?
A–There is none. Smart income-property buyers do not use gross rent multipliers, except as a very rough “ballpark” measurement to see if the asking price is reasonable, because GRMs don’t take into consideration the operating expenses.
For example, suppose there are two identical apartment buildings next to each other. Both are for sale at seven times their gross annual rents. But one owner includes utilities in the rent whereas the other building has separate utility meters and the tenants pay their own. Obviously, the building where the tenants pay their own utilities is the better buy. This example shows why GRMs should not be taken seriously.
A better alternative for setting your asking price is to find out the local net operating income capitalization rate for buildings like yours. Your Realtor should be able to get this critical information from recent sales prices of similar nearby apartment buildings. “Cap rates” are used by smart buyers and sellers to establish fair prices.
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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.
