Q–My wife and I are in the process of buying a brand-new house for $210,000. We are now shopping for insurance. I called one agent, and he recommends insuring for $208,000. But the “no name” insurance company recommended by the home builder recommends insuring for $158,000. Their “replacement cost” policy will pay up to $246,000 maximum for a total loss, including building code compliance. This company has been in business more than 50 years. The difference in insurance premiums is about $200. Our mortgage will be for $50,000. Which insurance company should we choose?
A–Unless you and your wife made an incredible, below replacement-cost purchase of that brand-new house, I am shocked that first agent would recommend insuring your $210,000 brand-new house for $208,000. That would be a gross violation of state law in your state (California) and in most other states, which prohibit overinsurance because it encourages arson.
Don’t waste money overinsuring your home. Much of the cost of buying your home is in the land value, which won’t burn in a fire. Obviously, land value should not be insured. Since the “no name” insurer will provide a guaranteed replacement cost policy up to $246,000, you should be well-protected in the event of a total fire loss.
If the “no name” insurance company has a good rating by the major insurance rating firms and if you will have a local insurance agent where you can file any claims, I suggest you go with the “no name” insurer.
Although it doesn’t apply in your situation, I should add that the mortgage balance has absolutely nothing to do with the amount of homeowner’s insurance needed. What matters are (1) the structure’s replacement cost, (2) the insurer’s rating for financial stability, and (3) your contact with their local insurance agent to file a claim, if necessary.
Q–In 1996 I bought a lot in a Florida golf and country club. I was told it was a premier golf community and the resale value would be outstanding. Although I do not play golf or desire to use the club, I was intrigued by the assurance of the resale value. I bought the lot for $66,000 and took a $53,000, three-year balloon mortgage. I intended to live on the property. I took the social membership for $525 a year dues.
In 1997 I got a job promotion and moved out of state. Since then, I have had my lot listed for sale. My annual social dues have now risen to an outrageous $2,111, and I even have to pay $192 per year for my lot to be mowed. Somehow, I have incurred more than $7,500 in debt to the club and have been banned for nonpayment. The fees are excessive and continue to increase. I want out, but I can’t sell my lot because no more golf memberships are available. I hired an attorney with no results so far. What can I do?
A–Your situation shows what can go wrong when buying at a new speculative development, where property owners must belong to the club. You should have known to never believe sales talk, called “puffing,” such as projections of future value. Why you would buy in a golf community if you don’t play golf is hard to understand.
Bite the bullet. Sell the lot for whatever you can get and move on with your life.
Even if you have legal recourse against the developer for nondisclosure of all the fees, the small amounts involved are not worth fighting about. I’m sure there was no guarantee against future fee increases. Your lawyer’s fees will probably be greater than any potential recovery from the developer for misrepresentation.
Q–In 1965 I bought a lot and built a house in a small subdivision of five lots. I was told the public road was privately maintained. Two of the other lots have houses on them. Neither of those owners wants to pay for street repairs, which are needed badly.
One house is now for sale. I called the seller to ask if she disclosed the road situation with the listing Realtor. She was unhappy with that conversation. Since there is no homeowner’s association, what should be done to fix the road and to inform the new buyer of the situation?
A–It is unfortunate that whoever developed your subdivision didn’t provide for future street maintenance. First, check with the city or county to verify who owns the road and who is responsible for its maintenance. The house where I grew up had a similar situation. My father investigated and learned the city was obligated to maintain our little one-lane, three-house public street. As a result, the city repaved it.
Second, if the five lot owners are responsible for street maintenance, have an informal, friendly discussion about how to pay for street repairs. This is an ideal time to do so before that house is sold. Emphasize that proper street maintenance will probably increase home values and salability. Also, notify the listing realty agent in writing of the situation so prospective home buyers will be informed.
Q–Your recent explanations of the “aggregate” two years during the last five years before a principal residence sale to claim the $250,000/$500,000 exemption were greatly appreciated. Please clarify what proof the IRS will accept for the two-year requirement. Will five annual five-month periods during the last five years suffice, and can the two-year periods run simultaneously for two “main homes?”
A–You can only have one “main home” at any time. For example, if you live in your Florida home five months each year, that is your “main home” for those five months annually. If you spend most of your time at your other home and occasionally visit your Florida home on weekends or perhaps a week or two at a time, your Florida home is not a “main home.”
The IRS has not specified, upon audit, what “main home” proof is required. Just in case, save all evidence of occupancy, especially utility bills, driver’s or auto licenses, voting records and expense receipts.
Internal Revenue Code 121 requires only an “aggregate” two-out-of-the-last-five-years ownership and occupancy. Five months per year for five years should qualify. However, the IRC 121 principal residence tax exemption can only be used once every 24 months. For full details, please consult your tax adviser.
Q–Last year my wife and I wanted to sell our investment property on an installment sale, but the buyers wanted to pay us cash. So, we elected to pay the entire taxes on our 1999 income tax returns. However, in a column back in 1990, you wrote that it is possible to set up an escrow account so the property sellers can have an installment sale but the buyers can pay the entire property purchase price into the account. I phoned title companies and real estate trusts listed in our yellow pages, but they couldn’t help. Where could we have set up such an escrow account?
A–I am impressed that you saved my installment sale column written back in the “dark ages” of 1990. Most banks that have trust departments would have been glad to accept your buyer’s full payment for your property and would have paid you during the years of the installment sale, plus interest, so you could claim installment sale tax deferral.
The key to such a tax deferral trust arrangement is that you have no right to receive the cash held in trust before the installment payments are due to you. For further details, please consult your tax adviser.
Q–When we bought our home in 1974, the sellers carried back a $24,000 second mortgage. In about 1985, we refinanced and paid off their second mortgage. Now we want to sell our house. Our problem is the second mortgage showed up on the title report as being unpaid. Unfortunately, we can’t find our refinancing records to show that $24,000 was paid off in 1985. The title insurance company insists on holding back $24,000 plus interest from our home sales proceeds, but we need that money to buy our next house. We have no idea where our 1974 sellers have moved. What should we do?
A–Your situation is not that unusual. When I bought my home, my sellers had a similar circumstance. Fortunately, they were able to find their sellers and obtain their signatures on a trust deed of reconveyance (a mortgage satisfaction is used for mortgages).
Since you are unable to locate your sellers and former second mortgage holders, nor are you able to prove you paid off their mortgage, the legal solution is for you to bring a quiet title lawsuit. You’ll need a real estate attorney.
Unfortunately, such a lawsuit will take several months, considering the time to publish legal notices and bring the case to court even though there is no opposition. Your circumstances show why it so important for homeowners who pay off their mortgage or deed of trust to be certain their lender records the appropriate document to clear the title of the encumbrance.
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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.
