Q–My husband and I are in our 40s. We are building a new home and selling our old home. We have a lot of investments, plus some office buildings, that we can sell to pay for our new home. Is it wiser to get a new mortgage for 15 years or to sell our office buildings to purchase our new home for cash? If we wait a year or two to sell the office buildings, they might appreciate $100,000 or more in market value.
A–Don’t sell those office buildings without a good reason. A sound reason to sell would be if they’re in a declining neighborhood or if they’re losing market value. But why sell investment property that is appreciating in market value so you can pay capital gains taxes now? That doesn’t make sense.
Before deciding how to pay for your new home, please get preapproved–not just prequalified– for the maximum home loan available. Then you will know how much cash you’ll need from the sale of your old home for the down payment.
Why take a 15-year mortgage on your new home? The interest rate difference between a 15-year mortgage and a 30-year mortgage is slight. I recommend taking a 30-year mortgage with either a fixed interest rate or an adjustable rate mortgage with the interest rate locked in for three, five, seven or even 10 years.
If you want to pay off your new 30-year mortgage quickly, you can pretend it is a 15-year mortgage and increase your payments. If you find the large 15-year mortgage payments too stiff (they are about 20 percent higher than for a 30-year mortgage), you can then fall back to the lower 30-year payments required by your mortgage.
Yes, I know you can save thousands of interest dollars by paying off your home loan in 15 instead of 30 years. But what will you do with those savings? You won’t even notice them. It would be nice not to have any mortgage payments, but that benefit is offset by the risk of having all your eggs (equity) tied up in your idle home equity.
Q–My wife and I are in the market to buy our first home. We’ve spent almost every Sunday afternoon at Realtor open houses. Most agents ask for our names and phone number, but they almost never call to find out if we liked the house or if they can show us others. I’m a salesman, so I know the agents are missing easy follow-up sales opportunities. Why are they so insistent on getting our names if they rarely follow up?
A–Many listing agents don’t like to work with buyers. They prefer to specialize in listing houses instead. That may explain why they don’t follow up.
The reason the sharpest listing agents want your names is to register you with the home seller. If you were dishonest, which I’m sure you are not, and if you were to buy that house after the listing expired, then the listing agent would be entitled to a sales commission if you were registered with the seller during that agent’s listing term. The “safety clause” in most home listings protects agents who register buyers who inspected the house during the listing term.
Q–Last July, we bought our home, which is about 15 years old. Our professional inspector found no evidence of roof leaks but said the house was nearing the end of its useful life. He was right.
In November, a heavy rain with a driving wind caused the roof to leak badly around the chimney and in several other places. We phoned the warranty company that issued our one-year warranty policy at the time of our home purchase. But we were shocked to learn the roof is not covered by our home warranty policy.
The company’s representative said we could have had the roof insured for an additional $150. Do we have any recourse against the warranty company? We went ahead and had a new roof installed at a cost of about $12,500. Shouldn’t the warranty pay at least part of the cost?
A–One-year home warranty policies for home buyers contain exclusions. Although each warranty company offers slightly difference coverage, the normal exclusions are the roof, plumbing outside the home’s perimeter, such as sewer lines, foundation, air conditioning and structural problems. The basic policy usually covers repairs to built-in appliances, wiring, plumbing, furnace and water heater.
For an additional premium, most home warranty companies allow buyers to purchase coverage for all or some of the excluded items. These extra types of coverage often limit the maximum amounts the policy will pay.
In most cases, the warranty company will pay for repairs, but not replacements. Since you didn’t pay the extra premium to include roof leaks, it appears you have no recourse against the home warranty company.
However, all or part of your roof replacement might be covered by your homeowner’s insurance policy. Since you mentioned it was a heavy rain with a driving wind, check with your insurance agent to see what coverage your homeowner’s insurance policy provides.
Q–In early January, we listed our home for sale. Our Realtor suggested we list it slightly below what she estimated our home was worth to stir up buyer interest.
She held a Sunday afternoon open house and “ordered” us to go to a movie, as she said serious buyers don’t like sellers hovering around. When we came back about 5 p.m., the agent had one full-price purchase offer. She said two other agents brought serious prospects who would make purchase offers on Monday.
By Monday afternoon, there were four offers–the Sunday offer at our full asking price, plus three higher offers. We accepted the highest offer.
Now, the first buyers from Sunday are threatening to sue us. They say we had to accept their full-price offer. To complicate matters, they claim we discriminated because they are minority buyers, but we never even knew that until they told us. Our Realtor says not to worry. What should we do?
A–A home seller does not have to accept a full-price purchase offer. The home’s asking price is an invitation for purchase offers at that amount, not an offer to sell for the asking price. That’s basic contract law.
However, those Sunday buyers could make things nasty for you and your agent if they can prove they were illegally discriminated against. Hopefully, they were treated fairly and equally by your Realtor with no evidence of any illegal discrimination, such as being told all offers would be considered by the sellers on Monday afternoon. For further information, please contact a real estate attorney.
Q–I’ve read about nationwide, appreciating home values. Why doesn’t that apply in our situation? We live in a nice suburb where we had our home built for $205,000 about eleven years ago. We have added around $50,000 of improvements and could probably sell it for $255,000 today.
To me, that’s zero appreciation. But our area has a lot of new home construction at prices higher than our home is worth. Do the home appreciation rates in the newspapers consider improvements added by the homeowners?
A–Most reports of home market values use median home prices. Some use average home prices. Median means an equal number of homes sell above and below the median price for the area. The big drawback is the median price can be skewed by a large number of home sales pulling the median price up or down.
But averages are no better because average is the total home sale prices divided by the number of home sales. A few very expensive or very cheap home sales can skew the average home price. Neither median nor average home prices consider cost of improvements added by owners.
When an area has a lot of inexpensive land available for home construction, the market values of existing homes are usually held down. However, in areas with strong home buyer demand and a shortage of buildable land, but little new home construction, resale home prices tend to rise rapidly.
Your residence probably has not appreciated much in market value because your area has a lot of new home construction and because buyers are willing to pay more for new houses than for resale homes.
Q–We own two houses, and we spend about six months a year living in each. If we sell our Florida house for little or no capital gain, can we then sell our other house and use our $500,000 tax-free exemption?
Also, you mentioned that if a principal residence sale falls below the $250,000 limit ($500,000 for a married couple filing jointly), the sale need not be reported to the IRS. I thought they had Form 2119 for reporting home sales?
A–I’ll presume you’ve owned and occupied both homes an “aggregate” of two of the past five years to meet Internal Revenue Code 121 requirements. Each house had to be your “main home” while living there.
If you sell your Florida home at even a slight capital gain and claim your $250,000/$500,000 tax-free exemption, you must then wait at least 24 months before using this tax exemption again on the sale of your other home.
For this reason, if you want to sell both homes now, it might be smart to use the exemption on the sale of the home with the largest profit and to pay the small capital gain tax on the sale of the other residence.
In 1998, the IRS abolished the use of its Form 2119 for reporting the Sale of a Principal Residence. The primary reason is such home sales below the $250,000- or $500,000-profit thresholds no longer need to be reported to the IRS. Home sales with profits exceeding these amounts are now reported on Schedule D of your tax returns. Ask your tax adviser for complete details.
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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.
