Ask Realty Times - April 15, 2005
by Peter G. Miller
Question: I made an offer on a property that was $4,000 below market value because the home has a water problem that the seller is not willing to fix. We called around and found a contractor who would fix the water problem for $3,000. I submitted an offer indicating that I will fix the problem myself. The next thing I know, the broker says he received another offer on the property. I had several of my friends call that broker's office and inquire on the home. They were able to schedule appointments to see the home. They were told that there was an offer on the home with a 48-hour clause. One friend was told to put a bid on the house and it would automatically kick that other offer out. I called my broker and explained what I had found out. We submitted another offer, now only $2,000 below market value and again indicated that we would fix the water problem ourselves. Now that seller's broker has counteroffered indicating that we must agree to waive our right to a full house inspection. The problem is I really want this home. What can I do? Answer: It's understandable that you feel strongly about the house. That said, let's look at what you've seen. - Your original bid on the house was $4,000 less than "market value." Plainly "market value" is a debatable number. The seller has no obligation to accept such a bid.
- The seller's broker has disclosed that the property has water damage. That is the proper thing to do.
- The seller's asking price may well already reflect a perceived discount because of the water damage.
- There is a contingent offer on the property with a 48-hour kick-out clause. This means the property has not been sold because there might be a contingency of some sort which has not been satisfied. The contingent agreement likely says that if another offer comes in, the first bidder will have 48 hours to remove all contingencies and go through with the purchase, otherwise the seller can accept a back-up offer.
- Because the property has not been finally sold, it will be marketed to other prospective buyers, which is what your friends discovered.
- You made a second offer on the property. Like the first, the seller is not obligated to accept. You could make other offers.
As much as you like this property, you have to wonder if it's worth buying at the seller's asking price and whether it's in your favor to waive a home inspection. Sellers have a right to make their demands -- and so do buyers. To purchase a home without a structural inspection satisfactory to you when there has been a water problem may mean big repair bills in the future -- with little opportunity for recourse against the seller. Question: We bought the house for $160,000. If we sell for $220,000, is it a straight $60,000 profit? Or does it matter that the house is now mortgage-free? By my calculation, between the principal and all the interest we put in during the first seven years it took us to pay it off, we have actually spent about $210,000. Is this taken into account to then say, that our gains are $10,000 instead? So, the question here is: Does the interest payment figure into the capital gains calculation? Answer: First, you paid off a mortgage in seven years -- that's great. In general terms, the purchase price is equal to the cost of the home plus closing expenses and capital improvements made during your ownership. The sale price is equal to the selling price of the property less marketing and closing costs. Thus you likely paid more than $160,000 to acquire the property and probably will "sell" for less than $220,000. Debt is not a capital gains issue. It does not matter if you buy for cash or finance, or if you owe on the mortgage when you sell or do not owe. The interest you paid was potentially an itemized deduction during your term of ownership, but it's not a factor when determining capital gains. For details, see IRS Publication 523: "Selling Your Home" and speak with a tax pro. Question: We purchased our home with an installment contract. After the contract was paid in full, we were to receive title insurance and a free and clear warranty deed. We received a warranty deed and a lender's title insurance policy. When our property was discovered to be encroaching into a public road we learned we were never given an owner's title insurance policy. What can we do? Now we are uninsured and without a valid title to our property. We will have to spend thousands of dollars in to defend the property. What can we do? Answer: You received a title insurance policy. A "lenders" policy means that there is coverage up to the value of the mortgage. An "owners" policy means that in case of a claim, you are protected up to the value of the purchase price (though some title policies also have an inflation clause). As to the encroachment, if you have been using someone else's property for a given number of years in a manner that is "open, notorious, adverse and continuous" the land may actually belong to you. However, since your encroachment concerns public property, your nearby friendly government can always condemn a portion of the land for its use in exchange for fair compensation. It can do this whether or not there was an encroachment. Are you prohibited from using, or selling the property or any part of it? Has a lender refused to provide a loan? It's possible that you have good, marketable and insurable title because the seller was able to provide title insurance and also that the encroachment is simply not a real problem. For specifics, sit down with a real estate attorney or legal clinic and have them check your title. Question: Five years ago I was under pressure to sell a condo I owned because of an impending foreclosure. The first mortgage was paid in full and the second mortgage lender accepted a lesser amount. Now, three years later, the second loan lender is suing me for the $20,000 shortfall. It was my understanding at the time of closing that the second loan was settled in full. Can they force me to pay? Answer: Who worked out the loan pay-off with the lender -- you or the buyer? Who said it was paid in full? Did you have an attorney review the paperwork before signing? Because you're being sued you have no choice: Take the paperwork from closing and the sale agreement and have it read by a lawyer. If the closing paperwork says all is forgiven, then you should be okay. It may be that the lender has simply lost a file or made an error. However, what you have here is a "short" sale and there is no reason to expect that a lender will joyously and gleefully give up $20,000. Whether the lender has a right to sue is something that the paperwork will determine. Question: How many rental properties are allowed in order for an individual to claim depreciation? Answer: Each property used in business or to produce income must be depreciated. For details, see IRS Publication 946: "How To Depreciate Property". Question: We are selling property by ourselves. We have a contract and a deposit. Since there are no real estate agents involved, who holds the escrow? The buyers are acting skittish and we think they may back out. We are supposed to settle in two weeks. Answer: In a typical transaction, the buyer's deposit is placed in an "escrow" (trust) account established by the listing broker. The money cannot be removed without the written authority of both parties. Does the sale agreement say how the deposit it to be handled? If not, it might make sense to establish an escrow account with a bank that requires the signature of both parties before the money can be removed. However, aside from the deposit issue, how can the buyers become "skittish" and back out if you have a valid sale agreement? If not deposited to this point, can the buyers' check be stopped? Real estate transactions have become increasingly complex. For this reason -- and because of your experiences -- you are best served by sitting down with a local professional.
This column is designed to provide accurate and authoritative information in regard to the subject matter covered. It is made available with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services. If legal services or other expert assistance is required, the services of a competent professional person should be sought. | 
