Ask Realty Times January 5, 2007 - 1/5/2007 - Mortgage Loan Refinance Debt Equity

Ask Realty Times January 5, 2007

by Peter G. Miller

Answer: You have a seller with a home under contract. That contract, whatever its terms, is an agreement between the property owner and a buyer.

In this instance, the buyer has 10 weeks to resolve a contingency. That essentially gives the buyer a 10-week option. As a seller this would not be attractive to me unless the buyer also paid a non-refundable deposit or there was a kick-out clause.

With a kick-out clause a buyer says I'll buy the house but only if I can meet a given condition -- say the sale of my house. The seller says that's great, but if I get another offer that I like then you'll have so many hours (say 72) to either eliminate your contingency or lose the deal.

If the agreement between the buyer and seller does not have a kick-out clause then you -- as another buyer -- cannot magically add one. The present contract is as it is and if the seller did not put in a kick-out clause then that option does not exist.

Question: I started working as a sales associate in August. I was a bartender before I started. I sold one house in November. I quit bartending and started a part-time serving job to pay my bills. I have been told that to pay taxes I must set aside 30 percent of each sale.

Will I get money back for this last year I bartended? Because I've only sold one house this year, will the government expect a full 30 percent of the commission I earned? When do I have to pay taxes? Where do you suggest filing my taxes?

Every penny counts right now and it doesn't seem right with my limited income that I have to have to pay 30 percent of one sale commission for this year.

Answer: Let's look at these questions individually:

Will I get money back for this last year I bartended?

I don't know. It depends on your total net income from all sources during the year and the state where you live -- several states do not have an income tax and you could be under the federal reporting minimum.

Because I've only sold one house this year, will the government expect a full 30 percent of the commission I earned?

Your commission represents gross income. From that amount you must subtract your business expenses. What's left may be subject to a tax, depending on the amount involved. It's entirely possible that your tax rate could be lower -- however you must also pay a self-employment taxes. Combine self-employment and income taxes and you can easily pay 30 percent of your income in taxes.

When do I have to pay taxes?

As a real estate agent you are likely an independent contractor. You are typically required to pay estimated taxes on a quarterly basis and you should send a final accounting (and often a check) on April 15th (though extensions to file are available).

Where do you suggest filing my taxes?

To find out about state taxes, contact your state government. For federal tax information, go to IRS.gov or call 1-800-829-1040.

Question: I just purchased a home for $86,400. The mortgage lender was talking like he was saving me money on my loan. At closing, I found out that he gave me two loans, one for $71,400 at a high interest rate and a interest-only loan for $15,000. I didn't know this until closing. The loan was sold to a different lender at closing. Should I wait to refinance, or should I refinance with the first loan so I can have one 30 year fixed-rate loan? There is a prepayment penalty: Does that mean I have to pay $5,000 dollar no matter when I refinance?

Answer: Your first step should be to look at the good faith estimate of closing costs and other paperwork to see whether the lender delivered what was promised and that all terms and conditions were disclosed.

Did this lender offer you an interest rate that's different from the rate you actually received? Did you lock in a given rate and get another rate? Did you not know that you would be getting two loans?

If you want additional help, please contact the consumer affairs division of your state attorney general's office and ask them to review the transaction.

As to the prepayment penalty, is it $5,000 for one loan or $5,000 for each loan? Is there a period after which it does not apply? Please read your paperwork for specifics.

By any chance, do you have poor credit? If yes, have you spoken with a community housing organization? Go no further with refinancing until you have spoken with a housing counselor.

Question: I offered $1.1 million for a home. A few days passed and I thought my offer was being considered by the seller. My agent then told me that another offer had been accepted for $1.05 million. Both my agent and I were stunned that another offer had come in, seemingly out of the blue, seemingly designed to just barely beat my offer.

My agent soon thereafter told me that he had heard through the grapevine that the seller's agent had informed another buyer of our offer, enabling this other buyer to exceed our offer amount. My agent also thought that the buyer who had been given this advantage was represented by the seller's agent.

Is there any action that I can take at this time against the seller's agent, who seems to have acted unfairly and unethically in this case? If I can document my original offer can I ask the seller's agent to explain why the seller sold this house for less than I offered?

Answer: A seller need not accept the highest offer for a property. Why? Because price is only one part of an offer. There are other elements to consider such as the amount of the deposit, the proposed date of settlement, any required seller concessions, inspections, the buyer's financial qualifications, what goes and what stays, the division of closing costs, etc.

What a seller cannot do is reject your offer for discriminatory reasons such as your race, faith, gender, nationality, etc. However, you have not suggested that discrimination is an issue in this situation.

You say your agent "heard through the grapevine" that something was amiss in the transaction. Could this be nothing other than sour grapes? What hard evidence and documentation does your agent have?

The owner took several days to respond to your offer. Would not the owner benefit by waiting to see if a better offer was made, especially in a sellers market?

Could you have made an offer that terminated automatically in 24 hours? Would this have pressured the seller to accept your bid?

No one likes to lose a home after making a purchase offer, but when there are multiple offers it's inevitable that one or more bidders will walk away empty-handed. This does not mean anyone acted unfairly or unethically, it only means that with one property and several offers the unavoidable result is that some bids will fail.

Question: My father, age 82, has asked if I would like to purchase his home, a property worth $185,000. I believe it's in his interest to sell and rent back for his lifetime. He's tired of maintenance and costs and believes a sale may lessen his burdens give me tax benefits, avoid problems with nursing homes and probate, etc.

Upon his death I would likely move into the home or rent out after needed improvements were performed. I am not aware of his current will details, but likely the home would pass to me upon his death.

Would you have him sell to me for $1, sell for market value, purchase outright, have him sell and take back a loan, etc?

Answer: None of the above.

Your father should speak with an attorney who specializes in elder law before doing anything. He needs both a will and a living will so he can direct the disposition of his assets in his estate and assure that if incapacitated he is treated as he prefers.

He might, for example, give you the house but create a life estate so he can remain in the property as long as he wants. He will then need to file IRS Form 709 to show that the transfer was a gift. There likely is no tax on the gift because we each have a $1 million lifetime gift allowance in addition to the right to gift $12,000 per year. See a tax professional for specifics.

He could sell the property to you for its fair market value, take back a mortgage and get an income from you each month -- and then forgive any remaining debt at the time of his death. You, in turn, could rent the property to him for a fair market rental value -- and then give him a $1,000-a-month gift to offset his rental costs. This seems both plausible with the right paperwork and complex.

Your father could make you a "joint tenant" in the property with a right of survivorship. Upon your father's death the property would be yours without probate -- see an attorney for details.

Or, he could get a reverse mortgage, keep the property, get a monthly income and will the house to you -- you would likely have to sell the property to pay off the reverse mortgage. Under no condition should he consider a reverse mortgage without the help of an independent attorney, nor should he accept a reverse mortgage with an equity kicker -- the right of the lender to claim some of the home's appreciation in addition to fees and interest. Upon his passing you would likely have to sell the property to pay off the reverse mortgage or else obtain replacement financing to cover the debt.

Lastly, 82 is hardly old in today's world. At age 89, my father was a CPA and drove an Alfa Romeo ... . While you and your father are right to plan for the future, the future may be a long way off.

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.