Ask Realty Times - May 6, 2005
by Peter G. Miller
Question: I listed my house in mid-January at $269,000. The current list price is $239,000. I bought two years ago for $230,000 and added improvements worth $25,000. Between the purchase price, improvements and marketing expenses, I will have a loss at the latest price. The home is being marketed well, the home is priced very well (as many have said), and the home is beautiful (a 115-year-old Victorian that was completely updated). What could be other possible issues? Answer: No doubt the house is beautiful, but if the home were "priced very well" it would have sold. By any chance, is it more expensive than like homes nearby? The usual rule in real estate is that buyers seek the least expensive home in the most expensive neighborhood they can afford. Why sell at a loss? Could you keep the house and then refinance the property to get some cash? Would it make any sense to rent? Unlike investment property, a loss on the sale of a personal residence is not deductible -- see a tax pro for more information. Question: We're in an obviously "hot" market. We recently accepted an offer on our house but the appraisal was $17,500 below the selling price. We just had the house appraised in December and then it was $10,000 more than the current appraisal. What happens now? Isn't there any leeway for appraisers? Just because our neighbors undervalued their properties, is there any way for us not to be penalized by their marketplace weakness? Answer: The current appraisal is $17,000 below the selling price. The December appraisal was $10,000 more than the current valuation. That means the December appraisal was still $7,000 below the current sale price. In neither case does an appraisal support your sale price. The problem is this: Lenders make loans on the basis of the sale price or the appraised value, whichever is less. In this situation, you could ask the buyer to put up more cash, ask the lender for a second appraisal, reduce the sale price or arrive at some compromise. Question: I have rehabbed two houses since 2000 and enjoy it very much. It's a lot of work, as I have to work on them on weekends and after work. Is a home equity line of credit the way to go if I plan on buying another house and want to turn it around in about three months? I have equity in my home of about $80,000 and I need to borrow about $85,000. I have the money in savings but was told it isn't a good idea to write a separate loan every time I buy a house to fix up. Answer: A line of credit on your prime residence would be a smart financing choice -- with a caveat. You should be able to get a home equity line of credit with little or no up-front cost. Because the loan is secured by a prime residence, the interest rate would be lower than with investment financing. As you repay the loan, you would then have funding for other purchases. By not getting a new loan with each investment home purchase, you would save considerably on closing costs. The caveat is this: What happens if a rehab does not work out? A home equity line of credit is secured by your house. If you can't repay the debt your home could be foreclosed. Question: Do builders normally expect to receive list price for a model home, or can you negotiate with them like you would from a normal seller? Answer: You can negotiate. As with any seller, however, a builder has a right to just say "no" until the right offer comes along. Question: My brother and I recently inherited two homes which have been separately surveyed and deeded. The properties are in a trust in which we are co-trustees and there are no other beneficiaries. Rather than a trust, I would like to own one property outright and give my brother the other -- they are roughly equal in value. My brother disagrees. How can we resolve this matter? Answer: Review the trust papers. Under what conditions can the trust be terminated without going to court? Is there a way it terminates automatically? Family disputes can be heated and divisive. Whatever your real estate preferences, you also need to consider the value of your brother's relationship to you. Sometimes there are questions which are just not worth raising, especially if the probable result will be decades of rancor. Question: Can you escape capital gains taxes by refinancing a property prior to selling it? Do you have to pay capital gains taxes on borrowed money? Answer: Capital gains taxes are levied in certain cases when a profit is produced. Money obtained from a loan is not "income," rather it is debt that must be repaid. That the property is financed or not financed is not a capital gains issue. For details, please speak with a tax professional. Question: We are moving into a bigger home, and planning to put our current home up for rent, instead of selling it. Our current home is all paid for. We're trying to decide if we should use the equity from our current home to bring down the mortgage of the new home, and thus have two medium-sized mortgages, or leave the equity in our current home, and just have one large mortgage on the new home. Is mortgage interest on a rental property deductible exactly like that on your primary home? Answer: No. Mortgage interest is generally tax deductible -- however there are limits for a prime residence. For details, speak with a tax pro. Rather than base the decision on tax issues, a better approach would be to see which financing option produces a lower interest cost. Residential financing should be the cheaper choice. Question: My husband and I have lived in our home for 12 years and owe approximately $104,000. My husband would like to sell our home for about $350,000 and bank the profit for about 12-18 months. During that time he wants to rent. He is hoping that the market will drop at the end of the 12-18 month rental period, so we can turn around and buy another home for what we have in the bank. My concern is that nobody knows what the market will do, so I don't feel it's a good idea. What do you think? Answer: You're entirely right -- no one knows what the market will do, including folks who write about real estate. In considering this matter, it might be helpful to contact your local planning office. Is the local population and job base expected to rise in the next two or three years? Will construction keep up if the population and job base do grow? Question: What are the pros and cons of being an investor and having (or not having) a real estate license? Answer: When you buy or sell you would have to say you are licensed, if that's the case. Some might argue that such disclosure is a drawback because consumers might prefer to deal with non-professionals. I don't think there is much substance to such a view. Alternatively, if you have a license you will likely pay a lower fee to sell and get a credit when you buy. You can easily track properties as they come onto the market and brokerage classes should give you a substantial advantage in the bargaining process. As a licensee you can be a principal with an equity interest in the property, or you can act as an agent and participate only in the transaction process. There's also a middle ground, a situation where someone takes the basic class required before taking the sales exam. This class, by itself, can be enormously valuable even for those who elect not to become salespeople. Such courses are a great way to learn the basics of marketing, financing and negotiation. Question: We're members of our local multiple listing service and we are Realtors®, members of the National Association of Realtors. We have a competitor who is neither and yet claims membership in both the local MLS and NAR. What can we do? Answer: Real estate regulatory codes provide that licensees cannot improperly use registered trademarks. The term "Realtor" is a trademark which may be used only by NAR members. Provide written evidence to state regulators regarding misuse and the problem will end. Incidentally, according to the U.S. Patent and Trademark Office, registered trademark #0519789, says the term "Realtor" was first used in commerce on March 31, 1916. It's an expression which "describes the brokerage of real estate, industrial brokerage, farm brokerage, mortgage brokerage, in the appraisal of real estate, management of real estate, in the building of structures on real estate, in the subdivision of real estate properties, and (for consultative and advisory services) in community planning for the development of raw land and slum clearance areas."
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