Ask Realty Times July 6, 2007 - 7/6/2007 - Mortgage Loan Refinance Debt Equity

Ask Realty Times July 6, 2007

by Peter G. Miller

Answer: There are unknown factors here such as whether values will actually drop, how much they might drop and how long until values reach bottom -- if in fact prices in your community actually fall any further.

We also do not know what will happen with rates -- they could rise or fall. If they rise then a loan at 6.5 percent becomes an asset, a hedge. If rates fall enough, with a 6.5 percent loan it may be time to refinance.

Imagine that you can buy a home with a $200,000 mortgage at 6.5 percent. Your payment over 30 years will be $1,264 per month for principal and interest. If the rate goes up to 7 percent, then your monthly cost will be $1,330. That's an increase of $66 per month or 5.22 percent.

To make things "equal" you could insist that the seller take a 5.22 percent price drop. That's a nice theory, but in practice what really happens is that owners will sell for as much as the market will allow -- and buyers will purchase for as little as possible. When bids and offers meet somewhere in the middle then there will be a transaction -- regardless of what the math says.

So, getting back to your question, you have a locked-in rate. Why not find a house which will serve your needs and hopefully appreciate. If rates go down you can refinance. If rates go up you've got your hedge -- plus a nice place to live.

Question: I'm currently renting in Nevada. Within the next five years I would like to purchase property here. Right now the home prices are pretty ridiculous. I'm hearing buzz that real estate prices in my area will decline within the next two years or so. True? Will the next two years be a good time to purchase property?

Answer: You have raised a very reasonable question. Unfortunately, there is no equally reasonable answer.

No one knows what will happen in the future. "Buzz" is not a substitute for research or a sound basis for investment.

What might help is to spend some time with the local economic development office. Ask about future population and job trends in your community. Speak with active real estate brokers to determine the local areas most likely to be in the path of future growth. Consider how changes in mortgage rates might impact local real estate activity, etc.

Question: Back in February we put our house up for sale. Our buyer wants to move in within 30 days and we want 60 days. Settlement will be in three weeks and I can't find anything to rent. I feel I will lose my house and have nothing.

To tell you the truth, I sold the property. The person that came called the broker to see the house, but they were in front of my house when I got home. They asked me if they could see the house and I, not the broker, showed them the property. What do you think of this?

Answer: There are several issues here.

On the matter of a closing date for settlement, that's something which is established in the sale agreement. If 30 days was not good for you then you should have bargained for more time.

As to the lack of suitable rentals, if you are marketing a home it follows that you should be prepared to move. It's difficult to imagine that in a huge metro area there is no property which would fit your needs, even on a temporary basis.

Lastly, you did not sell the house. You may have physically shown it to the buyer, but did you place the ad or the sign that attracted the buyer? Did you negotiate a written agreement? Did you make certain the buyer was qualified to purchase the property? Did you arrange for closing? Etc.

It was the broker's ad which set in motion a series of events which lead to the sale. You admit you ran into a buyer who went to the property because of the broker's ad. In effect, the broker "introduced" the buyer to the property, one of the steps a listing broker takes to earn a fee.

If you had an "open" or "exclusive agency" listing agreement then you could sell to any buyer who directly contacted you and not pay a fee. But, most probably, you had an "exclusive right to sell" listing agreement which provides that the broker is entitled to a full fee regardless of who sells the property during the listing term. Since the form of listing is a negotiable item, you could have used a different format had you desired a different result.

Question: I am a homeowner in the Northern Virginia area but will be relocating to Houston, Texas, soon. I understand the strained housing sales market in my area and would like to sell my house or lease it through the government as "temporary housing." Is this possible and if so, who would I contact in order to make this happen?"

Answer: You might contact the housing offices on local military bases. They typically have a list of homes available for rent to service personnel.

However, why limit your efforts to government employees? The government is your largest local employer, but most local citizens are employed by the private sector. Speak with local brokers about rental demand and rates -- and also ask about sale opportunities.

Question: I purchased my personal home (condominium) 13 years ago for $104,000. Seven years later I purchased another unit in the same condominium from a bankruptcy court for approximately $50,000 and put it into service as an investment rental. Currently the market value for each unit is approximately $185,000 to 200,000.

Within about 2 years I paid off the mortgage on the investment unit and had income for a few years. Last year I mortgaged the unit and withdrew about $120,000 of equity (most of which I still have) and left about $70,000 equity in the property. The rental income covers about 96 percent of my expenses, having a very small negative.

Here are my problems and the resultant question:

The building's reserve account and financial condition is appalling and I am very worried about having all of my eggs in this one basket. I anticipate another maintenance fee increase (5 times that of other like buildings) or a special assessment. In addition, I'm plain tired of living in the same 500 square feet for 13 years.

Almost all properties within commuting distance of my job have a market value exceeding $380,000. My condo apparently is the only condo in town that hasn't appreciated to this level.

I can't really afford to sell either unit and buy in my areas market. If I sell the investment, I'd never be able to buy another that would carry the mortgage. If I sell my personal unit I'd never be able to buy another that I could afford to pay the mortgage. I perhaps could sell both units and take the amassed equity of both and buy a personal home unit in a better building.

Please tell me how to get out of this building without giving it all up to the IRS.

Answer: If you sold both units you would have a gross of between $360,000 to $400,000, less the $120,000 in equity from refinancing the rental unit. In rough terms, you would have $240,000 to $280,000 in cash from the sales before closing costs and marketing expenses. Take the money from the sales and combine it with almost $120,000 in cash from the refinancing and you could buy a replacement unit for $380,000 with perhaps a small mortgage, perhaps $50,000 and maybe less.

Alternatively, you could rent out the residential unit to gain additional monthly income, though that seems unlikely to produce benefits equivalent to a sale.

As to taxes, there should be no capital gains tax on the sale of the residential unit and long-term capital gains on the sale of the investment property. As well, you would have to recapture depreciation on the investment unit.

For specifics, speak with a CPA or other tax professional and talk with local brokers about the real estate market.

Question: I recently rented a home and thought I smelled gas. I informed the owner and he came out on a Sunday and said there was a gas leak and that he would shut off the gas and would be back to fix the problem. On Friday, I still smelled the gas so I called the gas company to come out and take a look. Needless to say I still had a gas leak, so they shut off my gas and said they wouldn't turn it back on until a plumber came out to fix the problem.

Today is Thursday, the problem has been fixed and the gas company is supposed to come out today to turn the gas back on. My question is: For what should I be compensated? Should the owner not charge me for the days I was living in gas, or from the day I informed him of the issue or only the days I was without hot water?

Answer: None of the above. You should not have moved into the property until the problem was resolved -- then you would have had a far better case for compensation. Not having hot water in the summer is a minor matter when compared with the potential damage which a gas leak can cause.

Natural gas is colorless and odorless, what you smelled is called an "odorant." This is a substance placed in natural gas, a safety feature, so that leaks can be spotted as soon as possible. Teco Peoples Gas offers this advice:

 

• "If you suspect a gas leak, check your pilot lights or see if a burner valve has been left partially on. If you can't find the source, open windows and doors to disperse the gas and call" your local gas company.

   

• "If the odor is extremely strong, leave the building at once."

   

• Call from a neighbor's phone. "Do not use your phone or light any matches. Do not operate switches or electrical devices or pull any plugs from outlets. Any of these actions could ignite gas that may have accumulated."

If I was the owner, in your situation and as a matter of courtesy I would say thank you, apologize for the inconvenience and offer dinner for your household at a nice place nearby.

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.