Real Estate in Steamboat

Q: I recently had laminated flooring put in an apartment. When the workers finished installing the floor, they painted the walls. But when they painted the ceiling with a roller, little dots of the oil paint splattered all over the floor.

How do I remove these paint spots without scraping the floor or otherwise marring the finish?

A: Drop cloths are wonderful things. If your painters had exercised a little more effort and spent a little more time, you would not have to fix the results of their laziness.

In building and remodeling there’s a definite order to things. In this case it would have been wise to paint before putting in the laminate. Any nicks or scratches made when the floor was installed can easily be touched up before showing the apartment.

But since that is not the case, before suggesting ways to remove the specks, allow us to digress and explain the proper way to prepare a room before painting so that paint gets on the walls and ceiling, not where it doesn’t belong.

Judicious use of masking tape, plastic and drop cloths can eliminate the need to clean up spilled paint. Use blue painter’s masking tape to ensure a crisp line between a surface to be painted and another surface like a cabinet or baseboard. The blue tape is moisture resistant and will not stick to a surface if you get a little paint on it.

Tape plastic sheets over cabinets and countertops so that no paint specks get on them when rolling out the walls or ceiling. Finally, cover the entire floor with drop cloths. Even though they are a bit expensive, we prefer cloth drops used by professional painters. Plastic drops work, but we’ve found that it’s just too easy to slip on them. Also, plastic is for one-time use, then it’s off to the landfill. Heavy-duty cloths can be used over and over again. For added protection, use masking paper at the perimeter of the room. This makes doubly sure that no paint gets on the edges of the floor.

To remove the specks, we suggest you use a graduated approach, starting with mild cleaning agents and working up to solvents if necessary. First, dissolve a handful of trisodium phosphate (TSP) in a pale of warm water. Dip a Scotch-Brite pad in the solution and scrub. It may take a couple of tries, but this should remove most of the paint. For more stubborn marks, a Scotch-Brite pad is also the tool, but use a small amount of paint thinner as the cleaning agent. This should do the trick. This process will take some time and some elbow grease, but with patience, we’re confident you’ll get the job done.

As a last resort, try a small amount of acetone or lacquer thinner. Be careful here, though, as it could dull or mar some finishes. Test this method first on a leftover piece of the flooring or in an out-of-the-way place.

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Copyright 2006 Bill and Kevin Burnett

John Dubois and Timothy Prindable lived in a Honolulu condominium on the beach at Waikiki, across from Kapiolani Park and near Diamond Head. The condo by-laws say, “No animals … shall be permitted on the premises, except that qualified individuals with disabilities may have assistance animals.”

In January 2000, Dubois brought home “Einstein,” an English bulldog. Dubois and Prindable submitted to the association several letters from doctors recommending they be allowed to keep Einstein for “medical reasons” but without further details.

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Upon request by the homeowner’s association, they submitted letters from a behavioral medicine specialist and two doctors stating Prindable suffered depression and he would benefit from animal-assisted therapy.

The condo homeowner’s association then granted Dubois and Prindable temporary permission to keep Einstein, pending review of Prindable’s medical condition.

However, Prindable then filed a housing discrimination complaint against the condo owner’s association with the U.S. Dept. of Housing and Urban Development, which referred the matter to the Hawaii Civil Rights Commission.

But rather than await the results, Dubois and Prindable filed this lawsuit, alleging discrimination.

If you were the judge would you rule the condo homeowner’s association discriminated against Dubois and Prindable?

The judge said no!

The condominium homeowner’s association did not deny the request of Dubois and Prindable for a reasonable accommodation of service animal Einstein, the judge began.

“The Condominium Association never required Einstein to leave and thus never refused to make the requested accommodation, which is one of the essential elements of the Fair Housing Act claim. Dubois and Prindable kept Einstein from the day they brought him home in January 2000 until the day they vacated their unit in September 2003,” the judge emphasized.

The homeowner’s association requested more medical information from Prindable, and that was not unreasonable to verify that an exception to the no-pets rule should be made to accommodate Prindable’s condition, the judge concluded.

Based on the 2006 U.S. Court of Appeals decision in Dubois v. Association of Apartment Owners 2985 Kalakaua, 453 Fed.3d 1175.

(For more information on Bob Bruss publications, visit his Real Estate Center).

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Copyright 2006 Inman News

DEAR BOB: My mother-in-law recently passed away. My husband and his sister recently went to a lawyer and were notified that she is still considered a co-owner of the house despite her passing. How can this be? Her will says the two children (my husband and his sister) are to split everything 50-50 –Joanne K.

DEAR JOANNE: When a real estate owner dies, the title to the realty he/she owned before death remains in his/her name. To transfer title, action must be taken. Change of title is not automatic.

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If your mother-in-law held title to her house and other major assets in her revocable living trust, it would be a simple matter for title to be transferred by the successor trustee (such as your husband or his sister) to whomever is designated in the living trust to receive each asset.

You said your late mother-in-law left a written will giving her properties to her two children, your husband and his sister. To transfer title, the will’s executor must petition the local probate court to distribute the estate assets according to the terms of the will.

The probate court will make certain the deceased’s creditors are first paid from the estate assets. In most situations, this can take six months to several years, depending on complications of the estate.

Your husband and his sister should consult a local probate attorney in the county where your late mother-in-law resided to pay her creditors and transfer title to her house according to the terms of her will. Those costs and delays could have been avoided if she had a revocable living trust.

UNLESS YOU PLAN TO RETURN TO THE AREA, SELL YOUR HOUSE

DEAR BOB: We are active-duty military who made a mistake in taking out a second mortgage on our house at 15.5 percent interest. We have paid the payments for 15 years. The house has been on the market for sale the last six months. We have never defaulted on either our first or second mortgages. Should we combine these two mortgages? Or should we continue trying to sell this house, which is located in North Carolina? We really want to get rid of this house and have not purchased another house at our new location –Santana C.

DEAR SANTANA: Unless you have plans to return to the vicinity of that house, get it sold. My understanding is the market for houses in most North Carolina cities is quite good, especially near military bases, which are expanding.

Perhaps you have the house listed with a “bad agent” who isn’t using “due diligence” to get it sold quickly. Or maybe your asking price is too high. That is the most frequent reason a house doesn’t sell within a reasonable time.

Hopefully, you have the house rented to produce rental income. Ask your tenants if they would like to buy their home. They are your most logical buyers.

ONE OWNER CAN’T FORCE CO-OWNER TO PAY OUTRAGEOUS PRICE

DEAR BOB: I lived with a man for 28 years in a common-law marriage, which is not recognized in the state where we lived. Seventeen years ago we bought a house together. Our relationship ended on Dec. 17, 2004. He never came back to reside. I continued the house’s upkeep. Now he wants more than half of the house’s current value. I said “no way.” It looks like we will have to go to court to settle. Are there any avenues I can take, as I don’t want to give up the house or pay his outrageous price? I am willing to offer him half of the appraised value. But I understand the judge can order the house to be auctioned. I don’t want this to happen. What can I do? –Sharon S.

DEAR SHARON: Please consult a local real estate attorney. If both names are on the title, either co-owner can file a partition lawsuit to force the sale of the house. However, the partition sales proceeds will be divided 50-50. Maybe when your ex-boyfriend realizes this, he will let you buy out his half of the house in return for a quitclaim deed. If you have good income and good credit you can probably refinance the mortgage to obtain the cash to buy him out.

The new Robert Bruss special report, “Five Easy Ways to Buy Your Home and Investment Property for Nothing Down,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.

(For more information on Bob Bruss publications, visit his Real Estate Center).

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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2006 Inman News

The number of homes purchased as second residences and as rentals continues to be a greater percentage of the total housing picture. For parents of students headed off to college, back-to-school often means shopping for clothes and off-campus shelter.

In a recent column, we addressed the possibility of researching homes in a college town as an alternative to dormitory living. From a tax standpoint, the arrangement could either be a second home or an investment property. Typically, the student manages the rental investment while mom and dad reap the tax benefits and appreciation that come from owning a rental home.

Often the venture won’t work because some buildings near schools are too expensive for the numbers to make it worthwhile. Also, there is the initial problem of handling the down payment and monthly expenses in addition to skyrocketing tuition fees. However, there are “doable” areas that continue to appreciate, bringing more interest from parent-investors. With the stock market now more of an “iffy” option for many folks, a rental in a college town has become more appealing.

If the property definitely is going to be a rental, you can’t rent to your children and their friends for a song. The IRS will not allow you to show a taxable loss on the property if you personally use it for more than 14 days or 10 percent of the total rental period. “Personal use” includes renting to any relative unless you charge a “fair market rent.”

If the student-partner does not pay rent, depreciation cannot result in a taxable loss. Expenses may be deducted, but not to the point where an actual loss is shown.

If you do not have children, or feel they are not mature enough to head up a dorm-alternative household, there are still attractive rental possibilities for your potential property that do not include underclassmen seeking the next “Animal House.”

The number of visiting professors to college campuses always is underestimated, as are the number of staffers (secretaries, security, catering, librarians) who often are terrific rental-lease prospects. Notes to human resource representatives have worked wonders in landing mature renters, as have inquiries posted in faculty lounges and on-campus faculty living areas. Graduate students (some married) also form a significant, yet untargeted, renter pool. Sometimes, professors seek alternative housing for highly coveted students.

For example, several years ago, the dean of the Institute for Theological Studies at Seattle University was trying to locate a group home for a number of his graduate students. Several of his applicants were former nuns relocating from other states. Needless to say, the women were not eager to occupy rooms of an undergraduate high-rise dorm dominated by college freshmen.

The dean contacted an investor friend whose wife was an associate on the Seattle University faculty. The investor did not own property in the area but told the dean he would see what might be for sale. A quick drive through the area revealed no “for sale” signs, so the investor copied down the addresses of several large houses within a four-block walk from campus. Today, the investor would have been able to enter the addresses into the county’s real property database, or other property Web sites, to determine the owner and tax assessment. Then, however, he had to make a trip to the county treasurer’s office to determine the owners’ names and mailing addresses.

The investor found a willing seller who not only would make the home available so that the former nuns could occupy the house in time for the fall term, but the owner also agreed to provide seller financing. The arrangement worked for all parties involved — the dean used the example as a recruiting tool; the former nuns (none of whom owned a car) found affordable housing within walking distance from campus; the investor secured an appreciating asset while the nuns covered his monthly housing costs; and the seller got a quick, clean sale.

What made the deal run smoothly was the investor’s ability to meet and communicate with the eventual seller the intent of the rental. People will often listen when they hear that former nuns need a place to live.

If you want to invest in a college rental yet would prefer not to rent to undergrads, take a day and meet some of the department heads and other resource officials on campus. There could be a group that fills the investment property you would like to buy.

Tom Kelly’s new book “Cashing In on a Second Home in Mexico: How to Buy, Sell and Profit from Property South of the Border” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com. Tom can be reached at news@tomkelly.com.

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Copyright 2006 Tom Kelly

The best thing about “Be a Successful Property Manager” by experienced real estate author R. Dodge Woodson is the attractive book cover with lots of supposed benefits listed for readers of this book. Unfortunately, the text rarely delivers on the book-cover promises. Instead, the author provides superficial, bland explanations about property management rather than getting down to specific details of what makes a successful manager.

Having read all of R. Dodge Woodson’s previous real estate books, primarily about construction, I was expecting an excellent insightful explanation of how I can become a successful property manager. Instead, the book offers very general information about what property managers do. There is not a word about how much they earn or if the work pays very well.

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Having owned and managed investment properties for almost 40 years, I know a little bit about property management. Because there is always more to learn, I hoped this new book would teach me how to make property management easy and lucrative.

But I was very disappointed because, despite Woodson’s many years of property management experience, there were virtually zero personal examples. Surely he has some juicy real-life management stories to tell about what he did right and wrong.

Although there are many forms and checklists included, they are all very generalized, especially the lease and rental management forms. The two-page lease example is the worst and most incomplete I have ever seen. If I had to evict a tenant and showed this lease form to a judge, he would laugh me out of the courtroom.

The book’s biggest glaring omission is it has absolutely nothing to say about apartment-building resident managers. Based on personal experience, I’ve found that any residential property more than three or four units needs to have one of the tenants “in charge” to handle minor problems and the renting of vacancies (unless the owner loves that drudge work). But there is not one word about the legalities of hiring and supervising resident managers.

Determining the author’s theme or goal for this book is impossible. I’m not sure if he was trying to tell readers what a great career awaits property managers or if he wanted to show investment property owners how to manage their own properties. Unfortunately, he failed to reach either goal in this unfocused book.

To show how incomplete this book is, the worst chapter is titled “Taxes and Insurance.” As far as it goes, the insurance portion lists the types of insurance a property owner needs, or at least should consider. But after reading the chapter, I question the author’s knowledge of necessary insurance coverages. He completely failed to mention the valuable benefits of umbrella liability insurance policies, which offer property owners multimillion-dollar coverage at very low cost. The taxes section of that chapter was even less complete.

Chapter topics include “Managing Your Own Property”; “Managing Someone Else’s Rental Property”; “Following the Rules and Getting Maximum Profits”; “Subsidized Rental Income”; “Getting Low-Interest Loans and Grants”; “Improving a Property”; “Attracting the Best Tenants Fast”; “Tenant Strategies and Procedures”; “Collecting and Raising Rents the Right Way”; “My Top 20 Tenant Problems and How to Solve Them”; “Evicting Problem Tenants”; “Taxes and Insurance”; “Financing”; “Maintenance”; “Finding and Managing Contractors”; and “Protecting Yourself from Contractors and Vendors.”

When I started reading this new book by a highly respected real estate author, I was looking forward to an enjoyable and profitable read. But after a few chapters, I began wondering. Further on, I realized this was not R. Dodge Woodson’s finest book. On my scale of one to 10, this very disappointing book rates only a four.

“Be a Successful Property Manager,” by R. Dodge Woodson (McGraw-Hill, New York), 2006, $29.95, 289 pages; available in stock or by special order at local bookstores, public libraries, and www.Amazon.com.

(For more information on Bob Bruss publications, visit his Real Estate Center).

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Copyright 2006 Inman News

DEAR BOB: I am a 74-year-old widow. About six years ago, I added my daughter’s name to my home’s title in joint tenancy with right of survivorship so she wouldn’t have to worry about probate costs when I pass on. I’m doing pretty well, health wise, but am running low on income since my airline pension income was cut about two years ago. However, I am told I can’t qualify for a senior-citizen reverse mortgage because my daughter is on the title. Is this true? I asked her to quitclaim her interest back to me but she is reluctant –Martha Y.

DEAR MARTHA: Because your daughter is obviously not yet 62, her being on the title to your home disqualifies you for a reverse mortgage. All co-owners must be at least 62 because reverse-mortgage eligibility is based on the age of the youngest owner.

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Your situation is another example why I do not recommend adding heirs to real estate titles to avoid probate.

However, your problem has an easy solution, which is good for you and your daughter. You can create a revocable living trust with your daughter named as the successor trustee and the heir of your living-trust assets after you pass on.

Before you do this, be sure she agrees and signs a quitclaim deed to you. Then obtain your reverse mortgage. After it is recorded, you can then transfer title to your home into your new living trust, thus avoiding probate after you pass on.

The reason you should wait until after the reverse mortgage is recorded to transfer title into your new living trust is reverse-mortgage lenders insist the title not be in a living trust when the reverse mortgage is originated.

LAST RESORT TO REMOVE A LEANING TREE

DEAR BOB: My neighbor’s property has a big old tree that leans dangerously toward my house. About a year ago, in a storm a big branch fell on my house but fortunately didn’t do much damage. However, I am concerned the tree has become heavier and seems to be leaning more toward my bedrooms. I’ve tried being nice to the neighbor, even offering to pay for trimming or removing the tree. But she refuses to allow me to hire tree professionals to work on her property. What should I do, as I am very worried about this dangerous situation? –Herm W.

DEAR HERM: Check with your city officials to see if there is a city ordinance affecting your situation. If so, the local code enforcement officer can probably help. That’s what I did a few months ago in a similar situation. The local code enforcement officer contacted my absentee neighbors who agreed that two of their trees were dangerous and they had them removed at their expense.

If the neighbor is not cooperative, your legal action is to file a private nuisance abatement lawsuit. This is not a do-it-yourself project. You will need to hire a local real estate attorney. If the judge agrees the leaning tree is dangerous, he can order the neighbor to trim or remove it as a private nuisance.

“FLEX MORTGAGE” CAUSES NEGATIVE AMORTIZATION

DEAR BOB: I have read several articles about “flex mortgages,” and they are getting a bad name. I refinanced my home in January 2005 and have one of those loans, which expires in January 2008. No one told me about how bad negative amortization can be. How concerned should I be? Should I refinance out of this bad loan? There is a prepayment penalty for doing so. I am planning on selling my home by the end of 2007 –Juanita J.

DEAR JUANITA: I presume “flex mortgage” is another name for an “option mortgage” where you have the choice of making monthly payments of interest only, below-interest only, amortized payments, or partially amortized payments. Any unpaid interest is added to your mortgage principal balance. The result can be “negative amortization” where you owe more than you borrowed.

At least six months before your too-short three-year loan comes due in January 2008, you should list your home for sale and hope it sells within a few months.

Because your mortgage has a prepayment penalty, and you only plan to keep the home another year or so, refinancing now to a fixed-rate mortgage would be a waste of money.

The new Robert Bruss special report, “Five Easy Ways to Buy Your Home and Investment Property for Nothing Down,” is available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.

(For more information on Bob Bruss publications, visit his Real Estate Center).

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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2006 Inman News

Dear Barry,

We received a notice from our local building department informing us that our garage was converted to a bedroom without a building permit. The conversion was actually done by the previous owners and they disclosed this to us when we purchased the property. We never thought to ask them for an as-built permit, but now we wish we had. Is this a serious problem? –Kim

Dear Kim,

When building departments become involved in permit violations, the potential for seriousness is undeniable. The direction, degree and outcome of that seriousness, however, depend on a few variables. The first consideration is whether garage conversions are even allowed in your neighborhood, even with a permit. In some areas, enclosed parking is a requirement. In those cases, building departments can order restoration of garages to their original function, at considerable cost to homeowners.

If garage conversions are allowed in your area, the question becomes one of building-code compliance. Was the work done according to required standards? (Home inspectors are often told by sellers, “We did this without a permit, but it was all done to code!” — as though sellers were sufficiently versed in building codes to make that determination.)

The final arbiter of code compliance issues is the local building official who inspects the conversion after you apply for an “as-built” permit. Such permits enable municipal inspectors to evaluate unpermitted construction after the work is completed. Issues that commonly arise during these inspections include floor and ceiling heights, room dimensions, wall and ceiling insulation, smoke detectors, number and placement of electrical outlets, light switches at doorways, exterior windows for light, ventilation and emergency escape, and much more. In nearly every case, some code violations are cited. Once these are corrected, the inspector signs off on the permit, and the conversion becomes just as legal as though the garage was converted under permit.

Unfortunately, there is an element of unpredictable risk in the as-built permit process — specifically, the discretionary attitude of the individual inspector. If the sun of good fortune shines upon you that week, your inspector will be a reasonably good-natured civil servant, diligently performing the duties of building-code enforcement.

On the other hand, your case could be assigned to an inspector who is consumed with the zeal of high office, or is simply having a bad day. This could expose you to any number of costly and burdensome consequences. For example, you could be ordered to remove drywall to enable a full inspection of the framing and electrical wiring. You could be assessed a fine for the unpermitted work, even though you were not the one who made the conversion. In the worst of cases, you could be ordered to restore the garage, as a punitive consequence of the unpermitted conversion, again with no regard for the fact that you were not responsible for the conversion. Fortunately, abusive enforcement of this kind is not the rule, but complaints about such treatment are not as rare as one would hope. Appealing to an elected official, such as a county supervisor or a member of the city council, can often resolve difficulties of this kind.

Hopefully, your as-built permit will be processed and approved without too much controversy. This will enable you to sell the property at a later date, without having to disclose that there is an illegal conversion.

To write to Barry Stone, please visit him on the Web at www.housedetective.com.

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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2006 Barry Stone

DEAR BOB: My mother signed a listing contract to sell her Lauderhill, Fla., condominium. She said the listing agent told her a 6 percent sales commission and a six-month listing period were mandatory and there is a fee imposed if the property is sold by a different real estate agent within 30 days of the contract expiration. Are these statements true for Florida real estate? She had only two showings of her condo during the first two weeks of the listing and none since then. Her listing expires in October. What should she do? –Mike K.

DEAR MIKE: That listing agent lied to your mother. Real estate sales commissions and listing terms are fully negotiable in every state.

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A few brokerage firms set listing rules for their sales agents, such as a 6 percent minimum commission and a six-month listing term. But your mother was free to list with another agent upon different terms. Listing terms are not set by state law.

Your mother must be a very patient person. To have only two showings of her condo to prospective buyers and no purchase offers indicates something is seriously wrong.

Maybe it is overpriced. Perhaps it isn’t being actively advertised in newspapers and promoted in the local MLS (multiple listing service) as well as on the Internet at www.Realtor.com and other Web sites. It sounds like that listing agent wasn’t using “due diligence” to get the condo sold.

Thankfully, the listing with that agent is about to expire. Your mother should interview at least three successful local real estate agents who sell condos like hers, preferably in the same condo complex. She should ask lots of questions about their client references of recent condo sellers and then phone those sellers to inquire, “Were you in any way unhappy and would you list your condo for sale again with the same agent?”

To avoid getting stuck with a bad agent again, she should either sign a 90-day listing or a longer listing with an unconditional cancellation clause after the first 90 days.

WHERE SHOULD PARTITION LAWSUIT BE FILED?

DEAR BOB: Many years ago my husband and his brother bought a property together. His brother died several years ago. His two children inherited the brother’s half of the property. Unfortunately, they never transferred title into their names. They live in New York state. The property is in Colorado. My husband wants to sell, but they are not cooperating. Since several states are involved, in which state should he file a partition lawsuit to force the sale of the property? –Gloria G.

DEAR GLORIA: A partition lawsuit can only be brought by a co-owner in the state and county where the real property is located. The out-of-state co-owner heirs will be summoned to appear in the lawsuit to raise any objections they might have to a court-ordered sale of the property.

Because their names are not on the title, although they are the heirs of their late father’s 50 percent of the property, when the property is sold their share of the proceeds will probably be held in trust for them. But that’s their problem, not yours. For details, please consult a local real estate attorney where the property is located.

GET A REVERSE MORTGAGE EVEN IF YOU HAVE A MORTGAGE

DEAR BOB: I am 74; my husband is 79. Our house is in desperate need of repairs. But our mortgage is not fully paid off. I understand there is some way we can get a reverse mortgage anyway. Is this a good way for us to go? –Nancy P.

DEAR NANCY: Presuming you want to stay in your home at least five years, a reverse mortgage can be the ideal solution to your problem.

If your current mortgage’s balance is less than 50 percent of your home’s market value, you can probably obtain a senior-citizen reverse mortgage. Part of the proceeds will be used to pay off the existing mortgage to eliminate its payments because the reverse mortgage must be recorded as a first mortgage.

Your excess entitlement can be used to pay for your home repairs or any other desired purposes such as lifetime income. To find a reputable reverse-mortgage representative in your area, go to www.reversemortgage.org. More details are in my special report, “The Whole Truth About Reverse Mortgages for Senior Citizen Homeowners,” available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com.

WHAT IS STEPPED-UP BASIS FOR INHERITED FARM?

DEAR BOB: In 1972 my friend’s husband bought a farm (prior to their marriage). In 2003 he added her name to the deed. He died in 2005. She recently sold the farm. What was her basis for tax purposes? Was it the 1972 purchase price or the market value in 2003 when she was added to the deed? –Ruthann T.

DEAR RUTH: The correct answer is “neither.” Because your friend inherited her late husband’s interest in the farm, she had what is called a new “stepped-up basis.”

If the farm is located in a community property state where they lived, then your friend’s new stepped-up basis became the market value on the date of her husband’s death.

However, if the property is located in a non-community property state, because your friend already owned 50 percent of the farm, she received a new stepped-up basis on only half of the farm’s market value on the date she inherited her late husband’s share. She should consult her tax adviser to calculate her exact stepped-up basis.

WATER CISTERN PREVENTS OBTAINING REVERSE MORTGAGE

DEAR BOB: I tried to help my mom get a reverse mortgage. After the lender put us through six months of gathering info and costly reports, she was turned down because she has a water cistern and a well for water on her property. The cistern tested fine for water pollutants, but the well, which is used mainly for other purposes, did not. Mom has little income and her home is all she has to help pay for her care. What should she do? –Diana W.

DEAR DIANA: I have never heard of a water cistern except in third-world countries. Depending on rainwater is not a reliable water supply. If the well water can be certified safe to drink, that could solve the problem.

Frankly, the lender was very smart to turn down the reverse mortgage due to lack of a reliable drinking-water supply. If an adjustment can’t be made to make the well water safe to drink, maybe it’s time for your mom to sell her home and move to an assisted-living facility.

WHY SMART HOME SELLERS OBTAIN PRE-LISTING INSPECTIONS

DEAR BOB: I need your opinion on having a house professionally inspected before listing it for sale. I heard of a family that had such an inspection and then listed it for sale. The house sold quickly after that. The person relating the story said some real estate agents consider it a waste of time and money to have such an inspection. What is your opinion? –Jan M.

DEAR JAN: The smartest home sellers have their homes professionally inspected before signing a listing. Then the seller knows about the home’s defects and can either have them repaired before putting the house on the market or they can be disclosed to prospective buyers up front.

Pre-listing home inspections are becoming very common. It is not a waste of time and money for the seller to have a house professionally inspected before putting it on the market.

$250,000 HOME-SALE EXEMPTION ALSO APPLIES TO INSTALLMENT SALE

DEAR BOB: If I sell my free-and-clear home where I have lived the last few years and claim that $250,000 tax exemption, what if I agree to carry back a mortgage for my buyer? Will I get any tax breaks on the payments? –Dale McG.

DEAR DALE: Yes. All your principal residence sale capital gains are tax-free up to $250,000 (up to $500,000 for a qualified married couple filing jointly) if you owned and lived in it at least 24 of the last 60 months before its sale. The same exemption also applies to your installment sale principal payments received when carrying back a mortgage for your buyer.

However, the interest income portion of each mortgage payment you receive from your buyer will be taxable as ordinary income. If your home-sale capital gain exceeds your $250,000 (or $500,000) exemption, then part of each installment-sale payment will be taxable as long-term capital gain. For details, please consult your tax adviser.

The new Robert Bruss special report, “Five Easy Ways to Buy Your Home and Investment Property for Nothing Down,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.

(For more information on Bob Bruss publications, visit his Real Estate Center).

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Copyright 2006 Inman News

How would you feel if you bought a house that was advertised as a having four bedrooms, three baths with a large recreation room and later discovered that technically it was had only three legitimate bedrooms, two bathrooms and a basement?

This scenario is not far fetched. In neighborhoods with older homes, it’s common for properties to undergo several improvements over the years – and sometimes without the blessing of the local building department.

It’s easy to understand why a homeowner would decide to bypass the permit process. There are fees attached to building permits and time involved in waiting for building inspectors to show up. But, skirting permits can create a big headache if you ever intend to sell your home.

For instance, in most cases the buyer of your home will have to get a mortgage to close the sale. This means that the property is likely to be scrutinized by a property appraiser sent by the lender to confirm that the buyer isn’t overpaying.

Most appraisers look at the public record to confirm the number of bedrooms, bathrooms and square feet of living space. Granted, the public record is often inaccurate, particularly in areas of older homes that have been renovated over time.

But, some appraisers ask for verification that the improvements that are not reflected in the public records were, in fact, done with permit. If the sellers can’t substantiate that the work was done with permits, the appraiser might not give full value for the improvements. If the house doesn’t appraise for the sale price, the transaction could be in jeopardy.

HOUSE HUNTING TIP: Even if you don’t intend to sell now, you can enhance the value of your investment by making sure that your substantial renovations are done with building permits. Today’s value conscious buyers are likely to pay attention to this important detail.

However, buyers should not assume that an addition wasn’t done with building permits just because it doesn’t show up in the public record. Recently, Piedmont, Calif., homeowners put their home on the market. They had made a couple of additions to the property over the years that added 477 square feet of living space to the house.

Even though the sellers had obtained building permits before they did the renovations and their property had been reassessed to reflect the cost of the improvements, the public record did not include the extra 477 square feet in the total square footage calculation.

So the seller merely went to the county assessor’s office and filled out a form to correct the public record.

The sellers also had a recent appraisal of the property. The appraiser included the 477-square-foot addition in his overall square footage assessment. Appraisers will often include renovations in their square footage calculation even if that figure differs from the public record figure if the improvements were of similar quality to the rest of the house.

Some homeowners do quality renovations that withstand the test of time. Others hire slipshod contractors or handymen to make improvements that don’t hold up well. To ensure that you know what you’re getting, check the public record of any house you’re interested in buying. If you can’t find permits for significant work that has been done to the property, ask the sellers for copies of the building permits.

THE CLOSING: Also be aware that sometimes homeowners apply for building permits, but never receive a final sign off on the permit. This could mean that some work might not have been completed satisfactorily.

Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.

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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2006 Dian Hymer

“Please explain the difference between a mortgage lender, mortgage broker and correspondent lender.”

Lenders and brokers both perform a variety of loan origination tasks, which include finding, counseling and qualifying borrowers, taking applications, checking credit, and verifying employment and assets. But the lender is the one who must approve the deal and disburse the money to the borrower. Mortgage brokers usually are not authorized to provide final loan approval, nor do they disburse money.

But let’s muddy this up a little. Suppose that at closing, the lender lends the broker enough money for the broker to fund the loan in his own name, then 10 minutes later when the transaction is completed, the broker sells the loan to the lender. Would this convert the broker into a lender? If we define “lender” as the entity who disburses funds to the borrower and receives back a note and mortgage, then the answer has to be “yes.”

In fact, the practice I just described is fairly common; it is called “table-funding.” Most authorities, however, including HUD and bank regulators, do not view table-funding as converting a broker into a lender. Implicitly, therefore, there must be something else that a lender does besides disburse the funds at closing and receive the note. But before looking at what that is, let’s consider why it matters.

It matters because the disclosure rules differ for brokers and lenders. Suppose the wholesale lender quotes a price of zero points on a 6 percent loan to a loan provider (LP) — this is the term I use to cover both brokers and lenders. If the LP wants to make two points on the deal (2 percent of the loan amount), he quotes a price of 6 percent and two points to the borrower. As a broker, the two points appears on the Good Faith Estimate (GFE) as a “Broker Fee,” and as a lender, it appears as “Points.” Not much difference there.

But the wholesale lender also offers, in addition to 6 percent and zero points, 6.25 percent with a two-point rebate. Still looking to make two points, the LP’s price to the borrower would now be 6.25 percent with zero points. As a broker, the two points has to be disclosed. It isn’t disclosed very well, and borrowers frequently overlook it or don’t understand it, but it is there.

As a lender, in contrast, the two-point rebate is not disclosed at all. The lender made a 6.25 percent loan at zero points, then sold the loan in the secondary market for a two-point profit, but that profit is nobody’s business but his. Of course, brokers view this as extremely unfair.

Now let’s go back to the question of what makes a lender a lender? I think most economists would say that a lender puts his money at risk — something a broker doesn’t do under a table-funding arrangement. This brings me to correspondent lenders, many of whom began life as brokers.

Consider a broker who develops significant business volume, has earned the confidence of wholesale lenders who will authorize him to approve their loans, and has accumulated some capital. He can now obtain a credit line from a bank that can be drawn against to fund loans, repaying the loans when they are sold to wholesale lenders. Under the law, the broker has morphed into a “lender” — the type called “correspondent lender.”

But correspondent lenders operate in the same way as brokers in avoiding market risk. The prices they deliver to borrowers are those of the wholesale lenders, plus a markup. When they lock a price for the borrower they simultaneously lock it with the wholesale lender, which locks in their markup. By my definition of “lender,” therefore, correspondents don’t make it; they are just large brokers.

The law views the matter differently, however. Correspondents are lenders under existing law, and therefore avoid having to disclose rebates. This has created a different set of disclosure rules for brokers and correspondent lenders, who are competitors, and much more alike than they are different. It has also created a wholly artificial incentive to pull brokers into larger entities, called “net branches,” which are lenders and therefore don’t have to disclose rebates.

To a borrower who knows the score, it should not matter whether the LP they deal with is a broker or a correspondent lender. In either case, they should require as a condition for doing business that the LP agree in writing to a fee for service, and pass through the wholesale price to the borrower. Unfortunately, borrowers who don’t know the score often assume erroneously that the law protects them.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2006 Jack Guttentag