Real Estate in Steamboat

DEAR BOB: I own a rental condo. The owner of the unit abovemine requested and was granted approval by the homeowners’ associationdirectors to install wood floors. I objected, but the condo directors stillgranted approval. Now my condo tenant is complaining about the noise from theupstairs condo. It sounds like the upstairs resident is in the same room. Ihave complained to the management company, with no results. The decision of thedirectors to allow the wood floors upstairs has made an impact on renting mycondo. The condo board and the management company refuse to respond. Whatshould I do? –Patty C.

DEAR PATTY: I suggest you consult a local real estateattorney who is experienced with condominium law. At this point, it sounds likeyou haven’t suffered any actual damages. But if you lose a tenant because ofthe noise from the upstairs unit, then you can prove your loss.

Purchase Bob Bruss reports online.

Have you talked with the upstairs resident to ask that rugsbe placed on top of the wood floor? That could dull or eliminate the sound,even if you have to pay for the rugs.

As a last resort, you could sue the upstairs owner formaintaining a private nuisance if you lose your tenant due to the noisy floor.However, I don’t think the homeowner’s association has any liability to you forgranting approval of the wood floor.

WITHOUT COMPLETION DATE IN HOME CONSTRUCTION CONTRACT, NOLIABILITY TO HOMEOWNER

DEAR BOB: We hired a custom-home builder to build our dreamhome. Before hiring him, we checked his references very carefully and everyonepraised him. The contract says he was to complete our new home in 110 days.That means our home should have been finished last summer. But today it is only50 percent complete. However, the contract says the builder cannot be heldliable for any extra cost incurred by not completing by the deadline. We didnot include any penalty if the builder was late. So far this extension has costus extra for our construction loan and additional rental fees for our currentresidence. What can we do? –Tony A.

DEAR TONY: Without a penalty clause in your constructioncontract with the builder, you have no practical recourse against him. I’ll betthe builder prepared that contract.

After the house is completed, however, you should have a”discussion” with the builder about how much his delay cost you. Butbe aware if you withhold final payment from him, he could record a mechanics’lien against your property so that is not a good solution.

Consultation with a local real estate attorney who isexperienced with construction law is suggested to learn if there might be anyrecourse other than a lawsuit for your damages.

CAN HEIR NAMED IN WILL CLAIM TAX DEDUCTIONS?

DEAR BOB: I have a friend who has been willed a house shelives in. She is paying all the bills, the mortgage payments, etc. Can shededuct the mortgage interest and property taxes on her 2006 income tax returns?–Joan D.

DEAR JOAN: If your friend holds title to her principalresidence, then she can claim the mortgage interest and property taxes shepays.

However, if she is merely named in the property owner’s willand that person hasn’t died yet, she isn’t the property owner and isn’tentitled to any tax deductions for mortgage interest and property tax she payson that property. For full details, she should consult her tax adviser.

The new Robert Bruss special report, “How to BuyFixer-Upper Houses with Little or No Cash for Fun and Fortune,” is nowavailable for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or bycredit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this columnare welcome at either address.

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

***

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

Copyright 2006 Inman News

For thefirst time, we are empty nesters. There will be no Christmas basketballtournament featuring a Kelly kid coming off the bench, or a casual, error-proneannual holiday show wrapped around cider and seasonal sugar cookies.

Moreimportantly, future visits “home” will be awkward and curious. I havereferred to the Southern California house I grew up in as “my parents’house” and its surrounding community as “the old neighborhood”for more than 30 years. Although the memories of that place are dear andprecious, home is where we now live and where our four kids were born andraised.

When mydad died a little more than eight years ago, mom sold the large family home of46 years and moved into a nearby condominium, keeping the dreams of the areayet leaving the emptiness and upkeep of an old structure. Only one of sevenchildren remains in that area, and visiting siblings shuffled between his homeand mom’s “step-saver” condo.

Now, momhas left the old neighborhood and moved to the San Francisco Bay Area to becloser to my two sisters, brother and their families. How will I respond to noteven driving by that house that first delivered Santa to me? How will our kidsremember the huge backyard, driveway basketball hoop and cozy sidewalkssurrounding my parents’ home? And, when will I next visit my childhood home?

The oldneighborhood is packed with holiday memories. My first experience of a Christmasplay (the nuns of the Blessed Virgin Mary loved to labeled it “thechildren’s holiday pageant”) occurred just five blocks from that house.The extravaganza was — and still is — viewed from an oh-so-comfortable Samsonsteel folding chair in the rear of a packed hall and around parents dartingtoward the stage with powerful cameras anticipating the perfect Kodak momentwhen their Freddy — only a blur from four rows deep in the student band –clangs the symbols to mark the surprise conclusion of “Angels We HaveHeard On High.”

I thoughtabout those Christmas plays this week when I considered the number of suchevents my parents — with seven married children and 17 grandchildren — hadwitnessed. I can remember standing on those steel chairs as a small child,looking toward the entry/exit for my father to come flying in the door latefrom work, his necktie flopping about his chest as he lunged in the darkness tofind the seat my mother carefully guarded with her folded overcoat.

“Didyou remember the camera?” she would whisper so all around her could hear.”And what about the film?”

The crowd– and everyone knew everyone — would begin shushing my mom, index fingers onlips, with the not-so-subtle: “Jane, we can’t hear!”

My dadwould respond with an answer-all: “Relax!” He then miraculously wouldexpose a tiny camera with the huge flash, which looked like a pie tin with a40-watt bulb in the middle of it, that simultaneously lit and blinded the halland all of its spectators.

When thelast carol was sung and the final nativity scene photographed, the venue wouldshift to the parish hall for conversation and cookies.

“Didn’tMichael look just like Joseph?” Sister Mary Arcadia asked me nearly 45years ago.

“Iguess so.”

The scenehad changed little, except for the quality of camera and the nuns. SubstituteJodi for Jane, me for my dad, and you had virtually the same Christmas pageantenvironment of 1961. I often came flying in late from work and even used”relax” (I am somehow allergic to “chill”) as a semiconsciousresponse.

I failedto ask my dad if he missed the Christmas play — or the thought of sitting inthose folding chairs? What became of the rolls of film he shot from thatarchaic camera?

I will askmy mom — on the telephone — next week. I will also ask my wife where shestored all of the holiday photos she has taken. I’d like to know, before ourkids ask us if they can have some for their own Christmas family albums.

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

***

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

Copyright 2006 Tom Kelly

Q: Notlong ago you answered a question from a reader about fireplace chimneys. Youtalked at length about dampers, but you did not mention the need for a chimneyliner.

Myhouse is 1906 vintage, and a chimney sweep recently told me that I had aserious hazard because of not having a lining. Evidently buildings constructedbefore 1924 did not have them. Any comments?

A: In theearly part of the past century, fireplaces were really heaters. The fuel wasusually coal, but these fireboxes would support a small wood fire.

The nexttime an opportunity presents itself, take a good look at a firebox in aVictorian-era building. What you’ll see is a shallow firebox with an angledback wall. The heat produced by a small coal or wood fire was deflected intothe room rather than up the chimney, as would be the case with a deeperfirebox.

We’re notsurprised that a 1906 home is equipped with an unlined masonry chimney.Widespread use of flue liners did not occur until later.

The lackof a liner does not necessarily mean that the chimney creates a serious hazard.If the mortar between the bricks is sound, it may be OK. But, because of theage of the chimney, it is more likely than not that flue gases from 100 yearsof fires have played havoc with the brick and mortar, compromising the chimney.

We thinkyou would be well served to investigate having a flue liner installed. Think ofit as an investment in your safety.

We assumethat your chimney sweep did a thorough inspection of the firebox and chimneybefore saying it was unsafe. His inspection probably revealed cracked anddeteriorated mortar joints between the bricks of the chimney.

Failedmortar joints can result in two serious safety hazards. Carbon monoxide canleak into the house through voids in the masonry, and sparks from a fire canpenetrate through these cracks and set fire to the wood framing of the house.

Fire ismore likely if there is creosote buildup on the interior of the chimney.Creosote is a sticky, flammable byproduct produced by burning unseasoned softwoods such as pine and Douglas fir. It coats the walls of the chimney andsaturates the mortar. If the creosote is ignited in the chimney, there is avery real possibility that flames will migrate from the flue to the framing,causing catastrophic damage.

Flueliners protect the house from heat transfer to combustibles. They also protectthe masonry from the corrosive effects of flue gases. Flue gases are acidic andeat away the mortar joints of unlined chimneys.

There arethree types of flue liners. The most common material used is clay tile. Theyare installed in sections and mortared together. The weak link of this systemis the mortar. Mortar is susceptible to decay caused by flue gases. Inaddition, clay tile cannot rapidly absorb heat and evenly distribute it, sothey are subject to cracking.

Metal flueliners made from stainless steel are primarily used to upgrade and repairexisting chimneys. These liner systems are tested and listed by theUnderwriter’s Laboratory (U.L.), and if properly installed and maintained (ayearly cleaning) are safe and durable.

Finally,cast-in-place chimney liners are lightweight concrete-like products that areinstalled inside a chimney, forming a smooth, seamless, insulated passagewayfor flue gases to be vented to the outside. As an added bonus they can improvethe structural integrity of aging chimneys.

Whetheryou decide to have your 1906 chimney relined depends in large part on thecondition of the chimney and how much you use your fireplace. We suggest thatyou err on the side of caution and consider installing a flue liner. For moreinformation, we recommend you view the Web site of the Chimney Safety Instituteof America at www.csia.org.

***

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

Copyright 2006 Bill and Kevin Burnett

In good markets or bad, real estate broker Ralph R. Robertsreveals in “Flipping Houses for Dummies” how he acquires run-downhouses, fixes them up, and then either “flips” (sells) them for aprofit or holds for long-term investment. Roberts, a highly respected realestate author, trainer and broker, shares his techniques along with advice onhow to minimize the tax bite on profits.

Every serious real estate investor who wants to earn largeprofits needs to understand the methods Roberts uses because he has perfectedflipping houses almost to a science. He thoroughly understands and explains allthe critical aspects, including locating the properties to determining if theyare suitable, negotiating a successful purchase, supervising the fix-up work,and making a profitable resale.

Purchase Bob Bruss reports online.

As a longtime real estate broker, Roberts knows all aspectsof the home brokerage business and he doesn’t hesitate to share his insidersecrets. For example, he says, “Nothing on the MLS (multiple listingservice) is the gospel truth. Sellers and real estate agents alike often estimateroom sizes or make mistakes when entering details. Approach all prospects witha discerning eye.”

Even if you are not interested in “quick flip”real estate profits, this is a great book to study because the author shares somuch of his real estate knowledge which he gained, starting at age 19, overmore than 30 years in the real estate business.

Maybe Roberts is getting a little “salty” in hisold age, but he exposes secrets most Realtors would never share with theirclients. Examples include how to obtain a “listing history” of aproperty, how to determine what the seller paid, how long the property has beenon the market even with more than one listing, and if the property is difficultto “unload.”

This is a “fun read” book in the usual dummiesstyle, which includes features such as tips, warnings and even several sanitychecks. Along the way, Roberts shares many personal examples to illustrate thetopics, making the book extremely valuable so the readers don’t make the samemistakes he made.

Throughout the book there is heavy emphasis on what to lookfor in a potential flipper house, how to locate them, how to acquire them, andhow to finance them. Roberts provides valuable insights about the importance ofborrowing funds. “As a real estate investor, good debt gives youleverage,” he advises, meaning you control the property with little ofyour own cash.

Along the way, there are several excellent checklists suchas the “profit projector” and the “home inspectionchecklist” so no important aspect is overlooked when evaluating a possibleflipper candidate.

Especially valuable is the chapter on “The Art ofHaggling: Negotiating a Price and Terms.” Having sold thousands of homesat his real estate brokerage, Roberts is a “pro” when it comes tonegotiation and putting sales together. His negotiation strategies arepriceless. I especially enjoyed the part about “digging up pertinentinformation about the seller.” If you are a serious real estate investor,this chapter is a “must read.”

Foreclosures receive extra attention because they offerspecial flipper profit opportunities. Acquiring these properties can be tricky,but Roberts simplifies the process as much as possible without getting boggeddown in details. Of course, it helps that he has a full-time associate whospecializes in acquiring these distress properties.

Chapter topics include “Wrapping Your Brain Around theIdea of House Flipping”; “Building Your Dream Team”;”Guesstimating Your Potential Profit”; “Security in the Funds toFuel Your Flip”; “Trudging Through Some Taxing Issues”;”Hunting for Houses in Your Target Area”; “Inspecting theProperty with an Eye for Rehab”; “Prioritizing and Planning YourRenovations”; “Perking Up the Curb Appeal”; “Dazzling theCrowds with Updated Kitchens and Baths”; “Marketing Your Home”;and “Staging a Successful Showing.”

This book is designed for realty investors who want toprofit from buying below market, making cosmetic improvements to add value, andthen quickly reselling. But real estate agents and home buyers should alsostudy it because of the valuable insights offered by a longtime, verysuccessful real estate broker. On my scale of one to 10, this superb book ratesan off-the-chart 12.

“Flipping Houses for Dummies,” by Ralph R. Roberts(Wiley Publishing Co., Hoboken, NJ), 2007, $21.99, 348 pages; available instock 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).

***

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

Copyright 2006 Inman News

DEAR BOB: Two years ago my partner and I bought a condotogether. I paid the entire down payment and we have split the mortgagepayments, condo fees and property taxes since then. However, he recently movedout and says he wants his half of the equity (which I figure is around$45,000). I don’t have that kind of money to buy him out. Nor will I be able topay the expenses on my own. Can he force the sale of our condo? –Tamara Y.

DEAR TAMARA: If both names are on the title, the answer isyes. Your ex-partner can bring a partition lawsuit to force the sale of thecondo with a split of the sales proceeds. However, if his name is not on thetitle, he can’t bring a partition lawsuit.

Purchase Bob Bruss reports online.

You will need to hire a real estate attorney if he sues forpartition so your interests can be protected. Because you paid the downpayment, your attorney will make certain you receive that amount before thesales proceeds are divided.

A partition sale is a possibility whenever two or moreindividuals take title to real estate together. For this reason, it is wise toconsider other forms of co-ownership, such as a partnership agreement, whichprohibits a partition lawsuit.

WHY PAY PMI (PRIVATE MORTGAGE INSURANCE) FEE UP FRONT?

DEAR BOB: I recently heard financial adviser Suze Ormansuggest that a home buyer can pay upfront for his/her PMI premiums by paying 1percent of each $100,000 of the mortgage. She says most mortgage lenders don’texplain this. Is this true? –Tany A.

DEAR TANY: PMI premiums can be prepaid, but why in the worldwould you want to do that unless you receive a huge discount?

It makes no sense to prepay PMI, especially since PMI feesare not tax deductible (although Congress is considering making them deductiblelike mortgage interest). Another reason not to prepay PMI is you might sell theproperty and pay off the PMI mortgage, or you could pay down the mortgagebalance to get the PMI premiums removed.

IF YOUR NAME IS ON THE TITLE, DEDUCT MORTGAGE INTEREST YOUPAY

DEAR BOB: Last year my mom quitclaimed her house title toherself and me. She recently lost her job and I started paying her mortgage.After my name was added to her title, I got married. My wife and I are nowpaying the mortgage. Can I add my wife’s name to the title so title will beheld by my mom, my wife and me? –Kevin K.

DEAR KEVIN: If your name is already on the title to thehouse, you can then deduct the mortgage interest and property taxes you pay onthat property.

Why complicate things by adding your wife to the title? Insome states, such as California, that could cause a partial property taxreassessment.

I don’t see any advantage — only several disadvantages –of adding your wife’s name to the title. The mortgage interest and propertytaxes you pay will still be deductible on your joint tax return because you arelegally obligated to make those payments. For full details, please consult yourtax adviser.

The new Robert Bruss special report, “How to BuyFixer-Upper Houses with Little or No Cash for Fun and Fortune,” is nowavailable for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or bycredit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this columnare welcome at either address.

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

***

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

Copyright 2006 Inman News

Dear Barry,

Your column often advises people to find the mostexperienced home inspector possible. That’s all well and good, except for thoseof us who are just starting out. How do we get the experience we need if no onewill hire us because of lack of experience. Most home inspection companies areone-man operations, with no need to hire another inspector. So there’s littleopportunity to gain experience as employees of another company. Because ofthis, I’ve dropped out of the business. Whenever people asked how long I hadbeen inspecting, I had to be honest, and then they wouldn’t hire me.Additionally, unless you’ve performed many home inspections, you cannot obtainfull membership in a recognized home inspection association, and candidatememberships don’t encourage business. How can new home inspectors overcome thisentry-level impasse? –Gary

Dear Gary,

All home inspectors start out with little or no experienceand without full memberships in professional associations. At first, businessis slow, as with most business start-ups. A few jobs might be lost when peopleask how may homes you’ve inspected, but the fact is, most people never ask thisquestion.

To generate increased business, a new inspector mustcontinually market his or her services to Realtors. Most agents will notrespond, but a few will. And if they’re happy with your services, they’ll callagain. Many agents actually prefer new inspectors, rather than ones who areexperienced. These are often not the most ethical agents, but they do providenew inspectors with the opportunity to become experienced. 

Little by little, experience is gained, and home inspectionskills are refined. Most home inspectors started out in this manner, the onlyexceptions being those who entered the profession as employees of largercompanies. But as you’ve learned, that avenue is not available to many.

A large part of the problem is that the real estatemarketplace, in recent years, has become saturated with an overabundance of newhome inspectors. Home inspection schools have become a burgeoning business,pumping out more fledgling inspectors than are currently needed, and manyretiring contractors are viewing home inspection as a part-time career.Consequently, many new inspectors are encountering the same obstacles thatfrustrated your attempts to establish a business foothold.

The problem of gaining initial experience poses a seriouschallenge, but as difficult as it may appear, there are those who eventuallyovercome the resistance. As with success in most fields, perseverance anddetermination are essential.

Dear Barry,

In a recent article, you discussed the problem ofungrounded outlets in old houses. In my home, the screws that hold the coverplates on the outlets turned out to be grounded. Is this the case in all olderhomes? –Al

Dear Al,

The screw at the center of the outlet plate is only groundedif the wiring system in the home includes a ground wire to each outlet box orif the wiring is contained in metal conduit. In many older homes, no suchground wires or conduits are provided.

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: I recently refinanced my condominium withCountrywide Mortgage, a major nationwide lender. But I was shocked whenCountrywide’s appraiser valued my condo at only $468,000, which was less thanmy purchase price and less than identical units in the complex sold for inrecent months. I brought this to Countrywide’s attention and demanded anotherappraisal (with an appraiser of my choosing). As I suspected, the secondappraisal came in much higher at $625,000. But the Countrywide underwriterrefused to use the second appraisal and instead used the median of the twoappraisals. Later, I discovered Countrywide’s original appraiser did not evenuse any “comps” from the other recently sold units in the complex,which sold in the $625,000 range. I complained to Countrywide about the processand was told it was too late, as the loan was already completed. TheCountrywide representative said she would get the original appraiser and have athree-way conference call so he could explain. That call never came. TheCountrywide representative refuses to take or return my calls. Are there anyagencies or watchdogs where I can take my complaint against Countrywide? –LearS.

DEAR LEAR: That must be a very nice condo if it is worthover $600,000. Normally, I don’t name names in this column, but a $157,000appraisal difference between two licensed appraisers is shocking.

Purchase Bob Bruss reports online.

The fact Countrywide would even hire an appraiser who didn’tshow recent comparable sales prices in the condo complex in his appraisal isoutrageous. In your price range, a “drive by” appraisal without compsis not acceptable.

Presuming your refinanced mortgage is now closed, thereisn’t anything you can do about Countrywide’s bad treatment except take yourfuture mortgage business elsewhere. Countrywide is a mortgage banker, which isvirtually unregulated.

If you have not already obtained copies of both appraisals,you should do so and send them to the state office of appraiser licensing forevaluation. That first appraiser, hired by Countrywide, sounds like he isdownright incompetent if his appraisal didn’t even show any recent”comp” sales from the condo complex to justify his low appraisal.

TRICKING FIRST-TIME SELLER INTO ONE-YEAR LISTING IS UNFAIR

DEAR BOB: I am selling my first home, a small house, so Ican buy a larger house for my family. Being an immigrant, I am not familiarwith real estate rules. However, a friend of a friend is a real estate agent.She told me how listings work and gave me a form to sign. I didn’t really understandit. That was about seven months ago. She has only brought a few prospects tolook at my house, which is small but very well maintained. It has fresh paintand looks as good as possible. But I am very disappointed with the agent. Shedoesn’t return my phone calls and avoids me at social events. Upon reading mylisting, I see it is for 12 months. How can I get out of this bad deal? –TranT.

DEAR TRAN: I am shocked any real estate agent would even askfor a 12-month listing.

As regular readers of this column know, I recommend 90-daylistings. If a 90-day listing expires with the home unsold, but the listingagent is doing a good job, you can always renew. But a 90-day listing preventsgetting stuck with a bad agent, as happened in your situation.

Your listing agent obviously tricked you into that listing,presuming you didn’t understand.

I suggest you contact the manager of the brokerage whereyour realty agent works. Explain the problem and ask to either cancel thelisting for misrepresentation or have the listing transferred to a better agentwithin the same firm.

Your goal is to get your home sale. The brokerage has thesame goal. It is unfortunate you listed with an ineffective agent, but thebrokerage manager can solve that problem for you.

ADVERSE POSSESSION REQUIRES HOSTILE OCCUPANCY

DEAR BOB: I found a property on which I want to do anadverse possession. I am in contact with the mortgage company that has a loanon the property. How can I save this house from city code enforcement? Do Ihave to pay the property taxes? –Kathy H.

DEAR KATHY: To acquire title to a property by adversepossession, you must physically occupy the property for the number of yearsrequired by state law where it is located. Your possession must be open (notsecret), notorious (obvious), hostile (without permission), and continuous forthe required time period.

Meanwhile, the city code-enforcement officials in an extremesituation could order the property vacated. I was involved in a case like that(not adverse possession) several years ago where the city declared a house Ieventually bought as “uninhabitable.” Don’t mess with those folks.

Another problem is the mortgage lender could foreclose ifthe payments are not being made. Or the local property tax collector could holda tax sale. For full details, please consult a local real estate attorney todiscuss your alternatives.

NO EASY WAY TO AVOID TAX ON HOME SALE PROFIT OVER $500,000

DEAR BOB: My married sister is trying to sell her house for$1.7 million. She and her husband have owned and lived in it about 10 years.Their capital gain will exceed the $500,000 exemption. If they buy anotherhouse for $1 million, how will that figure in their capital gain? –Richard H.

DEAR RICHARD: Purchasing a replacement principal residencewon’t help your sister avoid capital gain tax on the sale of her home. Forgetthat idea.

Presuming they owned and occupied the home at least 24 ofthe last 60 months before the sale, the capital gain exceeding the $500,000exemption for a qualified married couple using Internal Revenue Code 121 willbe taxed at the maximum 15 percent federal rate, plus any applicable state tax.That’s not so bad. For details, the sellers should consult their tax adviser.

NO FIVE-YEAR OWNERSHIP REQUIRED FOR TAX-DEFERRED TRADE

DEAR BOB: When making an Internal Revenue Code 1031tax-deferred exchange, must I own the property for five years before selling inorder to avoid tax? –Ottilia C.

DEAR OTTILIA: Presuming the property is held for investmentor use in your trade or business at the time of the IRC 1031 trade, there is nominimum holding time. Of course, you must trade equal or up in both price andequity for another “like kind” investment or business property.

The only situation where a five-year minimum holding time occursis when a rental residence is acquired in an IRC 1031 exchange and the ownerlater converts it to his personal home.

In that situation, to be eligible for the IRC 121 principalresidence sale tax exemption up to $250,000 (up to $500,000 for a qualifiedmarried couple), the home must be owned at least 60 months and occupied as theseller’s primary home at least 24 of the last 60 months before the sale. Forfull details, please consult your tax adviser.

GET PUSHY BEFORE HOME BUILDER’S WARRANTY EXPIRES

DEAR BOB: Almost one year ago, I purchased my new house. Thebuilder’s one-year warranty is almost expired. Yet there are several”punch list” items to be fixed. For example, the grout fell out ofthe bathroom walls, there is a broken window, and a sagging door. The builderhas been dragging his feet to fix these items. What can I do to get him tofinish these repairs? I am worried my warranty will expire and these items –which I presented to him soon after I purchased in December 2005 — will not befixed. Do I need to contact an attorney? Should I hire a home inspector?–Jenna S.

DEAR JENNA: You must be an extremely patient person. Iwouldn’t have waited more than 30 days before taking strong action with thatbuilder.

I presume you have already sent the builder a written listof the specific repairs that need to be completed promptly. Don’t accept anymore excuses for his delay.

Before you contact a local real estate attorney, it might beto your advantage to hire a professional home inspector to be certain youhaven’t overlooked any serious problems.

I recommend members of the American Society of HomeInspectors (ASHI) because they have the toughest membership requirements. LocalASHI members can be found at www.ashi.org or1-800-743-ASHI.

Because your warranty is about to expire, a real estateattorney might advise filing a lawsuit against the builder to show you meanbusiness and to preserve your warranty rights.

The new Robert Bruss special report, “How to Buy Fixer-UpperHouses with Little or No Cash for Fun and Fortune,” is now available for$5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this columnare welcome at either address.

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

***

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

Copyright 2006 Inman News

There are pros and cons to stretching financially to buy a home. An advantage of pushing the limit of what you can afford to pay is that you may save in the long run if this means that you move less often in the future. The fees involved with buying and selling homes can add up to tens of thousands of dollars, or more. Also, moving takes time and energy. Less moving means less disruption.

On the other hand, if you make a big leap monetarily, lose your job and can’t afford to make the monthly mortgage payments, you could lose the house and jeopardize your good credit. Buyers who stretch to buy a new home and count on a big payout from the home they’ll be selling may be vulnerable in the current market if they’re depending on a large sum and the property sells for less than what they expected.

Despite the risks, there are compelling reasons for many buyers to move now to a home that better suits their long-term needs: There is less competition from other buyers; competition tends to drive prices higher; and interest rates are still in the mid-6 percent range for 30-year fixed-rate financing — low by historical standards.

However, buyers who need the equity from their current home should give serious thought to selling before buying a more expensive home, particularly if there’s no margin for error. Some buyers who recently bought first have had difficulty selling their old home.

Real estate is a local business. There is a lot of variability from one market to another. In some areas, well-priced homes are selling relatively quickly and in other areas listings are sitting for months. The longer your home sits on the market, the more it ultimately costs to make the move.

Pricing right for the market is the key to success. It’s difficult for most sellers to hear that they won’t be able to sell their home for as much as they’d hoped. And, unfortunately, there are some real estate agents who are willing to tell sellers what they want to hear to obtain a listing.

HOUSE HUNTING TIP: Don’t get carried away by an agent’s enthusiasm for your home. Ask for solid information about the probable selling price for your home. The most reliable comparable sales will be the ones that sold most recently, not those that sold six months ago when the market was different.

Tapping equity before you sell is easy enough. There are plenty of lenders who will give you an equity line of credit secured against the home you’re selling, often based simply on your estimate of the property’s value and a drive-by appraisal. Even so, it’s best to be conservative about the value of your home. In this market, you won’t know for sure how much cash you’ll net from the sale until the property is sold.

Most buyers stretch to buy, banking on the fact that their financial situation will improve within a few years. There are mortgage products designed to help you buy over your immediate affordability. One such product is the interest-only mortgage, which enables you to make lower, interest-only payments for up to 10 or so years. 

These mortgages serve a purpose. But, they can become problematic if your financial future doesn’t turn out as planned and you don’t have the resources to pay the much higher mortgage payments that could follow when the initial interest-only payment period expires.

THE CLOSING: Buying a home you can grow in to over time is a great idea as long as you fully understand the risks and rewards involved before you make the commitment.

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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Copyright 2006 Dian Hymer

“We are purchasing a $400,000 home that we want tofinance with a 30-year fixed-rate mortgage. While we can more than afford thecost of a 20 percent down payment, I would prefer to keep my money in myinvestments instead. I was thinking of financing 100 percent (using an 80/20 toget out of paying PMI) but was unsure whether this type of loan structure wouldresult in a higher interest rate on the first mortgage?”

Taking a100 percent loan with a piggyback — a first mortgage for 80 percent of valueand a second mortgage for 20 percent — would result in a higher overall costthan an 80 percent loan with a 20 percent down payment. In part, the highercost will be in the higher rate on the second mortgage. But in addition, eitherthe rate on the first mortgage will be higher, or the total loan fees will behigher.

Toillustrate, on Oct. 17 I shopped for a purchase loan on a $400,000 property inCalifornia. If I put down 20 percent, I could get a 30-year, $320,000fixed-rate mortgage at 5.75 percent, 1/2 point, and other lender fees of$4,770. If I went 100 percent and kept the first mortgage rate at 5.75 percent,the rate on the second mortgage of $80,000 was 8.15 percent, total points were1.5, and other fees were $6,490.

Yourintent is to invest the $80,000 that would otherwise go into a down payment.But a down payment is also an investment. The return consists of the reductionin upfront costs, lower interest payments in the future, and lower loanbalances at the end of the period in which you expect to be in the house. Icalculated the annual rate of return on investment in the case cited above,assuming you intended to be in the house for seven years. It was 15.6 percentbefore tax, and it carries no risk. Investments that good are not available inthe marketplace.

Why is thereturn so high? When you take a 100 percent loan, even though you have thecapacity to make a down payment, you place yourself in the same risk class asborrowers who have not been able to save for a down payment, and who havenegative equity in their house the day they move in. The default rate of suchborrowers is relatively high; they pay for it in the price of the piggyback (orin mortgage insurance); and you pay the same price as them.

Youwouldn’t have your 17-year-old son purchase automobile insurance for your car.You wouldn’t buy life insurance and tell the insurer you are 10 years olderthan you really are. You shouldn’t take a 100 percent mortgage loan when youcan afford to put 20 percent down.

DoesInterest-Only Really Cost More?

“You say that it costs more for an interest-onlyloan, but my lender is giving me one for the same price. Is it possible thatthe professor is wrong about this?”

Theprofessor has been wrong about some things, but he is not wrong about this. Hehas checked wholesale price quotes from many lenders, covering many differentloan types. Invariably, if two loans are otherwise identical, the interest-only(IO) variant is priced higher.

Thewholesale market is composed of very large lenders who fund mortgage brokersand smaller lenders, called “correspondents.” This market isextremely competitive, because the brokers and lenders who select from amongthe different wholesalers are knowledgeable and careful shoppers. That’s why Ilook to the wholesale market for evidence on price relationships amongdifferent mortgage types.

In theretail market, in contrast, these relationships can be obscured by a widedisparity in markups. Retail markups of the wholesale price vary both with thepractices of retail loan providers, and with the sophistication and shoppingacumen of borrowers.

Here is anexample. Borrower A comparison shops online and finds the best deal on a30-year fixed-rate mortgage is 6 percent with the IO version at 6.125 percent.Borrower B, who is identical except in smarts, is solicited by a high-pricedlender who quotes 6.5 percent for the same mortgage, and when B asks about anIO, this lender generously offers it at the same price.

Conclusion:if your loan provider doesn’t charge extra for an IO, you know you are beingovercharged.

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

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Copyright 2006 Jack Guttentag

Good economic news all week long had mortgage rates headedfor an up-side blowout until rescued by today’s word of zero change in November’s Consumer Price Index. Do not be misled: for long-term mortgage rates to holdnear 6 percent — let alone decline further — the economy has to sink, andthat is not what it is doing.

The killer this week was retail sales, up a solid 1 percentin November, and October revised up. Then came word of falling applications forunemployment insurance and a surge in applications for new purchase mortgages– the first real gain in a year, up 15 percent in just three weeks in ausually quiet season.

The basis for belief in a substantial economic downturn, Fedeasing, and justification for a 4.5 percent 10-year Treasury and six-flat mortgageshas been housing’s implosion. Overall, the housing market is still somedistance from hitting bottom (house prices may begin to stabilize, but loandefaults and foreclosures will rise for a year or more, and resumed priceappreciation is a long way off), but there is no sign that housing weakness isundercutting consumers.

Back in September, the Fed rounded up every money-lendingregulator to issue a “guidance” to banks, S&Ls, credit unions,and Fannie Mae and Freddie Mac, ordering them to tighten underwriting andadvertising standards for “nontraditional mortgages,” defined as any loanwith interest-only or negative-amortization provisions of any kind. In theworld of banking, a Fed guidance is a bolt of Jovian lightning — fail to payattention, and you will fry.

The events involved resemble policy-making in the Green Zone:

1. The guidance is about five years too late.

2. The central demands, a significant tightening of credit,are laudable: Thou shalt underwrite all interest-only loans as if amortized,and all negative-amortizing loans by amortizing the highest potential balance.Thou shalt cease thy deceptive (and stupid) advertising: “ONE percentFIXED for THIRTY years!”

3. The guidance, however, missed the big targets. To anation in desperate need of reform of subprime lending: Thou shalt payattention to our edicts of 1999 and 2001. The totally ineffective ones. Yes,those. Thy 100 percent piggybacks may continue, but thou shalt be careful or weshall warn thee again and again and again.

4. The entire mortgage industry ignored the guidance.Totally. Our firm has not received a single e-mail from any wholesaler evenconsidering compliance with the interest-only and negative-am requirements. 

5. Yesterday, the Office of Federal Housing EnterpriseOversight, Fannie and Freddie’s regulator, apparently noticed the cold shoulderand sent to them a blistering letter demanding immediate compliance.

6. It is incredible to me that the Fed has not discoveredthat mortgage lending became a Wall Street business 20 years ago. The Fed canshoot all the lightning it wants at banks, but they aren’t lenders anymore,just originators and conduits like the broker working in the house next door.

7. Main Street underwriting standards are based on the termsof loans that Wall Street will buy. If an investment bank’s wholesale mortgagesubsidiary will buy some piece of total mortgage crap because its back-officewise guys can lay off the risk to a sucker in the credit-derivative market,then a nice, upstanding Main Street “lender” will accommodate thedesire of a suicidal home buyer or refinancer. Sign here.

8. The Fed will sooner or later figure this out (a rocket tothe Street’s “primary dealers” will be required), and thereby do theone thing worse than slam the door on an empty barn: slam it on the ankle ofthe housing market while it’s running for cover, while the credit-burned bondmarket is already swinging shut on its own.

9. It’s a great country. Really.

Lou Barnes is a mortgagebroker and nationally syndicated columnist based in Boulder, Colo. He can bereached at lbarnes@boulderwest.com.

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Copyright 2006 Lou Barnes