Real Estate in Steamboat

In early 2004, Hotels Nevada owned the Alexis Park Hotel andthe American Inn Apartments in Las Vegas. Louis Habash owns and controls HotelsNevada, and he agreed to sell Hotels Nevada to L.A. Pacific Center Inc. for $75million.

Richard Alter and Eddie Chan were L.A. Pacific’s authorizedagents. At their request, Habash agreed to a $5 million holdback from thepurchase price for 12 months after the sale.

Purchase Bob Bruss reports online.

In March 2004, after the sales agreement and memorandumunderwent several drafts, Habash and Alter met at the office of the attorneyfor L.A. Pacific. Alter then told Habash he wanted the holdback period to befor 60 months rather than the agreed 12 months.

Habash refused to agree and walked out. Alter immediatelyapproached Habash in the hallway and told him L.A. Pacific would agree to the12-month holdback after all. Habash returned to the attorney’s office, reviewedcopies of the agreement and memorandum to confirm they both contained a12-month holdback period.

Habash then signed two originals of the multipage agreementand memorandum. The following day, counsel for Hotels Nevada received a copy ofthe documents containing the 12-month holdback period. They were then sent toan escrow agent who recorded the memorandum with the Clark County Recorder inNevada.

The escrow officer mailed a copy of the recorded memorandumto the attorney for Hotels Nevada. But the recorded memorandum contained a60-month holdback provision.

Hotels Nevada learned of the 60-month holdback in April 2005when it wrote L.A. Center with wire transfer instructions for the $5 millionholdback. L.A. Center then denied the $5 million was due. At an April 22, 2005,meeting, Alter presented Habash with a copy of the recorded memorandumcontaining the 60-month $5 million holdback.

Hotels Nevada and Habash had not previously seen any versionof the sales agreement or memorandum containing the 60-month holdback. On May4, 2005, Hotels Nevada filed this lawsuit against buyer L.A. Center, allegingfraud and requesting cancellation of the sale based on illegality andconspiracy.

The seller alleged L.A. Center “manipulated, fabricatedand manufactured” the version with the 60-month holdback. Defendant L.A.Center moved to compel arbitration under the agreement’s arbitration clause.But Hotels Nevada objected, arguing the fraud in the execution of the agreementmade it void from the beginning.

If you were the judge would you order arbitration of thisdispute?

The judge said no.

Before the arbitration issue can be decided, the judgebegan, it must be determined if “grounds exist for revocation of theagreement.”

If the promisor (Habash) knew what he was signing but hisconsent was induced by fraud, then the contract is voidable by him, the judgeexplained.

“Fraud in the execution, on the other hand, occurs whenthe promisor is deceived as to the nature of his act and actually does not knowwhat he is signing, or does not intend to enter into a contract at all, mutualassent is lacking, and it is void,” the judge emphasized.

“Turning to the complaint, we conclude that HotelsNevada sufficiently alleged facts supporting a claim of fraud in the execution,a claim that could constitute grounds for revocation of the agreement ifsubstantiated by evidentiary support,” the judge noted.

In summary, fraud in the inducement of a contract makes thatcontract voidable, but fraud in the execution makes the contract void from thebeginning and, hence, unenforceable, the judge concluded.

Based on the 2006 California Court of Appeal decision in HotelsNevada v. L.A. Pacific Center, 50 Cal.Rptr.3d 700.

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

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Copyright 2007 Inman News

DEAR BOB: I know a person who owns his home and owns anotherresidence he rents to his daughter. But he insists the money he gets from hisdaughter is not rental income. He says it’s just enough to pay the mortgage sohe doesn’t report it on his IRS tax return. But he claims the property taxesand mortgage interest on his personal tax return, Schedule A. Is this correct?–Jose C.

DEAR JOSE: No. Your friend should be reporting the rentalincome on Schedule E of his federal income tax return. This is the same placehe can deduct the applicable mortgage interest, property taxes, insurance,repairs, other expenses and depreciation for the rental house.

Purchase Bob Bruss reports online.

He probably thinks he is cheating the IRS. But he is reallycheating himself because he isn’t claiming the maximum tax benefits from hisrental property. If he has less than $100,000 annual adjusted gross income, hecan deduct up to $25,000 tax loss from his rental property, thus reducing hisincome tax. He should consult his tax adviser.

DON’T SPEND INHERITANCE BEFORE RECEIVING IT

DEAR BOB: According to my parents’ will, each of us fourkids will inherit one-fourth ownership of their primary residence. I am theonly one who has ever expressed any interest in owning the house outright. As Iam the executrix of their estate, what steps do I need to take to ensureeveryone receives a fair price for their one-fourth share? –Joan R.

DEAR JOAN: Please don’t be so hasty. If both your parentsare alive and well, many things can happen before they both die and you foursiblings inherit the house. They can change their wills, or even write you outof the will because wills are revocable.

Or maybe they will sell the house, move to a grass shack inTahiti, and spend your inheritances traveling around the world.

The best thing you can do now is make sure the house titleis held in a revocable living trust so, after the last parent dies, thatparent’s estate won’t have to go through probate court costs and delays. Atthat time, obtain a professional appraisal to establish the home’s stepped-upbasis to market value.

The big living-trust benefit is the successor trustee(presumably you) can distribute the living-trust assets according to the termsof the living trust promptly after any estate debts are paid. Probate courtproceedings usually take a minimum of six months, sometimes years.

A secondary living-trust advantage occurs if one spousebecomes incapacitated, such as by a severe stroke or Alzheimer’s disease. Ifthe other spouse is still alive, he or she can then manage the living-trustassets, including selling them if necessary.

Or, if only one spouse is alive, then you as the successortrustee can make important living-trust decisions, such as selling the house topay for a parent’s care. More details are in my special report, “24 KeyQuestions Answered: Living Trust Secrets Reveal How to Avoid Probate Costs andDelays,” available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA94010, or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com.

NO OBLIGATION TO PAINT NEIGHBOR’S SIDE OF THE FENCE

DEAR BOB: The condo building adjacent to ours has a concreteblock wall on its property that faces our building. The adjacent condo ownersrecently had their side of the wall painted. But our side of the wall remainsdark with mildew and age. We asked them to paint our side of the wall too. Theyrefuse. Do we have any recourse? –Nancy S.

DEAR NANCY: No. There is no law of which I am aware thatrequires a property owner to paint the side of his/her wall that faces theneighbor’s property. If I were in your situation, I would go ahead and paintthe ugly wall the color I prefer.

The new Robert Bruss special report, “The 10 KeyQuestions Smart Home Buyers Ask to Avoid Getting Ripped Off,” 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).

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Copyright 2007 Inman News

Q: I’m having cultured marble installed in a shower in myhouse. The installers have made it clear that they install, period. They won’tdrill holes to replace the sliding shower door. I don’t own a power drill anddon’t feel confident enough to rent or borrow one and try to drill the holesmyself, as I believe a special bit is required. Is there a way to reinstall theshower doors using some kind of adhesive that won’t damage the cultured marble?The doorframe is lightweight aluminum and the shower won’t get much use.

A: Sorry,we don’t recommend gluing the doorframe to the wall. The one exception is ifthe manufacturer allows this type of installation. The fact that you won’t useit much doesn’t play into it. The next guy might.

In ourview, there is a fair chance that you will create a safety hazard if you glueit. Often a person using the shower will grab the door and without a secureframe would run the risk of having the frame fall out, possibly causing injury.

It’s asimple job that can be done in short order. Normally we would encourage you todo this yourself but because you would have to buy, borrow or rent a drill, wesuggest you look for a handyman to install your new shower door.

Q: Inmy 1940s bathroom, the tile only goes halfway up the wall around thetub/shower. Above that were glued white Masonite panels, which I tore off. Butthat left me with a top layer of plaster that’s broken, brittle and coveredwith old adhesive.

Forshower use, I want to install new panels over this area. I am considering usingDupont Wall Surfaces, which recommends installation over green board. Do I tearthe plaster down to the wall studs and install green board? Or can I repair thetop layer of plaster and seal it? How should I do this and what products shouldI use?

A: Becauseyou have gone to the trouble of tearing up half the tub/shower enclosure, whynot go all the way and replace the tile too? This is the cleanest — and wethink the most efficient — way to do this job.

Itshouldn’t cost you much more to redo the entire shower. You can do thedemolition yourself by removing the lath and plaster exposing the studs. Youcan even install the green gypsum board that is recommended by themanufacturer. Once the wall is prepared, professionals can install the finishedwall surfaces.

We alwaysrecommend that manufacturer’s recommendations be followed when installing anyproduct. Doing so gives the best chance of successfully completing the job andwill leave any warranty attached to the product intact. We do not recommendinstalling Dupont Wall Surface over the existing compromised plaster wall. Yourwall is broken, brittle and pockmarked with adhesive. A panel of any kind isonly as good as the support below it. Even if Dupont allowed this product to beapplied over existing plaster, we’d recommend against it.

Installyour new Wall Surface over green board as recommended by Dupont. Theirtechnical information states, “The only recommended support for this typeof installation is water-resistant gypsum board.” They also caution thatonly their proprietary “Surfaces Adhesive” and “SurfacesSealant” be used in the installation. No substitutes allowed.

For moreinformation regarding Dupont Wall Surfaces go to www.wallsurfaces.dupont.com.

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Copyright 2007 Bill and Kevin Burnett

DEAR BOB: I bought a land parcel at a government auction. Iwon over another bidder who owns a neighboring property. He is angry at mebecause I outbid him. His fence encroaches onto my land. Six months ago, Iwrote to him, requiring he remove his fence. Can I remove the fence myself? –TatyanaB.

DEAR TATYANA: If you are 100 percent absolutely, positivelycertain the fence is on your side of the correct boundary line, as shown by arecent survey, it is your fence.

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What is the purpose of the fence? Does it keep animals fromstraying? Before removing the fence, check applicable state and local laws tosee if the property must be fenced. Before taking action, please consult alocal real estate attorney to be certain you don’t make a costly mistake.

BUYING A REPLACEMENT HOME WON’T AVOID HOME-SALE TAX

DEAR BOB: If I sell my home in less than the two-year limitfor that Internal Revenue Code 121 tax exemption, is there a tax law aboutbuying a replacement home within a period of time? I bought our current home inJune 2005 and am moving out of state for health reasons –Jane T.

DEAR JANE: There is no tax law allowing tax exemption ordeferral upon the sale of your principal residence if you buy a replacementprincipal residence. That old tax law, Internal Revenue Code 1034, was repealedin 1997.

Presuming you have a valid health reason for moving,evidenced by a physician’s statement, then you can qualify for a partialInternal Revenue Code 121 principal-residence-sale tax exemption.

Because you don’t meet the full 24-out-of-last-60-monthsownership and occupancy test, the percent of your exemption will be based onthe number of months of ownership and occupancy.

For example, if you owned and occupied the home as yourprimary residence for 18 months before its sale, then you qualify for 75percent (18/24) of the $250,000 single-person tax exemption (or 75 percent ofthe $500,000 exemption for a qualified married couple filing a joint tax returnin the year of home sale). Full details are available from your tax adviser.

PROS AND CONS OF CONSTRUCTION TO PERMANENT MORTGAGE

DEAR BOB: My fiancé and I recently bought a home to beconstructed by a home builder. He offered construction to permanent mortgagefinancing. I am now having buyer’s regrets that I am locked into this housebefore its completion. The builder is paying the interest on the constructionloan during the one-year build period. We will refinance with a permanentmortgage after the house is completed. What are the pros and cons of thisarrangement? –Monica T.

DEAR MONICA: If it will take a year to build your new home,it must be the Taj Mahal! Most new homes take six to nine months to complete.I’m glad the builder is paying the construction loan interest.

Does your contract say what happens if there are costoverruns? That frequently happens. Is the builder well capitalized with asuccessful record? I hope he’s not a Homer Simpson type.

The big question is what will be your interest rate andterms on the permanent mortgage when the house is completed?

Maybe you can find a better mortgage elsewhere. Does thecontract require you to accept the builder’s permanent mortgage financing? Oris there a penalty if you get another mortgage on better terms elsewhere? Theseare questions that you should have asked before signing the mortgage papers andpurchase contract.

The new Robert Bruss special report, “The 10 KeyQuestions Smart Home Buyers Ask to Avoid Getting Ripped Off,” is nowavailable for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010, or bycredit report 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).

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Copyright 2007 Inman News

If you are adverse to new ways of thinking about yourmortgage and building wealth, don’t read “Untapped Riches” by Susanand Anthony Cutaia. This new book will challenge your thinking about mortgages.

Instead of making extra mortgage principal payments to ownyour home and investment properties free and clear as fast as possible, themortgage broker authors advise never paying off your mortgage and buildingwealth instead.

Purchase Bob Bruss reports online.

This book is not for typical homeowners who think it’s smartto pay off their home loans as fast as possible. Instead, the husband and wifeco-authors explain why interest-only, so-called “option mortgages,”and even negative-amortization mortgages cut monthly mortgage payments,enabling borrowers to acquire more properties.

Contrary to what most mortgage advisers suggest, the Cutaiasare big advocates of using the leverage of borrowing and periodic refinancingto use tax-free cash to acquire more properties. They recommend interest-onlyadjustable-rate mortgages (ARMs) with maximum payment increase”caps,” and making 20 percent cash down payments to obtain 80 percentloan-to-value mortgages.

The book’s themes are (1) minimize your mortgage payments,(2) maximize the use of leverage and the use of compound interest, and (3) payyourself first before you pay the bank.

The authors show how savvy wealth builders pay minimuminterest-only mortgage payments and then use the excess cash they would havepaid on a fully amortized 30-year mortgage to deposit into their savingsaccount earning at least 5 percent compound interest. They explain how the cashin a savings account earns money for the borrower instead of earning profitsfor the bank.

Susan and Anthony Cutaia emphasize putting money into otherrealty investments, rather than paying off a mortgage rapidly, will yield farmore profits. They see no future in pouring “dead money” into monthlymortgage payments higher than minimum interest-only payments.

A controversial part of the book extols the advantages ofthe negative-amortization mortgage. “Neg am” means the monthlypayment is less than the interest earned by the lender, and the unpaid interestis added to the mortgage principal instead. Most borrowers don’t feelcomfortable with this concept, however, especially if property values are notrapidly rising.

Even readers who don’t embrace the authors’ concept of”keep your money out of the bank’s hands, never pay off yourmortgage” can still accept the advice to “find a mortgage first, thenfind the property.” This simple, sensible suggestion means borrowersshould get pre-approved in writing first by a mortgage lender so they know howmuch they can then afford to pay for their home or investment property.

Just in case readers don’t agree with the authors that ARMsare good, not bad, one of the chapters is titled “The Single WorstMortgage in Creation: The Fixed-Rate Mortgage.” For borrowers who alreadyhave fixed-rate mortgages, the authors suggest never making extra mortgageprincipal payments and instead putting extra cash into a compound interestsavings account.

The authors point to the 2005 hurricanes as an example ofhow little advantage there is in having a paid-off home. When homeowners buildup too much equity in their homes, the authors suggest, the mortgage should beperiodically refinanced and the tax-free cash taken out should be put intoinvestment accounts, but not with the same lender.

The second half of the book explains the tax advantages ofowning real estate investment properties. Most of these explanations areexcellent. However, the chapter about using a “cost segregationstudy” to accelerate depreciation deductions for short-life components ofan investment property is nice to know but a bit beyond the tax sophisticationof most investors and their tax advisers.

Chapter topics include “Never Pay Off YourMortgage”; “Don’t be House Rich and Cash Poor”; “Create theIdeal Exit Strategy”; “What are New Smart Loans?”"Interest-Only Mortgages: the Increasingly Popular Way to Free Up UsableCash”; “More on Neg Am Mortgages and Why They Are Gaining MoreAdherents”; “Gaining a Tax Advantage: Tenant in Common Real EstateTransactions”; “1031 Exchanges to Defer Paying Taxes”; and”Personal Strategies for Real Estate Transactions.”

This is far from an average “how to get amortgage” book. It explains why the authors recommend interest-only ARMsrather than traditional fixed-rate mortgages, and why paying off mortgagesearly makes no sense. This thinking person’s book is sure to be challenged, butthe authors do an admirable job of explaining their viewpoints. On my scale ofone to 10, this controversial book rates a solid 10.

“Untapped Riches,” by Susan and Anthony Cutaia(AMACOM Publishing, New York), 2007, $18.95, 179 pages; available in stock orby 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 2007 Inman News

Dear Barry,

We are currently selling our home and have a questionabout seller disclosure. Beside our house, there is a large Dutch elm tree. Itis diseased and will probably die in a couple of years. Our buyers have notraised any question about the tree, and the symptoms of the disease are notreadily noticeable. Should we tell them about the tree or just let them enjoyit until it needs to come down? –Jim

Dear Jim,

In today’s litigious environment, it is never wise towithhold or abridge real estate disclosure. There are buyers out there whowould sue over the loss of a tree with an undisclosed disease. So play it safeand disclose everything you know about the condition of your property. It isthe way you would want to be treated if you were the buyer.

As for allowing the buyers to enjoy the tree for the timebeing, that enjoyment will have little intrinsic value when they eventually paythousands of dollars to have the tree removed. If they should then suspect thatyou knew about the problem, you could find yourself wishing that you had saidsomething before the property was sold.

The answer to all disclosure uncertainties consists of threesimple words: disclose, disclose, disclose. Allowing one exception to thisbasic rule invites further exceptions. It is a slippery slope that leads tocostly liability. The disclosure you withhold today could be tomorrow’s incomefor a hungry attorney.

Dear Barry,

This is not a question, but a comment. I met a homeinspector in a hotel hot tub in Montana. He loved doing home inspections in thewinter because exterior problems were often covered by snow and he could justcheck the “unknown” box and avoid any responsibility or recourse.Could you please alert readers to this unfortunate cop-out? –James

Dear James,

In cold states and high elevations, heavy snow can severelylimit the thoroughness of a home inspection. This is an unavoidable reality inmany areas of the country. In winter months, deep snow prevents inspectors fromevaluating the lower portions of walls, some portions of foundations, grounddrainage conditions around buildings, various plumbing fixtures (including yardsprinklers), driveways and patios, stairs and decks, roof conditions, chimneytops, and more. In such cases, home inspectors have no choice but to listburied conditions as “unknown” and to recommend evaluation after thespring thaw. If inspectors take pleasure in the seasonal work relief providedby snow cover, they reveal the lazy proclivity of human nature itself, not thescandalous nature of the home inspection profession.

Those who buy homes that are partially obscured by snow mustaccept a degree of risk. To some extent, they are buying property sight unseen,and in many instances, defects become apparent when warm weather returns.

Home inspectors sometimes joke among themselves that theperfect inspection site is a house with a slab foundation and a flat roof. Thistranslates, of course, to no crawling under the floor or through the attic. Nowthe list can be expanded to include a slab home in heavy snow.

White winters limit the thoroughness of home inspections. Itis an inescapable reality in colder climates, one that should not be heldagainst home inspectors, even if they take pleasure in the momentary respite.

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

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Copyright 2007 Barry Stone

DEAR BOB: My mother, now divorced, owned a house with herformer husband. But before the divorce papers were finalized, without mymother’s knowledge he changed his title to the house from joint tenancy withright of survivorship to tenants in common. He passed away recently. Now hisnephew is claiming the house under his will. My mother is still on the title andloan papers. Can a joint tenancy title be changed without permission of theother joint tenant, and is my mother entitled to all or half of the property?–Leslie LeB.

DEAR LESLIE: For simplicity, I presume the house is not in astate allowing a married couple to hold title as tenants by the entireties (aspecial form of joint tenancy that cannot be terminated by one spouse alone).If the divorce settlement papers didn’t specify what was to happen to the housetitle after the divorce, each still owned half of the house after the divorce.

Purchase Bob Bruss reports online.

Unfortunately for your mother, a joint tenant with right ofsurvivorship does not need permission from another joint tenant to change theownership method to “tenants in common.” Also, her ex-husband couldhave sold his half-interest in the property or given it away without herpermission.

Presuming the ex-husband executed and recorded a validquitclaim deed from himself as a joint tenant to himself as a tenant in common,that broke up the joint tenancy without notifying your mother. The result isthe ex-husband’s half of the house became subject to his will, which apparentlyleft his half of the house to the nephew.

Under the law of virtually every state, your mother stillowns her half of the house, but as a tenant in common and not as a joint tenantwith right of survivorship. The fact her name is on the mortgage papers isirrelevant to the title.

Perhaps she should offer to buy out the nephew’s inheritedhalf. Or maybe she should ask him to buy her out. Better yet, perhaps theyshould try to get along as tenant-in-common co-owners. For more details, sheshould consult a local real estate attorney.

GET A SURVEY TO PROVE TRUE BOUNDARY LOCATION

DEAR BOB: My next-door neighbor insists the property linesfor our properties are wrong. He is a “bully type” and insists myroadside mailbox is on his property. He has even gone so far as to place surveyflags along the supposed boundary. Is there anything short of legal proceedingsor another survey that he will contest? –Mike H.

DEAR MIKE: I suggest you hire your own licensed surveyor todetermine the correct boundary location. I’ve heard of a few situations wherelicensed surveyors disagree on the correct boundary location, but thosecircumstances are very rare. Until you have written proof where the trueboundary is located, you’re in a weak situation.

PITFALLS OF OUT-OF-TOWN PROPERTY OWNERSHIP

DEAR BOB: I am at my wit’s end. I am a landlord with atownhome several hundred miles from my residence. The tenants didn’t pay therent for two months. They moved out in the middle of the night. I contacted alocal attorney there. He wants $1,000 up front to file a lawsuit against themand try to serve them with a process server. Can I file the court papers myselfand try to serve them, as my funds are limited? –Pamela F.

DEAR PAMELA: You forgot to tell me how much the ex-tenantsowe for unpaid rent, the amount of their security deposit, and if they have anyassets. If they moved out in the middle of the night, they might not be worthsuing.

Yes, you could prepare the summons and complaint yourself,but I don’t recommend it, as you are likely to make mistakes. Presuming youfind the ex-tenants, have a process server serve them with the summons andcompliant (you can’t do that yourself), and get a court judgment; then you haveto try to collect it.

Your situation shows the pitfalls of long-distancerental-property ownership. But a big part of this problem was you! You nevershould have let your tenants get two months behind in the rent. This might be agood time to fix up that distant property and sell it.

As a landlord, my policy is to make a friendly phone call(or visit if I want to check up on the property) when the rent is three dayslate to remind the tenant the rent hasn’t been received. Sometimes it’s just anoversight. On the fourth or fifth day, I post the “Pay Rent or Move”notice on the door and then keep the eviction action moving as fast aspossible.

In more than 35 years of renting to tenants, I’ve had toevict only three tenants in court. But I’ve started the procedure so many timesI’ve lost count. Most tenants either pay up, move out, or we reach an agreementto pay the overdue rent weekly.

HOW TO CLAIM TITLE BY ADVERSE POSSESSION

DEAR BOB: My favorite article you wrote was the one aboutobtaining title by adverse possession. My question involves an abandonedproperty that is going to tax sale. What is the best way to post notice on theproperty and remain completely in honor? –Rodger W.

DEAR RODGER: If you have been occupying the property withoutthe owner’s permission for the required number of years in the state where itis located, you may qualify to obtain title by adverse possession. Therequirements are open (obvious), notorious (not secret), hostile (without theowner’s permission) and continuous occupancy. In addition, you must have paidthe property tax for the required number of years.

If you qualify to obtain title by adverse possession buthaven’t paid the overdue property tax, hustle down to the tax collector’s officeto pay those taxes so the property doesn’t go to the tax sale where somestranger can obtain title with his/her high bid.

After you pay the property tax, presuming you meet the testsexplained above, you can bring a quiet title lawsuit to perfect your title byadverse possession. You’ll need a local real estate attorney for that.

BEST WAY TO LEARN IF SELLERS KNEW OF HOME DEFECTS

DEAR BOB: My son and his wife bought their first home inAugust 2006. With the first heavy rain, the sewage from the septic tank backedup into the house. They had the tank pumped out. But at the next heavy rain,the same problem happened again. No mention was made during the purchasenegotiations about any septic tank problems. Do they have any recourse againstthe sellers? –Harry F.

DEAR HARRY: This situation shows why buyers of homes withseptic tanks should always make their purchase offer contingent on asatisfactory septic tank inspection before the purchase closes.

Your son and his wife might have recourse against the sellersif they can prove the sellers knew of the problem and failed to disclose itbefore purchase.

The best way to learn if the sellers knew of any homedefects is to ask the neighbors. They usually know if there were any problemswith the property before the sale.

If not, it could be a new problem and there might not be anylegal recourse against the sellers to have the septic tank rebuilt to operatecorrectly. For more details, the buyers should consult a local real estateattorney.

THE ONLY WAY TO AVOID TAX ON RENTAL-PROPERTY SALE

DEAR BOB: My wife owns an inherited rental house that weplan to sell this year. We estimate a $300,000 capital gain above thestepped-up basis market value on the date of inheritance. If we buy a new home,can we obtain any exemption from tax on the capital gain? We have not lived inthe house any of the last 60 months –Greg C.

DEAR GREG: There is only one way to avoid tax on the sale ofa rental property. It is to make an Internal Revenue Code 1031 tax-deferredexchange of the rental house for another property to be held for investment oruse in a trade or business, such as a rental house of equal or greater marketvalue and equity.

At the time of the IRC 1031 exchange, both properties mustbe rentals. However, you can eventually convert the acquired rental propertyinto your personal residence, if that is your wish. To show rental intent, mosttax advisers suggest renting the acquired property at least six to 12 monthsbefore moving in. For full details, please consult your tax adviser.

The new Robert Bruss special report, “The 10 KeyQuestions Smart Home Buyers Ask to Avoid Getting Ripped Off,” 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).

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Copyright 2007 Inman News

Missing outon a home you’d like to own can be heartbreaking. But, not all home saletransactions close, so you might have a second chance. Or, you could considermaking a backup offer.

A backupoffer is an offer that is negotiated like any other offer until the buyers andsellers reach a price and terms that are mutually acceptable. A unique term ofthe agreement is that it is accepted as a backup offer subject to the collapseof a previously accepted offer that is in primary position.

In anactive, low inventory market, a seller might receive multiple offers and acceptmore than one backup offer. In this case, the backup offers would be ranked.For example, backup offer #3 would be subject to the collapse of backup offer #2and backup offer #2 would be subject to the collapse of the primary offer.

Backupoffers also come into play in softer markets. The best listings at the bestprices attract the most buyer attention regardless of market conditions. Evenin a slow market a prime listing can sell quickly. If you’re a little late tothe table and no one else beat you to it, you might look into submitting abackup offer. But, first, consider the pros and cons.

Onedisadvantage is that you may be tempted to postpone looking at any otherlistings until you find out if the first deal goes through. By doing so, youcould potentially miss out on other good properties.

HOUSEHUNTING TIP: If you decide you want a property enough to accept a backupposition, continue to look at new listings that fit your parameters. Also makesure that your contract includes a provision that allows you to withdraw fromthe contract without penalty at any time up until you are notified that youroffer is in primary position.

Anotherdisadvantage of being in backup position is that your commitment to buy theproperty could strengthen the primary buyers’ resolve to continue with thetransaction, even when issues come up like property defects that mightotherwise kill the deal.

Be awarethat the sellers may have the right to renegotiate their contract with theprimary buyers.

Because ofthese drawbacks, many buyers shy away from making backup offers. They prefer towait on the sidelines to see what happens with the first contract. A benefit ofthis approach is that the sellers might be easier to work with after having hada deal fall apart.

There is,however, a risk in this approach. An attractive listing could draw seriousinterest from other buyers. If so, one of them might end up in backup positionand preclude you from buying the property

When there’san accepted backup offer, a listing doesn’t come back on the market when theprimary contract fails. The backup buyer is elevated to primary positionwithout giving other buyers a chance to buy the property.

Beforedeciding whether or not to make a backup offer, try to find out how muchinterest there is in the property. If there are other buyers serious about theproperty, it might be worth your while to submit an offer for a backupposition.

The otherrisk of waiting to see if the first deal collapses is that you could findyourself in competition with other buyers who are also waiting to see whathappens.

A lot oftime and emotional energy goes in to making any offer. Some buyers would rathersave this effort for a listing that is definitely available to buy.

THECLOSING: The best stance to adopt if you’re a backup buyer is: If it’s meant tobe, it will happen.

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

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Copyright 2007 Dian Hymer

Findingthe right home mortgage loan provider is complicated enough, but when you buy ahouse from a builder who has an in-house lender, the complications multiply.The builder wants you to use his lender, and will offer significant inducementsto do so. This puts many buyers in a quandary as they realize that theinducements must be weighed against the likelihood that the builder’s lenderwill overcharge them.

Offeringinducements is legal if it is done properly. A builder cannot post a sale priceof $290,000 and raise the price to $300,000 if a buyer insists on using his/herown lender. But a builder can post a price of $300,000 and reduce it to$290,000 for borrowers who use the in-house lender — as if there was adifference!

Indeveloping a strategy for dealing with a builder pushing an in-house loanprovider, it is useful to know where the builder is coming from. He expects tomake money on the lending operation, but the main reason for having a preferredlender is to provide assurance that home sales won’t fall through because oflack of financing.

Thebuilder wants to avoid investing significant marketing dollars in finding abuyer who then leaves him at the altar because his loan doesn’t come through.This won’t happen with his in-house lender because of some prior arrangementwith the builder. While the arrangement can take many forms, the thrust of itis that in the event that a loan to a buyer can be closed only at a loss, theloan will nonetheless be made, since the profit margin on the house will morethan cover it.

Forexample, if the buyer turns out to have previously undisclosed credit problemsthat make him unacceptable except at subprime loan terms, the in-house lenderwill make the loan and sell it at a loss.

To make upfor these losses, other buyers are overcharged. Since the builder cannotrequire buyers to use the in-house lender, he encourages them to do so byoffering concessions that he hopes buyers will value by more than theovercharge. For example, if the loan overcharge is $2,500, the builder mightoffer kitchen cabinets with a retail price of $3,000, but which cost thebuilder only $1,500.

It is amistake for a buyer to commit to a builder with an in-house lender withoutknowing the financial part of the purchase. The true price of the house whenusing the builder’s lender is P + O – C, where P is the posted house price, Ois the overcharge on the loan, and C is the value to the buyer of the builder’sconcessions. This is the price that should be used in comparing houses offeredby different builders.

The extentof the overcharge on the loan should be measured in present-value dollars byshopping one or more online lenders on the same day. I will have a detailedexplanation of exactly how to do this in the version of this article I place onmy Web site.

The valueof concessions is the value to the buyer, which could be less, perhapsconsiderably less, than the value suggested by the builder. If the builder’sconcession is to absorb some or all of the settlement costs, the buyer shouldcheck the alleged cost savings against those shown by online lenders such asAmerisave, E-Loan or IndyMac.

Incomparing true prices of different builders, buyers should give the buildersample opportunity to sweeten their concessions in order to make the deal.Especially in the kinds of soft markets that were common in late 2006,aggressive bargaining can yield a large payoff.

Somebuyers may find themselves in a situation where a particular house is the bestdeal, despite the fact that the builder concessions have less value to themthan the loan overcharges. In such cases, in negotiating with builders, buyerscan offer to allow themselves to be approved by in-house lenders, whilereserving the right to use their own lenders. This removes builder uncertaintythat deals might fall through due to a failure to fund, and should make themmore amenable to the use of outside lenders.

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

Copyright 2007 Jack Guttentag

Mortgagerates have risen again, sharply, beginning to push 6.5 percent for low-fee,30-year loans, and big-media “news” won’t discover the jump untillate next week because of lags in national surveys. It’s real, though, rightnow.

Thedefinitive 10-year T-note has blown up to 4.88 percent from 4.45 percent onlysix weeks ago, the damage caused by a colossal bond-market error in economicforecasting. It was just certain last summer and fall that a slowing housingmarket would tip over the economy, and the Fed would begin to cut its 5.25percent overnight rate in 2007.

Ascompletely mistaken as mistaken can be.

Theeffects of this error are going to ripple for months, mortgage ratescontinuously vulnerable unless we are saved by a delayed appearance of generaleconomic slowdown. Here’s a great thing for the housing sector: if you wantlower mortgage rates, you’ve got to hope for a deeper housing crater. Fire orice. The same is true for fans of the stock market, which has had an ugly weekas a voyeur at the bond-market wreck.  

Mortgagescould quickly run close to last year’s highs, just below 7 percent, inhigh-volatility trading. It’s been a long time since we’ve had quarter-point,over-the-weekend moves, wockety-tong up and down the stairs, but the correctionfollowing a mistake as big as this tends to break all the technical rules oftrading. Support, resistance, oversold … do not apply.

From thestraightforward (UP!) to the economics of a new forecast and bond marketadaptation, there is a lot in play. First, the health of the economy isunequivocal: today’s news of a 2.3 percent jump in December orders for durablegoods is too strong for argument. Everyone knew that job data was running aboveexpectation, but many dismissed that strength as a lagging indicator, convincedthat weakness would ultimately appear, and the Fed would ease. They were wrong.

The newesthousing market data has the Street completely confused. The Wizards of Wallbought bonds and mortgages last year on housing weakness, and this week dumpedthem in belief that housing has bottomed — huge sales on thin and ambiguousdata. Inventories of homes for sale fell by a half-month supply in December,interpreted as bottoming, even though resales dropped again. The Wizards don’tknow what every Realtor does: a decline in listings in the winter doesn’t meananything. A December gain in sales of new homes had traders hitting “sell”again today, but thin markets in a weird-warm winter … meaningless.

Thehousing reality: neither a blowing bubble nor a bottom. Housing and its effectson the whole economy are going to take years to resolve. A jump in long-termrates is a shove from behind that will certainly worsen conditions in thebubble zones, and will also begin to close the escape hatch for ARM-resetprocrastinators.

The bigshoe whistling down: mortgage credit quality is deteriorating rapidly. TheWizards think that rising loan defaults will be limited to 2006 originations,and they are mistaken about that, too: older paper will soon begin to tank. Asit does, credit standards for new loans will begin their inevitable tightening,and diminish the supply of buyers. Nobody knows how that spiral will play out;it’s just beginning.

The Fed onpause at 5.25 percent must feel like the audience at a Keystone Cops flickerduring one of the side-to-side chase scenes. Last year, low and fallinglong-term rates stimulated the economy while the Fed was trying to slow it.Now, rising long-term rates will brake the economy, just as the Fed began tothink it had to tighten some more.

FedChairman Ben Bernanke’s pause is either a sign of trans-Greenspanic wisdom, orhe’s the luckiest man since Ringo Starr.

LouBarnes is a mortgage broker and nationally syndicated columnist based inBoulder, Colo. He can be reached at lbarnes@boulderwest.com.

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Copyright 2007 Lou Barnes