Real Estate in Steamboat

Editor’s note: Robert Bruss is temporarily away. The following column from Bruss’ “Best of” collection first appeared Sunday, May 7, 2006.

DEAR BOB: As a real estate broker for 17 years, I especially enjoyed that recent letter from a home seller who was unhappy about her four-month listing with a “bad agent.” You gave an excellent answer, explaining what constitutes “due diligence” and suggesting the seller meet with the brokerage’s manager to perhaps transfer the listing to another agent. However, my question is, who judges due diligence by a real estate agent? Some home sellers will never be satisfied, especially in the current slowing market in most areas, no matter how hard the listing agent works. –Evan R.

DEAR EVAN: Great question. Unless the listing dispute winds up in court for a judge or jury to decide if there was lack of due diligence by the listing agent, it is up to the home seller to decide if he or she is satisfied with the listing agent’s performance.

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Having been a real estate broker for 39 years, I recall only a few home sellers who were unhappy with my listing agent services. The most frequent complaint was, “You don’t advertise my house enough.” The reason was the house was usually overpriced, based on comparable nearby recent sales prices.

However, there is another side to the story. As a typical listing agent, I often took overpriced listings where the seller insisted listing at a price I knew was too high. I always said, “Let’s give it a good try for 30 days, but if we don’t receive any purchase offers then let’s agree to reduce the asking price.” That method usually worked.

Nobody can say for sure what is due diligence. But any agent who takes a listing, puts it into the local multiple listing service (MLS) and does nothing else to get that listing sold is showing lack of due diligence. Unfortunately, such agent conduct occasionally occurs, especially when the listing agent expects a buyer’s agent to see the MLS listing and produce a buyer without further effort by the listing agent.

CAN HOMEOWNER TRANSFER TITLE WITHOUT AN ATTORNEY?

DEAR BOB: I want to deed my house to my sister but keep the mortgage with my current lender. Can I do the deed transfer, record it, and keep the current lender, without an attorney? My sister will continue paying off the mortgage instead of getting a new mortgage, which will cost more money. –Lien N.

DEAR LIEN: Yes, you can transfer title to your sister by executing a quitclaim deed and recording it with the county recorder of deeds. However, your sister won’t have the benefit of an owner’s title insurance policy to be certain she receives marketable title.

Your name will always be on that mortgage until your sister refinances, pays it off, or sells the property. She is buying “subject to” your mortgage and should be aware the lender might enforce the due-on-sale clause and call the balance due in full.

If that happens, she can usually either pay an assumption fee, typically 1 percent of the mortgage balance, or refinance with another lender. However, that is highly unlikely if she makes the monthly payments on time.

She should notify the insurance agent to add her name to the homeowner’s insurance policy as an additional insured, just in case the house burns down or there is a liability claim. For more details, she should consult a local real estate attorney.

NO WAY TO GET HOUSE TITLE BACK AFTER GIVING IT AWAY

DEAR BOB: A friend lives in a home where her son holds title. But he is delinquent on the mortgage payments and foreclosure is pending. What recourse does the mother have? She quitclaimed the title to her son when she was disabled. Now the son won’t give the title back. –Art D.

DEAR ART: Unfortunately, your friend’s situation happens far too often. Her obvious big mistake was deeding the title to her son while she was disabled.

A far better alternative, if she thought she was going to soon die, would be to create a revocable living trust, naming her son to receive title after she died. The primary advantage is to avoid probate costs and delays, with a secondary advantage of management of her assets if she is unable to do so.

At this point, there is nothing the mom can do to force the ungrateful son to deed the title back so she can cure the foreclosure default. She should consult a local real estate attorney.

The new Robert Bruss special report, “Pros and Cons of Fast and Slow House Flipping for Big Profits,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 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 2007 Inman News

Q: I am thinking of hiring a company to install a door in my home. I notice on the Contractors State Licensing Board Web site that this company is exempt from having workers’ comp insurance because it has no employees. I assume this means that it will sub out the actual installation of my door.

My question is whether I will be liable if one of the workers gets hurt on my property. Who is legally responsible — the company or me? I don’t want my homeowner’s insurance to be at risk.

Also, I’ve been shopping for an interior painter and notice that many licensed firms are also exempt from having workers’ comp. I’m afraid I could be at risk with these painting firms too.

Last, do you recommend that whomever I hire also carry personal liability/property damage insurance? I’m not sure exactly what to ask the contractor for in this regard.

A: Your concerns are well taken. Here are the answers to your questions in the order in which you asked them:

1. Your assumption that the company will subcontract the work may not be correct. Installation of a door is a small job and can easily be handled by an owner-operator.

The door installation company is not required to maintain workers’ compensation insurance coverage unless it has employees. Owner-operators are exempt.

If the company chooses to subcontract the work, workers’ compensation insurance is required only if the subcontractor’s employee is performing the work.

For more information on workers’ compensation go to Division of Workers’ Compensation Web site www.dir.ca.gov/dwc/faqs.html.

2. According to the licensing board Web site, if a contractor has employees, workers’ compensation insurance coverage is required.

Whether you are liable if an uninsured worker is injured on your job is a question best left to attorneys. However, we all know that anyone can sue someone for just about anything at any time. Plaintiffs look to potential defendants with “deep pockets” for money damages.

We think it’s unlikely that a contractor would carry other types of insurance if he does not carry workers’ compensation insurance on his employees. At this point, the “deep pocket” is you and your insurance company.

If a worker is injured while working on your property and the contractor doesn’t have insurance, you could be asked to pay for injuries and rehabilitation through your homeowner’s insurance policy.

Verify whether an employee is doing the work and if so, verify your contractor’s workers’ compensation coverage on the licensing board Web site, www.cslb.ca.gov, or by phone at (800) 321-2752.

3. Absolutely require the contractor to provide proof of personal liability and property damage insurance before you hire him to do any work on your home. Failure to do so puts you at risk.

Verify coverage on the Web site. Also, ask to see a copy of the certificate of insurance or ask for the name of the contractor’s insurance carrier and agency to verify that the contractor has the coverage.

Ask the insurance carrier some specific hypothetical questions like, “Do you cover the contractor if he is injured when installing my door?” or “What happens if he damages my wall in the process of installing the door?”

We would also suggest that you ask whether the contractor carries a general liability insurance policy to protect against third-party bodily injury and property damage.

According to the licensing board, licensed contractors are not required by law to carry general liability insurance. But home improvement contractors must tell you whether they carry it. Ask. If uninsured, they should be able to explain how they would cover losses that would ordinarily be covered by insurance.

Sounds like a lot to go through for just replacing a door, doesn’t it? But if you go through this process you’ll avoid liability and probably get a better result.

Contractors who take the time and incur the expense to be licensed and insured are serious about their business and generally will do a better job than those who are not.

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Copyright 2007 Bill and Kevin Burnett

Ted Jones never has tried to keep up with the Joneses. The senior vice president and chief economist for Stewart Title drags his own huge net to filter financial data and often offers opinions that are over the top compared to his housing brethren.

When it comes to second homes, he really heads back to basics and suggests potential buyers do the same.

“My definition of a second home is one that is purchased with no intention ever to sell it,” Jones said. “If you sell it or even intend to sell it, it’s an investment. Period. If you do, you’ve lost my definition of a second home.

“We plan to pass ours on to our daughters as a part of their inheritance. If fact, we don’t want it to go up in value because then we would have to pay more property taxes.”

Clearly, Jones’ idea of value of a second home has little to do with wealth accumulation. His only value gauge comes from the ability to enjoy the property — sunset over the lake, cocktails by the seventh fairway, a breathtaking mountain view just a short walk up the road, etc.

While it’s easy to agree with Jones about the basic idea of a second-home investment, most potential shoppers can’t afford to consider only the pleasure component; they are in need of a larger total package. So, let’s consider investing in a second home versus common stocks to help explore the possibilities.

Conventional wisdom still holds that common stocks offer the best returns over time. If you measure cash-on-cash return, this may be true, but when you look at total return, the picture changes. The ownership of real estate offers four distinct advantages over stocks:

1. Real estate prices are less volatile in most areas. As we have seen in the opening years of this century, stocks can move a great deal in both directions. This makes ownership of stock a crapshoot, with profit solely dependent on timing. If you cashed out in December 1999, your returns were huge; if you waited a year, you probably lost a great deal. Since then, it’s been up and down. House prices fluctuate, but within a lesser range. If real estate prices don’t shoot up the way stock prices do in a bull market, real estate markets don’t crash the way stocks do when the bull runs out of steam. In short, it’s a less risky investment.

2. Real estate is a leveraged investment. You can own a second home with an equity investment (down payment) of no more than 20 percent. In fact, there are many programs that let you buy with a lot less. Most people can’t do this with stock. You need to pay the entire price of the stock. So, when the price of a stock rises 5 percent, you make 5 percent on your money. If your real estate rises by 5 percent in value, your return is upwards of 25 percent.

3. Real estate is tax-advantaged. Any interest incurred for the financing of a second home is deductible from ordinary income for tax purposes. If your second home becomes an investment property, tax can be deferred and sometimes eliminated. You still pay capital gains tax on stock and you can’t deduct the interest on any debt incurred for the purchase of financial assets.

4. And finally, here’s the only return that drives the Jones camp: you can live in real estate. Stock certificates are pretty, with great colors, cool writing and embossed letters. Unfortunately, you can’t go to sleep in them or stand on them to watch the sunset over the lake, or hold a party for your friends and family in them. They just (hopefully) make you money. Real estate provides many different kinds of satisfaction that money can’t.

While I absolutely concur with Jones and about the pleasure power of a second home, I also believe deeply in its long-term wealth-building powers. In a nutshell, if you think a house is good enough to live in and enjoy, someone else will too, and they’ll pay you for the privilege to rent it. The ownership of an investment, particularly that property you can personally enjoy, pays dividends on a variety of levels and can be a very profitable road.

To get even more valuable advice from Tom, visit his Second Home Center.

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Copyright 2007 Tom Kelly

Editor’s note: Robert Bruss is temporarily away. The following column from Bruss’ “Best of” collection first appeared Sunday, May 7, 2006.

If you think you might like to become a real estate appraiser, first read “How to Get Started in the Real Estate Appraisal Business” by Daniel J. Nahorney. After you learn how difficult it is to get started and the very low pay for trainees who must acquire 2,000 experience hours, plus taking training courses to qualify for the basic appraiser’s exam, you might consider another career.

The author is not an appraiser, but he interviewed many longtime successful appraisers who responded with glowing reports about the wonders of the appraisal profession. However, Nahorney doesn’t hesitate to emphasize the negatives of being an appraiser, such as the very low starting pay, and extreme pressure from some mortgage lenders and borrowers to “hit the mark” and appraise for a specific home valuation.

Purchase Bob Bruss reports online.

Throughout the book, the author emphasizes the importance for a new trainee to embrace technology, which Nahorney says is the future of appraisals. He explains the importance of automated valuation models (AVMs), which can eliminate or minimize the need for an appraiser, thus reducing an appraiser’s income.

Nahorney notes the appraisal industry trend for successful appraisers is to specialize in a specific type of real estate, such as commercial buildings or luxury houses, and then become the local appraisal expert in that field. He also emphasizes mortgage lenders want appraisals, which are “better, faster and cheaper.”

Although the author tries to maintain a positive, upbeat attitude, he failed to interview any new appraisers or current trainees who are just getting started. Instead, he talked with “old timer” appraisers who have been involved in the profession at least 15 years.

Reading between the lines, it becomes painfully obvious it is very difficult for a beginner trainee to get started by finding an experienced appraiser willing to take on a raw recruit and pay him or her a living wage.

But Nahorney saves the worst news until the Appendix where he explains the even tougher appraiser licensing standards, which become effective for new licensees in 2008. In addition to the 2,000 hours of trainee experience required, the course requirements become more extensive and college degrees become required to appraise more than four-unit residential properties.

This realistic book is definitely not a “puff piece” for the appraisal profession. Instead, it is a critical look at a field that is vulnerable to charges of fraud and corruption by a very few appraisers, but in which is difficult to earn a modest living, at least at the start.

Although Nohorney is rather charitable toward the Appraisal Foundation, which establishes the often impossible to understand constantly changing Uniform Standards of Professional Appraisal Practice (USPAP) rules, he realizes their Appraiser Qualifications Board (AQB) establishes the minimum qualifications.

Chapter topics include: “Looking in at the Profession”; “From Outsider to Trainee”; “Choosing a Direction”; and “External Forces Changing the Profession.” Everyone interested in becoming a professional appraiser should real this book, which reveals mostly unknown downside of starting out as an appraiser.

After reading this realistic book, having been involved with real estate more than 35 years, I find it impossible to believe any fully informed young person would want to tolerate all the drawbacks and become an appraiser when there are so many better real estate opportunities. The author is to be commended for honestly writing about a very difficult topic. On my scale of one to 10, this excellent book rates a solid 10.

“How to Get Started in the Real Estate Appraisal Business,” by Daniel J. Nahorney (McGraw-Hill, New York), 2006, $21.95, 123 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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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2007 Inman News

Editor’s note: Robert Bruss is temporarily away. The following column from Bruss’ “Best of” collection first appeared Sunday, May 7, 2006.

DEAR BOB: I bought a property, as a married man, as my sole and separate property under my name alone. Then I added my wife and the in-laws to the title. We refinanced and I signed a deed to my in-laws. The title and mortgage is in their names. It seems like they don’t want me to go back on title. Is there anything I can do? I made the down payment from my 401k plan. Please help. –Eric D.

DEAR ERIC: Why would you foolishly add your in-laws to the title to your property? That makes no sense.

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Worse, unless you have horrible credit, why would you transfer your interest in the property to your in-laws? Was refinancing that important to give up your ownership?

Now there is nothing you can do to force them to deed the property back to you unless you can prove fraud, duress or mistake. Please consult a local real estate attorney for details.

GET EXPERT ADVICE WHEN SELLING PART-HOME AND PART INVESTMENT PROPERTY

DEAR BOB: We live in a very nice apartment, which is located upstairs from a commercial grocery store, which our family owns and operates. It has been a very convenient arrangement for the 23 years we owned the store and lived above it. Not many folks have the luxury of just walking downstairs to the work they love. But we had an opportunity to sell the convenience grocery store to a relative at a handsome profit. Now we are thinking of selling the property, subject to the 25-year grocery store lease. Our nice problem is our net profit will be around $800,000 for the sale of the building. My wife and I can shelter $500,000 of that with the principal residence sale tax exemption you often discuss. Is there any way to avoid paying tax on the remaining $300,000 profit? –Hugo V.

DEAR HUGO: Congratulations on your profitable situation.

Yes, you can sell your combination principal residence and business property and avoid paying tax on your handsome profits. Please consult an experienced tax adviser for complete details.

Be sure that tax adviser is familiar with Internal Revenue Procedure 2005-14. It permits concurrent use of both Internal Revenue Code 121 for the sale of your principal residence portion of the property and Internal Revenue Code 1031 for the tax-deferred exchange of the business or investment part of the property by trading for another business or investment property of equal or greater cost and equity.

HOW TO GET STARTED SELLING REAL ESTATE

DEAR BOB: About eight months ago, I received my real estate sales license. Since then I have been working in a large brokerage office where I have yet to make a sale. My manager is very supportive. However, I feel she is losing confidence in me. So am I. What can I do to get started selling homes? I have been trying to get listings, and have taken floor time to work with buyers, but no sales so far. Fortunately, my husband has been very supportive, but we need more income. Any ideas? –Sharon V.

DEAR SHARON: I notice your letter is postmarked from a large city and you are working with an excellent brokerage firm. However, maybe you are trying too hard.

If your brokerage firm has an active rental department, I suggest you ask to transfer to rentals and become a “rental agent.” The result will be almost immediate rental commissions when you rent a house or apartment.

If your brokerage doesn’t handle house and apartment rentals, perhaps you should switch to another brokerage or property management firm, which specializes in residential rentals.

Then keep in touch with your renters with a monthly newsletter. If you did a good job for them, when they are ready to buy a house or condo you will be the first person they call. You can then gradually ease into residential sales.

I know several super-successful realty agents who started out as rental agents for immediate income and then switched to the “big money” of house and condo sales.

The new Robert Bruss special report, “Pros and Cons of Fast and Slow House Flipping for Big Profits,” 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 2007 Inman News

Dear Barry,

In a recent column, you excused the unprofessional performance of a home inspector who failed to discover asbestos floor tiles under carpeting. I strongly disagree with your opinion. A competent inspector should take the time to pull up a corner of the carpet and check for this very condition. Even though home inspectors don’t test for asbestos, they can certainly let buyers know where suspect materials are found within a home. Let’s stop making excuses for these so-called professionals and hold them to the high standard they claim to represent. –JB

Dear JB,

If you’ve read this column with any regularity, you know that home inspectors are often taken to task for failing to perform their work in a competent manner. However, your expectation that home inspectors inspect for asbestos flooring beneath carpets involves a number of impracticalities.

If an inspector were to “take the time to pull up a corner of the carpet,” as you suggest, all that would be learned is whether there were asbestos tiles at that particular corner. It would tell us nothing about all the other carpeted corners throughout the house. To provide the level of disclosure you are suggesting, an inspector would need to lift all carpet corners in bedrooms, living rooms, dining rooms, family rooms, hallways, etc., a process that would include the moving of heavy furniture such as beds, dressers, sofas, hutches, and so on. Even if this procedure could be limited to corners without furniture, the lifting of carpets could easily run afoul of the sensibilities of sellers. Some would view the process as needlessly invasive and potentially damaging.

And what if carpet damage were to occur? Some carpet corners lift easily, while others do not. Tools are often needed to dislodge carpet edges from the tack strips, and pulling up on the carpet nap can sometimes damage the loops. Furthermore, pressing the carpet back into place might not be acceptable to some sellers; especially if they are familiar with the stretching processes employed by professional carpet layers.

Another problem posed by the lifting of carpets is that the scope of a home inspection would be expanded beyond its current definition. At present the scope is specified as “a visual inspection of exposed, readily accessible areas.” If the lifting of carpet corners were to become an accepted practice, then numerous other limitations would also be subject to reconsideration. Wall and floor surfaces that are concealed behind furniture would need to be inspected; clothing in closets would need to be shifted or taken out; removal of drawers from built-in cabinets would become necessary to enable inspection of concealed areas; attic insulation would need to be lifted to provide access to hidden wiring, plumbing, and other conditions; storage in garages would need to be pulled away from walls; and the etceteras would be endless.

Without question, there is room for improvement within the home inspection profession, but the lifting of carpet corners is not the most practical way to raise those standards.

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

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Copyright 2007 Inman News

Editor’s note: Robert Bruss is temporarily away. The following column from Bruss’ “Best of” collection first appeared Sunday, May 7, 2006.

DEAR BOB: Twelve years ago we successfully sold our home “for sale by owner” and saved the real estate sales commission. Now we are trying to sell our townhouse without an agent and are encountering nothing but problems. The additional legal paperwork and required disclosures are amazing. More important, we discovered that even paying a local Realtor to put our listing into the local multiple listing service (MLS) for a $795 fee hasn’t brought results. The local agents aren’t showing our home although it is reasonably priced and we offer a 2 percent broker co-op commission. We had one very serious buyer who came back three times. But she wanted us to reduce our sales price by 6 percent to compensate since we wouldn’t have to pay a sales commission. Any suggestions how we can sell our home and save the sales commission? –Norman V.

DEAR NORMAN: No. As longtime readers know, I do not recommend attempting to sell your home alone without a professional real estate agent. Although I am a real estate broker, unless I sell a rental house to my tenant, I always list it with a local Realtor. There are many reasons.

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Full-time, professional real estate agents know local market values, whether they are rising or falling. By attempting to sell alone, you could be vastly underpricing your home. Or maybe it is overpriced so prospective buyers will stay away.

Most prospective home buyers shy away from “for sale by owner” newspaper classified ads. They fear the seller is “strange” for not listing with a realty agent. There is a good reason more than 80 percent of home sales are handled by real estate agents.

As a do-it-yourself home seller, although you paid $795 to put your listing in the local MLS, that doesn’t mean it will be actively marketed. The MLS is a very powerful marketing tool, but your home also needs exposure on the Internet, such as www.Realtor.com, and other Web sites, which only a pro-active listing agent can provide.

Offering a mere 2 percent sales commission to a buyer’s agent is an insulting joke. Get realistic. In today’s competitive home sales market, you should list with a successful, aggressive real estate agent to get your home sold and to comply with today’s disclosure requirements to prevent future legal problems.

NO EASY WAY TO GET A LIFE TENANT OUT

DEAR BOB: My father died in 1986. He left his house to me, his only child, subject to a life estate for his second wife. My stepmother is now 93 and still living in the house, which is in a horrible state of disrepair. About five years ago, after reading your item about terminating a life estate for “waste,” on my behalf a local real estate attorney brought a lawsuit against her because she let the house deteriorate. However, the sympathetic judge ruled there was not sufficient waste to terminate her life estate. The house (worth around $300,000) is “declining” but in a decent neighborhood, and the life tenant isn’t spending a penny to maintain it. Is there anything I can do? –Ryan R.

DEAR RYAN: Of course you could bring another lawsuit for waste. But there is no guarantee of success.

Another alternative is to offer your stepmother cash to terminate her life estate. Perhaps she would like to move to an assisted-living center where she can receive care and cooked meals in a nice facility. Waving $50,000 or $100,000 cash (theoretically) in front of her might convince her it’s time to move out and terminate her life estate. For more details, please consult a local real estate attorney.

WHY IT IS BETTER TO INHERIT PROPERTY THAN RECEIVE IT AS A GIFT

DEAR BOB: After reading your recent article, I got the impression it is economically better to inherit property than to receive it as a lifetime gift. But both situations are subject to tax. Please expand on this topic. –Al R.

DEAR AL: There are many reasons why it is far better to receive real estate as an inheritance than as a pre-death gift. From the heir’s viewpoint, inheritance is more beneficial than a lifetime gift because the heir receives a new “stepped-up basis” of market value on the date of the decedent’s death. This is a huge tax benefit, especially if the property had been owned many years with a low basis.

When a property is gifted before death, the donee takes over the donor’s often very low adjusted-cost basis. Also, if the net value exceeds $12,000, the donor must file a federal gift tax return. But no federal gift tax will be due if the donor has given away less than $1 million in lifetime non-exempt gifts.

However, if the decedent’s net estate exceeds $2 million, then federal estate tax must be paid by the estate before the heir receives inherited title. Also, in a very few states, there might be an inheritance tax if the heir is not a close relative. For full details, please consult your tax adviser.

PROS AND CONS OF TENANCY-IN-COMMON APARTMENT BUILDINGS

DEAR BOB: I own a four-unit apartment building. I want to sell a 75 percent interest and retain 25 percent. If I sell 25 percent to each of three investors, can they force a sale of the entire building by a partition lawsuit? Or can any of the four co-owners sell their share without the approval of the other investors? Is it possible to allow the investors to occupy a specific apartment in the building? –John E.

DEAR JOHN: The situation you describe is known as a tenancy-in-common (TIC). TICs are widely used to get around local rent control and condominium conversion ordinances.

But the major drawback is there is one mortgage on the entire property. Each TIC co-owner cannot obtain an individual mortgage, as can a condominium buyer. Another problem occurs if a TIC fails to pay their share of the mortgage each month. Then the other owners must pay the deficit or risk losing the property by foreclosure.

Although I don’t recommend TICs for owner-occupied apartment buildings, because of the many potential problems that can arise, they have been successfully used for investment properties where the investors are not owner-occupants.

Yes, it is usually possible to provide in the TIC documents for the tenants-in-common to waive their right to force a partition sale of the property. The TIC documentation can specify a TIC can occupy a specific apartment in the building. For full details, please consult a local real estate attorney who is experienced with TICs.

CAN HOMEOWNER BE FORCED TO JOIN HOMEOWNER’S ASSOCIATION?

DEAR BOB: In 1997 I bought my home. There was no homeowner’s association. A developer bought the vacant lots in the subdivision and formed a homeowner’s association. Now the developer is applying pressure for everyone to join. There is a private road that has been apparently turned over to the association. Is this legal? We are in the process of selling our home and want the new owner to make the decision to join or not? –Zuella P.

DEAR ZUELLA: I have never heard of such a situation where the private road is transferred to the homeowner’s association, unless there was a vote of the affected owners or unless the developer controls a majority of the affected vacant lots.

The best you can do is to disclose the situation to yourbuyer and let him decide if he wants to join the homeowner’s association. Perhaps a local real estate attorney can provide further details.

BE EXTREMELY CAREFUL WHEN BUYING LEASEHOLD CONDO

DEAR BOB: My son was recently transferred to Hawaii. He is considering purchase of a condominium in Honolulu. It is on leasehold land. The inventory of available units seems very limited. We have benefited from your recommendations about IRC 1031 tax-deferred exchanges, living trusts, and tax-free cash from home sales, but have never before encountered leasehold land. Your recommendations? –Bev P.

DEAR BEV: Your smart son is wise to question the purchase of a condo that is on leasehold land. He should carefully investigate the terms of that land lease.

For example, when I was at a Realtor’s convention in Honolulu years ago, we went to inspect a beautiful new high-rise condo building. As an inquiring reporter, I asked about the land lease, its terms, and if there was a renewal option. I learned it was a 40-year land lease with no renewal option. Buying a condo in that building was clearly a very bad deal because as it gets close to the 40th year, the condo loses all its value since the building title then reverts to the land leaseholder.

Several years later, when I visited Honolulu, I inquired about the fate of that building. I discovered the condos did not sell and it is now an apartment rental building. When buying any improvement on leased land, you can’t be too careful.

The new Robert Bruss special report, “Pros and Cons of Fast and Slow House Flipping for Big Profits,” by Robert Bruss, 251 Park Road, Burlingame, Calif., 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 2007 Inman News

It’s becoming more common for sellers to hire inspectors to inspect their property before it’s put on the market. The reports are then made available to buyers to review before they make an offer.

From a seller’s perspective, presale inspections accomplish two goals. One objective — particularly in states such as California that have seller disclosure requirements — is to make sure that property defects are disclosed to prospective buyers in a timely fashion. Sellers who order inspections often do so to ensure that defects they might not be aware of are disclosed before, not after, the sale closes.

However, presale inspection reports should not be viewed as a substitute for a seller’s disclosure obligations. For example, if you are aware of a roof leak, you must disclose it, even if the inspector misses this defect.

Another benefit to sellers from presale inspections is that they tend to cut down on renegotiations that can occur after buyers complete their inspections. If the buyer is aware of a defect before an offer is made, it can be factored into the offer price. This way, the seller has a better idea of how much he is likely to net from the sale at the time the offer is accepted.

The more a buyer knows about the condition of a property before an offer is made, the better. If minimal information is available when the purchase contract is negotiated, and big surprises revealed are in the buyer’s inspection reports, the transaction could collapse. In this case, the seller has to start over. And, the reports that were generated by the first buyers will probably need to be disclosed to future buyers.

Sellers who understand the wisdom of ordering presale inspection reports should use inspectors that are well known and respected in the local area. Your real estate agent should be able to recommend the best local inspectors to you.

Some sellers and listing agents mistakenly order reports from inspectors who are known for being less critical than others. This can defeat the seller’s purpose and raise a suspicion in the buyer’s mind if the inspector overlooks an important defect that the buyers uncover when their inspector examines the property.

The seller of a Crocker Highlands home in Oakland, Calif., recently hired a pest inspector who issued a benign report on the property. The inspector recommended no further inspections.

When the buyer’s home inspector looked at the house, he saw evidence of dry rot under a bathroom. So, the buyers asked a second pest inspector to inspect the property.

The inspector recommended that test openings be done to determine if there was damage behind the finished walls. These further inspections revealed damage to the wood framing and a cost of more than $5,000 to repair it. So this particular presale inspection did little to mitigate further price negotiations.

HOUSE HUNTING TIP: Before you rely on an inspection report that was ordered by the sellers, make sure that the inspector who prepared the report is well respected for thoroughness and impartiality in the local marketplace. If this is not the case, plan on having another inspector look at the property. If the report is out of date, ask the inspector to update the report before you sign off on it.

Read the report carefully. Call the inspector yourself for answers to any questions you might have about the report or the property. Schedule a meeting with the inspector at the property to do a walkthrough of the property with you so that he can explain the report and answer any questions you might have.

THE CLOSING: It’s never a good idea to forego inspections just to save money.

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 2007 Dian Hymer

(This is Part 6 of a six-part series. Read Part 1, Part 2, Part 3, Part 4 and Part 5.)

Consumer groups believe that lenders should be held liable if they allow borrowers to take home mortgages that aren’t suitable for them. Previous articles in this series concluded that a suitability standard was not an effective way to deal with bad mortgage selection, unaffordable loans, refinances that don’t benefit borrowers, or overcharging.

This article looks at suitability as a potential remedy for another remedy that has never worked properly: mandatory disclosure rules.

The conventional wisdom, which I shared for a long time, is that government should formulate and enforce disclosure rules because that assures uniformity of disclosures across the market. But if the disclosures mandated by government are useless or worse, which is the case, uniformity does not help borrowers. Indeed, poor disclosures can be worse than no disclosures because they often lull borrowers into a false sense of security.

Here are some of the problems with the existing system of federal disclosures:

Excessive Number of Disclosed Items: Disclosures are so voluminous that borrowers are overwhelmed, unable to extract what might be useful from what is garbage.

Poor Selection of Disclosed Items: For example, lenders must show the sum of all scheduled mortgage payments over the life of the loan, which not one borrower in a hundred actually pays, but not total lender fees, which every borrower pays. On option ARMs and HELOCs, lenders must disclose the initial rate, which may hold for one month, but not the margin, which affects the rate for the remainder of the term. Interested readers will find many more examples on my Web site under “Mandatory Disclosures.”

Obsolescence: The disclosures are not kept up to date. For example, in 2007, the disclosures had not yet recognized the special problems associated with interest-only mortgages and option ARMs, which had been around as early as 2002. The interagency group of federal regulators in late 2006 recommended that lenders voluntarily develop their own disclosures about these instruments, as opposed to revising the existing regulations, so it could get done more quickly.

The deficiencies of existing mandatory disclosures can be traced back to the ways in which they are developed.

Divided Responsibility: Responsibility for mandatory disclosure has been largely divided between the Federal Reserve System (FRS) and the Department of Housing and Urban Development (HUD). Each agency developed its own disclosure form without any consultation with the other. While there is overlap between them, there is no way for a borrower to reconcile the information on the two forms. Neither agency assumes responsibility for the confusion.

Uncoordinated Legislation: Mandatory disclosures arise out of the Truth in Lending Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act and the Gramm-Leach-Bliley Act dealing with privacy. These laws were passed at different times to deal with different problems, and assigned administrative responsibility to different agencies. None of these laws require coordination among administering agencies.

Influence of Pressure Groups: While borrowers have little influence on the disclosures, interest groups have a great deal. In many cases, their footprints in the regulations are quite clear. While not always harmful in the instance, they are in the total because they invariably swell the size of the disclosures.

Disclosure is the one area in which the concept of suitability makes a lot of sense. Lenders could be held responsible for the adequacy of disclosures to borrowers because lenders are the experts on the mortgages they offer, and the suitability of disclosures does not depend on information about individual borrowers.

With lenders responsible for the suitability of disclosures, we can be sure the disclosures will be kept up to date. When a new mortgage is developed, the lender will be obliged to develop the disclosures that go with it. There would be no division of responsibility to confound the process.

However, to generate a superior product, a public entity would be needed with authority to rule whether disclosures are suitable. Otherwise, lenders would adopt the pattern that pervades securities disclosures, which is to disclose everything, including the most trivial and remote risks to the borrower. This would overwhelm borrowers (just as it overwhelms most investors), but would protect the lender against legal liability. On top of that, the disclosures would vary from lender to lender.

The public board would be charged with the responsibility of assuring that the disclosures proposed by lenders actually work for borrowers. If disclosures had to be approved by a public board, the major proposals would come from mortgage technology companies and the technology departments of major lenders. As particular disclosures were approved, they would quickly spread through the industry, with the result that uniformity would be widespread, if not complete.

The detailed charge to such a board — its legal basis, size, composition, method of selection and financing — are questions for another day.

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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Copyright 2007 Jack Guttentag

The 10-year T-note improved this week, back down from the spooky-healthy job-market surprise two weeks ago, mortgages about 6.25 percent. However, the 10-year is now smack in the middle of a three-week trading range with no reason to move until the economy declares itself in new data.

We’ll get housing news next week, and then nothing until the first week of May. I think the data suggests a steadily weakening economy, but that general perception is built into today’s rates. New claims for unemployment insurance are suspiciously high; March retail sales were stronger than expected, up .7 percent, but robbing from April; and industrial production rose, but going nowhere. New housing starts and permits were up a hair, but this is a false signal: the only way for builders to unload excess land is to build houses and give them away, further depressing local markets.

The key items: corporate capital spending is sinking, down to 1.5 percent growth from forecast 6-7 percent, and “free cash flow” has dipped to deep negative — by 5 percent of GDP, as stock-buyback tail-chasing nears its endgame. Core CPI was under control in March, up .1 percent, but overall up .6 percent, freezing the Fed no matter what weakness lies ahead.

The media have for the moment worn themselves out on the subprime meltdown but continue to miss the subtle changes affecting millions of buyers and owners.

Markets in trouble are distinguished by illiquidity and widening spreads.

Normally, the flow of mortgage paper is greased all the way from retail to the derivative mill. As that great machine throws gear teeth and intermittently gnashes to a halt, intermediaries up-stream are worried about getting stuck with paper — they would become “lenders,” which everyone knows is insanely dangerous.

Two bulletins to us in the last weeks: an excellent wholesaler/securitizer of Alt-A loans (junk, not trash), suddenly announced that the maximum lock-length would be 15 days, and only for loans fully approved. The second: a major warehouse bank (these provide credit to mortgage banks to fund loans at closing, the credit line paid down when the downstream securitizer buys/pays for the loan) announced that it would no longer warehouse second mortgages. At all. Then a week later reversed, but only for seconds underwritten by the downstream buyer.

These policy changes are on or over the edge of panic, in fear that the system will lock up altogether, in terminal absence of liquidity.

The system is already in terminal illiquidity, but progressive, from poorest product headed up to some yet-unknown middle zone, pricing spreads moving from daylight to tomb. Citibank, the definitive piggyback wholesaler, changed its whole underwriting matrix by 5 percent of loan-to-value; whatever it would do at 100 percent it will now approve only at 95 percent and so on down the scale.

Alt-A is completely misunderstood outside the trade. At its weak end, it is trash, but at its better end, quality is as good as any Fannie ever patted. Alt-A just means “not Fannie.” Example: We have a client moving to the area without a job, but with a half-million dollars in savings, a first-time buyer, a $450,000 condo with 25 percent down. Fine career in IT, will have a job as soon as he wants one; FICO score in the 800s.

This loan four months ago would have been priced perhaps a half-percent above today’s 6.25 percent Fannies. Today, the talking starts at 8 percent. This guy may decide to get a job rather quicker, but there are many other no-risk, “no-doc” candidates who won’t be buying soon — not until the true risk of default is understood. We’re years away from that resolution, and in the meantime, underwriting and pricing of marginal product is going to be herky-jerky, here-today, gone-tomorrow, back-again, but not the same.

Never ever again will it be as it was from 2001 to 2006.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

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Copyright 2007 Lou Barnes