Real Estate in Steamboat

DEAR BOB: My wife and I are both 85. We bought our house five years ago in an Internal Revenue Code 1031 tax-deferred exchange. It was our third 1031 exchange in a series so our cost basis is very low. We rented out the house for about three years and took it over as our home two years ago. Our plan was to sell it eventually and claim the $500,000 exemption to offset the capital gains tax we will owe on the 1031 deferred gains. However, I read in IRS Publication 17, “You cannot claim the exclusion if you acquired your home in a like-kind exchange.” Is there any legal way to get around this? –Don DeL.

DEAR DON: Yes. As you probably know, Internal Revenue Code 121 allows principal-residence sellers to qualify for up to $250,000 tax-free capital gains (up to $500,000 for a qualified married couple). To qualify, you must own and occupy the primary home at least 24 of the last 60 months before its sale. You and your wife appear to qualify. Only one spouse’s name need be on the title.

PurchaseBob Bruss reports online.

Effective Oct. 22, 2004, IRC 121 was amended to require a principal residence acquired in an IRC 1031 tax-deferred exchange to be held for at least five years to qualify for IRC 121. But only 24 months of owner-occupancy is required.

This tax law change was enacted to prevent investors from trading their investment property into a residential property, converting it to the owner’s principal residence, and quickly qualifying for up to $500,000 tax-free sales profits after only 24 months.

Now such a transaction requires at least five years of ownership including at least 24 months of owner-occupancy. However, depreciation you deducted will be taxed at the special 25 percent federal recapture tax rate. For full details, please consult your tax adviser.

WHAT IF HOME SELLER AND BUYER DISAGREE ON A DEFECT?

DEAR BOB: We sold our home in May 2006 and completed the seller’s disclosure form. The buyer had a professional inspector check the 8-year-old home. We repaired the few minor items he discovered. Now the buyer alleges we did not disclose that the patio ceiling under the open deck leaks. The patio has a vinyl ceiling under the open deck to divert rain water to the rear of the patio. Because this is the way the system was designed to function, we did not represent the area as a “dry porch.” The buyer claims he was misled and we failed to disclose this information. But we did not see this as a defect. The buyer has removed the vinyl ceiling and replaced it with a gutter system to provide for a dry porch. Now he wants us to pay and will take us to court if we don’t. What should we do? –Richard I.

DEAR RICHARD: When you are served with the court summons and complaint, be sure to answer it and then show up in court at the appointed date and time. Failure to answer could result in a default judgment against you.

If the amount in dispute is large, you should retain a real estate attorney. However, if the amount is not huge, I suggest you tell your story to the judge just like you stated it in the paragraph above.

From your description, you didn’t appear to do anything wrong. It sounds like your buyer is trying to get you to pay for an improvement he wanted. For more details, please consult a local real estate attorney.

IF DIVORCE DECREE IS SILENT, EX-SPOUSES STILL OWN THEIR HOUSE

DEAR BOB: A close friend got a divorce. But her name is still on the mortgage and the title to the house, which she and her ex-husband bought during the marriage. Although she has no interest in any of the belongings, does she still own half of the house? –Eddie P.

DEAR EDDIE: The exact answer depends on the wording of the divorce decree from the divorce court.

If nothing was said in that decree about the house, it appears she still owns half of the house and is still liable for the mortgage payments. She should consult her divorce attorney to clear up the details.

The new Robert Bruss special report, “Everything Home Sellers and Their Realty Agents Need to Know About the $250,000 Tax Exemption Rules,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010, or by credit card at www.BobBruss.com or 1-800-736-1736. 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

If you think you might enjoy earning an above-average income helping home buyers and homeowners obtain mortgage money, “Your Successful Career as a Mortgage Broker” by longtime mortgage broker David Reed explains the details. According to Reed, the average mortgage loan officer earns $76,000 per year, but those who make it to the top 5 percent of the industry earn more than $360,000 annually.

This career-planning book explains the three primary types of mortgage lenders: bank loan officers, mortgage bankers and mortgage brokers. Bank loan officers work for banks, savings associations, credit unions and other direct lenders. Mortgage bankers work for direct mortgage lenders who usually sell their newly originated mortgages into the secondary mortgage market.

PurchaseBob Bruss reports online.

But mortgage brokers act as wholesale middlepersons between borrowers and the actual lenders who are usually banks, savings associations or mortgage bankers. Reed has worked for all types of home-loan lenders, but he clearly favors being a mortgage broker. He likes the idea of being able to offer mortgages from dozens of lenders rather than just working for one lender offering only a few loan programs.

Throughout the book, Reed explains how successful mortgage brokers work to obtain loan applications from borrowers, process those applications quickly, and then fund the mortgages for borrowers. Along the way, he introduces readers to the important “players” such as loan processors, underwriters, appraisers, closers and others. He repeatedly emphasizes why mortgage brokers must be especially kind to loan processors and underwriters who can make or break the transaction.

After discussing the key personnel involved in mortgage brokerage, the author shifts to the topic of getting started. Because all states now license mortgage brokers, he says the first step is to get licensed. The book contains a state-by-state license information contact list.

Then Reed shifts to explaining the details of how licensed mortgage brokers get established and shop for the best terms and interest rates for their clients. Along the way, the author emphasizes the importance of superb customer service to rapidly complete the loan origination and gain repeat referrals.

The first part of the book is necessarily filled with basic fundamentals about how the mortgage brokerage industry works and how to get started. Although Reed is very positive about the advantages of being a mortgage broker, he also is realistic about the work it takes to find borrowers and get them to do business rather than to go down the street to a competitor.

It’s hard to find a fault with the book, but one glaring omission was Reed’s failure to discuss the notorious mortgage “junk fees.” He lists typical mortgage fees such as discount fees (points), origination fee, processing fee, administration fee, document preparation fee, funding fee, underwriting fee, commitment fee and “anything else fee,” but he fails to explain how borrowers can negotiate these charges away, or which charges are legitimate and which charges lenders refuse to cancel.

Heavy emphasis is placed on getting established with wholesale mortgage lenders, determining the mortgage broker’s profit margin and becoming a top producer in mortgage originations. At the beginning, this is an average “how to be a mortgage broker” book, but the book’s second half becomes more practical, such as explaining tactics mortgage brokers use to raise their income, and improve marketing strategies.

Chapter topics include “The Mortgage Loan Officer and His Team”; “How Do I Get Started?” “Mortgage Banker vs. Mortgage Broker”; “The Loan Application and Process”; “Types of Mortgage Loans”; “Loan Prequalification and Approval”; “Loan Documentation”; “How Brokers Make Money”; ‘Marketing Yourself”; and “Marketing Secrets from the Pros.”

Having read several of David Reed’s excellent books about mortgages, I got the feeling he wasn’t “opening up” to tell readers what it is really like to be a mortgage broker. He hits the major points a beginner mortgage broker needs to know, but I kept waiting for his “insider secrets,” which never were delivered. Nevertheless, on my scale of one to 10, this superb book still rates a solid 10.

“Your Successful Career as a Mortgage Broker” by David Reed (AMACOM-American Management Association, New York), 2007, $18.95, 179 pages; available in stock or by special order at local bookstores, public libraries and www.Amazon.com.

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

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Copyright 2007 Inman News

Dear Barry,

We bought our home about a year ago. At the time, we were renting and in a hurry to move because our landlord had given us notice. If it hadn’t been for the rush, we might have had a home inspection, but our Realtor said we didn’t need one because the house had been “well cared for.” That advice would be laughable if it weren’t for the thousands of dollars we’ve spent for plumbing, electrical and miscellaneous repairs. The seller omitted all these problems from his disclosure statement, but we’re especially disappointed in our Realtor for the faulty advice she gave. Shouldn’t she have recommended a home inspection, and isn’t she or the seller liable for these repairs? –Pati

Dear Pati,

You had every right to expect full disclosure from the seller, as required by law, and proper advice from your agent, as required by the Realtors’ Code of Ethics. Unfortunately, complaints such as these are not uncommon.

Competent agents know that it is unethical to discourage a buyer from hiring a home inspector. There is, in fact, no situation when an agent should advise against a home inspection, regardless of whether the home is brand-new, well-maintained, being sold as-is, or any other lame excuse. Faulty advice of this kind is an outgrowth of professional ignorance or personal dishonesty, neither of which is acceptable for a licensed real estate professional.

Your first course of action is to find the most qualified and experienced home inspector in the area and have your home thoroughly evaluated. A good inspector will find more defects than you have yet discovered: I guaranty it. Once you have the inspection report, there may be cause for legal action against the agent and the seller. That is something you’ll have to decide once you know the full extent of undisclosed defects.

Dear Barry,

My home is about two years old, and the water supply is a well. Last week, the well shut down because of an electrical problem. The people who originally installed the well said the power line to the fuse box was #14 gauge wire and should be #12 gauge. They ran a new line but said it would cost me $500 to have it buried. An electrician I spoke to said the wire should have been #12 gauge in the first place. Since this was the well contractor’s error, why should I share in the cost of repair? –Linda

Dear Linda,

You shouldn’t have to share this cost. The #14 gauge wires are definitely undersized for a well pump, and the contractor who installed the well and wired the equipment should have known this. If he debates the point, ask him to provide a copy of the pump manufacturer’s installation manual. Those instructions should specify the proper wire size for the system. Hopefully, the contractor will accept responsibility for all necessary repairs. If not, you can file a complaint with the state agency that licenses his profession. If that doesn’t work, you can seek redress in small claims court.

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 31-year-old niece died recently without a will. She purchased a condominium about three months ago. Can her mom now sell the condo, or does she have to do something else first? –Georgia Z.

DEAR GEORGIA: Unfortunately, because your niece died intestate without a will or a revocable living trust, her condo and other major assets will have to be “probated.” That means the local probate court will determine who inherits her assets.

PurchaseBob Bruss reports online.

If her mother is her closest living relative, the state law of intestate succession will probably give the assets to the mother after all debts are paid.

Before the mother can sell the condo, she first must receive the title transferred to her name by the probate court. Depending on the state where the condo is located and the local court backlog, this can take six to 12 months, sometimes longer. The mother should consult a local probate attorney.

This sad and potentially costly situation could have been avoided if your niece held title to her condo and other major assets in her revocable living trust. If that had been done, probate costs and delays would be avoided. The named successor trustee (presumably her mother) could then have transferred title according to the terms of the living trust. More details are in my special report, “24 Key Questions Answered: Living Trust Secrets Reveal How to Avoid Probate Costs and Delays,” 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.

BIG POTENTIAL PROBLEMS WITH HOME SELLER’S REMORSE

DEAR BOB: I recently put my house up for sale. I received a purchase offer from a buyer and we agreed on closing the sale. But due to job-related issues, I am no longer willing to move and do not want to close the sale. Can I get out of this agreed purchase offer without selling my home? –Tim S.

DEAR TIM: Home seller’s remorse can be a very expensive disease for a home seller. Presuming there are no loopholes in the sales contract for you to cancel the sale, if your buyer really wants to own your house he can sue you in a specific performance lawsuit.

He will probably record a “lis pendens” against your title to effectively prevent you from selling to another buyer or refinancing the mortgage.

If there was a listing agent or a buyer’s agent, even if you can get the buyer to cancel the sale, you may still owe a sales commission because a ready, willing and able buyer was found by the agent.

Be sure to consult the agent(s) to learn if you will have to pay a sales commission even if no sale takes place. For more details, please consult a local real estate attorney.

TAX-DEFERRED EXCHANGE DOESN’T APPLY TO PERSONAL HOME

DEAR BOB: Can a Starker tax-deferred exchange be used on a primary residence? I find myself moving often within the same town. My next move will be within less than 24 months. I am always moving up in value and equity. –Eric G.

DEAR ERIC: Sorry, an Internal Revenue Code 1031 tax-deferred exchange applies only to real estate held for investment or use in a trade or business, such as a rental house. Your personal residences won’t qualify.

However, if you own and occupy your principal residence at least 24 of the last 60 months before selling, then Internal Revenue Code 121 applies and you can claim up to $250,000 tax-free capital gains (up to $500,000 for a married couple where both spouses meet the occupancy test).

You could be entitled to a partial IRC 121 exemption if the sale is due to health reasons, job location change qualifying for the moving expense tax deduction, or unforeseen circumstances. For full details, please consult your tax adviser.

HOW A JOINT TENANT PARTIALLY BROKE UP A JOINT TENANCY

DEAR BOB: My husband and I together with a third party owned a house under joint tenancy with right of survivorship. The third party married and quitclaimed his one-third share into a revocable living trust. The third party died a year ago. The quitclaim deed was recorded, but I do not believe the deed was changed. Has the joint tenancy been broken if a new deed was not recorded? –Donna L.

DEAR DONNA: Unless the house is located in one of the few states that require issuing a new deed each time title is transferred, the recorded quitclaim deed from the joint tenant to his living trust transferred his one-third share. The other two-thirds remain undisturbed as joint tenants. Nothing further is required.

The one-third share that was held in the deceased’s living trust may now be distributed according to the terms of the deceased’s living trust.

Transfer of a joint tenant’s interest in a property does not require the consent of the other joint tenants. For full details, please consult a local real estate attorney.

NO STEPPED-UP BASIS IF WIDOW DIDN’T INHERIT ANYTHING

DEAR BOB: Does a widow get a new stepped-up basis on a home where the title was only in her name? Her husband died in 2005 but was not on the title because of his poor credit. –David F.

DEAR DAVID: Sorry, but the widow didn’t inherit anything. To obtain a new stepped-up basis for the asset’s market value on the date of the decedent’s death, there must be an inherited asset. Therefore, the widow doesn’t get a new stepped-up basis. She should consult her tax adviser for full details.

WHEN SELLING HOME, ALLOW EXTRA TIME TO PAY OFF IRS TAX LIEN

DEAR BOB: We are in the process of prepping our home for sale. We have an IRS tax lien on which we are making monthly payments. Will the tax lien have to be paid off before we list our home for sale, or can we pay the lien off when we pay off the mortgage at the closing? –Candace P.

DEAR CANDACE: You can list your home for sale with a real estate agent while the IRS lien remains on your title. However, be sure to disclose the situation to the listing agent. Explain you plan to pay off the IRS lien from the sales proceeds when the home sale closes.

The IRS tax lien must be paid off at or before the closing so you can deliver marketable title to your buyer. Be sure to allow extra time so the IRS can receive your final payment and remove the lien from your title.

Consult the firm that you expect to handle the closing of the sale now for details on the extra time needed because the IRS is not known for speedy service.

IS HOME SELLER’S WRITTEN DISCLOSURE LEGALLY BINDING?

DEAR BOB: How legally binding is a home seller’s disclosure statement? I have a statement that says all major systems are in working order. This is not the case. –Dave R.

DEAR DAVE: If you can prove the home seller knew of a significant property defect but failed to disclose it to you before you bought the house, the seller may be liable to you for the cost of repairs.

However, your difficulties will be (a) proving the seller knew of the undisclosed defect; (b) obtaining a court judgment (presuming the seller denies knowledge of the defect); and (c) collecting on that judgment from the seller.

If the defect is not expensive to repair, after sending a written demand letter to the seller setting a deadline for the seller to make repairs at his expense, rather than hiring a real estate attorney you might consider taking the seller to the local small claims court.

CAN CONDO BUYER TAKE OVER THE MORTGAGE PAYMENTS?

DEAR BOB: My partner and I own a condo located on a golf course. We bought it two years ago for $275,000 and are presently renting it for $1,400 per month. With property taxes and other fees, we have a $700-per-month negative cash flow. We are both retired and this is becoming a burden. If we sell, after paying a sales commission and because property values have dropped in our area, we would probably wind up with about $234,000, which is approximately our mortgage balance. Are there any companies that would buy our mortgage for what we owe? –Robert T.

DEAR ROBERT: Nobody buys an existing mortgage for its balance because there’s no profit.

What I think you are asking is can the condo be sold to someone who will take over your mortgage payments? Your tenant is the obvious logical buyer. Have you asked him?

Be sure to get the mortgage lender’s permission for the buyer to take over payments. In today’s home-sale market, the lender would be crazy not to approve a mortgage takeover by a creditworthy buyer.

The new Robert Bruss special report, “Everything Home Sellers and Their Realty Agents Need to Know About the $250,000 Tax Exemption Rules,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010, or by credit card at www.BobBruss.com or 1-800-736-1736. 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

The median price of homes sold in the San Francisco Bay area was up 6.6 percent in April 2007 compared to a year earlier. For homeowners waiting for a signal that it’s time to sell, this could be good news. Or, is it?

Half the homes sold in a given time period sold for more than the median price quoted for that period and half sold for less. Changes in median price do not necessarily reflect changes in home values.

An increase in the median sale price for a period could reflect an increase in home values. However, even if home values didn’t change, the median price could increase if more higher-priced than lower-priced homes sold during that period. Conversely, a decrease in the median sale price could reflect a drop in home values. Or, it could be a result of the fact that were was more sales activity in the lower-priced ranges than there was in higher-price ranges.

The April increase in median sale price for the San Francisco Bay Area represented an increase in the number of higher-priced homes sold relative to the number of lower-priced homes sold. In this area of the country, the price range that has been hardest hit by the slowdown in the home-sale market has been the lower end, not the higher end of the market.

Speculative home building did not run rampant in the Bay Area as it did in places like Las Vegas and Miami. However, most of the spec building that did take place was in the low-end condo market. Surplus inventories of unsold properties in this segment of the market and tighter lending standards have been a drag on low-end home sales.

HOUSE HUNTING TIP: You could misread the market if you focus solely on published changes in median sale price. If you’re a low-end condo seller in the Bay Area, you might think that your property increased by 6.6 percent over the last year. This is unlikely.

Occasionally, a home sells within a reasonably short timeframe, without any modifications made to it during the intervening period. One such high-end property sold in the Crocker Highlands neighborhood of Oakland, Calif. This property on Paramount Road sold for $1.4 million in April 2006 and again for $1.475 million, or 5.4 percent higher, in May 2007. Even if you own a high-end property in the Bay Area, your property may not have appreciated 6.6 percent in the last year.

Changes in absolute home values are more difficult to quantify than changes in median price. The best approach is to compare a property to other similar properties in the neighborhood that have sold recently. In a changing market, the most recent comparable sales will have the most direct relevance to the expected market price of the subject property.

The comparative value approach to home pricing is somewhat subjective. In neighborhoods where there is a lot of variability in the housing stock, there will be a wider margin of error using this approach than there will be in tract developments, where there is little variability in the size, age and condition of the housing inventory.

The accuracy of the comparative value approach improves when the sample of comparable sales for a period increases. With fewer comparables, the margin for error increases.

THE CLOSING: It’s difficult for sellers who have called their property home for years to be objective about its value. This is why it’s advisable to consult with a real estate professional about the realistic market value for your home before making plans to sell it.

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

Providing small loans at affordable prices has always been a challenge. The core problem is that the cost of originating and servicing a loan is much the same for a small loan as for a large one but the interest return, based on the loan amount, is smaller on the smaller loan. The obvious remedy, a higher interest rate on the smaller loan, makes it costly and perhaps unaffordable.

The price sheets of lenders in the United States generally show higher first-mortgage rates on smaller loans, with minimum sizes ranging from $50,000 to $75,000. Who needs a mortgage of less than $50,000? For one, people who live in isolated communities where houses are very inexpensive.

“In my town, we need mortgage loans from $5,000 to $30,000, and they just aren’t available. Is there anything that can be done?”

The town is Winters, Texas, population about 3,000, most of whom are retirees. There are no jobs there or anywhere very close. Houses in Winters sell for less than $60,000.

Mortgage loans are not available in Winters. In part, this is because the town is so isolated and the demand so small that it can’t support a lending facility. There are no appraisers, for example; if one is needed the cost will be double the cost in a larger center because of the time it takes for the appraiser to get to Winters and back.

But the major problem is that the loans are too small to justify the cost of originating them. A mortgage origination cost of $5,000, which is a very modest number, is 10 percent of a $50,000 loan, though only 1.7 percent of a $300,000 loan.

Another category of borrowers vulnerable to the small-loan problem are those who have paid their loans down substantially and would like to take advantage of lower interest rates by refinancing.

“I have a 10 percent loan from way back, but should have refinanced years ago; the balance is only $42,000 now — is it too late to refi?”

Of course, it is too late. No lender wants to refinance a $42,000 loan unless it is a substantial cash-out where the new loan is much larger than the balance of the old one.

On cash-out deals where the balance and new loan amount is large but the amount of cash taken out is small, the small-loan problem hits the borrower but not the lender. A reader recently described a deal in which she refinanced a $110,000 loan at 6.75 percent into a $122,000 loan at 7 percent. Of the $12,000 increase in the balance, $4,500 was the cash she took out and $7,500 was closing costs including the broker’s fee.

On this loan, the lender spread his costs over a $122,000 loan but the borrower’s cost of $12,000 was incurred to obtain cash of only $4,500. Plus the borrower is now paying a rate 0.25 percent higher than before on $110,000. Assuming she holds the loan for five years, her annual interest cost on the $4,500 is 32 percent.

Cash-out refinances for small amounts are almost always more costly than a second mortgage. In the case above, a second mortgage at any rate below 32 percent would have saved her money. Indeed, she might possibly have done better in the unsecured loan market.

The great majority of loans for amounts of less than $50,000 are second mortgages or unsecured. The development of the Internet has widened borrower choice in the unsecured market enormously — at least among those who use computers. (For the others, small-loan offices are still found in many shopping centers.) Residents of Winters, Texas, should forget about getting mortgages and shop for unsecured loans on the Internet.

A relatively recent online entrant into the unsecured loan market, called Prosper.com, is particularly interesting. I have spent hours on their Web site and have been enormously impressed.

Prosper brings potential borrowers and lenders together in a virtual market that appears to provide an attractive return to lenders and a reasonable cost to borrowers. Lenders (of which I will shortly be one) are given extensive information about borrowers, including credit information and referrals. They can lend as little as $100 on any one deal, which allows them to diversify their risk without committing larger sums. Because it is a virtual market, borrowers can live anywhere, even in Winters.

Prosper charges a reasonable origination and servicing fee for doing all the spade work: compiling borrower information, collecting the payments, keeping the books, and pursuing delinquent borrowers. I expect to have a fuller report on them in the near future.

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

Recently I received a letter from a reader who asked if having a tall water tower about 1,000 feet from his house would hurt his home’s market value. By coincidence, a few days later I saw an appraiser friend at the local post office so I confronted him with that question.

“It sure won’t help a home’s market value,” was his reply. Then, being an experienced appraiser, he reminded me the water tower is called “functional obsolescence.” That means it is a material fact that is virtually impossible to eliminate but has a significant impact on market value.

PurchaseBob Bruss reports online.

Functional obsolescence factors, whether within the property or outside, should always be considered when buying a home. Sometimes they “kill the sale.” But in other situations, the buyer doesn’t care or even likes the problem, which other buyers loathe.

For example, years ago I owned a rental house where the backyard adjoined a school playground. Although the house was in excellent condition, when prospective tenants spotted the playground hidden behind bushes, they suddenly lost interest. I quickly learned to advertise that house as “Close to elementary school.” Then I had no trouble renting to families with children.

Looking back, I now realize that house adjoining the noisy school playground was a “bad house.” It had an incurable defect that most prospective buyers and tenants disliked, thus affecting its desirability and market value.

EVEN NEW HOUSES HAVE DEFECTS. Fortunately, most on-site problems with new houses are correctable, such as paint scratches or doors that don’t close right. Buyers of new houses should (a) understand the terms of the builder’s warranty; (b) hire a professional inspector to thoroughly check the house before the sale closes; and (c) inspect the house with the builder (called checking a “punch list”) so both parties are aware of problems needing correction under the builder’s warranty. Realizing the importance of having satisfied customers, the best builders promptly take care of any defects reported by the buyers.

THE DUTY OF HOME SELLERS TO DISCLOSE DEFECTS. Most states now have either statutes or precedent court decisions that require home sellers and their real estate agents to disclose, in writing, known defects with the residence. However, some sellers and realty agents have “selective memory,” meaning they forget to reveal some defects, hoping the buyers won’t discover them.

When a home buyer can prove the seller and/or realty agent knew or should have known about a home defect, the buyer’s legal recourse is to either (a) seek rescission of the sale or (b) sue for monetary damages. However, the buyer’s difficulty is proving the defect was known before the sale closed.

PROFESSIONAL HOME INSPECTORS AREN’T PERFECT. In addition to obtaining a written home-defect disclosure report, even when a home is being purchased “as is” (meaning the seller won’t pay for any repairs), smart buyers insist their purchase offer include a contingency clause for their approval of a professional home inspector’s report.

When hiring a professional home inspector, be sure to inquire as to the inspector’s experience. Personally, I prefer members of the American Society of Home Inspectors (ASHI) because of their high membership standards. Local ASHI members can be found at www.ashi.com or 1-800-743-2744.

Home buyers should always accompany their professional inspectors. In addition, the realty agents and the seller are welcome to attend, just in case an unexpected serious defect is discovered and needs to be discussed.

When a serious undisclosed defect is found by the inspector and the buyer still wants to buy the house, a smart buyer will use the inspector’s report to (a) get the seller to pay for repairs; (b) reopen negotiations with the home seller to get a repair credit, or (c) go ahead with the purchase anyway, knowing of the defect, even if the seller won’t offer any compensation.

DON’T BE FOOLED BY HOME-WARRANTY POLICIES. Home sellers and their realty agents often buy, as a sales inducement, a one-year home-warranty policy. These policies pay for repairs to built-in appliances, plumbing, wiring, furnace, and the hot water heater. Often excluded, unless an extra premium is paid, from warranty coverage are the air conditioning, plumbing outside the home’s perimeter, roof, foundation and structure.

Home buyers should be aware warranty companies charge about $50 per service call, even if the defective component isn’t covered by the policy. A favorite ploy of many home-warranty companies, especially when the problem is very expensive to repair or replace, is to say the defect was a “pre-existing condition,” which is not covered by the policy. The best place to resolve such conflicts is in the local Small Claims Court where the home buyer usually is favored by the judge.

THE “TOP 10″ STEPS TO AVOID BUYING A “BAD HOUSE.” Although most professional home inspectors have these key factors on their checklists, savvy home buyers also should be on the lookout for these potential serious problems:

1. MOLD AND MOISTURE. Even the best homes, at one time or another, have mold or mildew. The cause is trapped moisture, usually due to poor ventilation. In excessive amounts, such as after a flood or water pipe break, it can ruin a home because mold can be extremely difficult or impossible to remove.

2. RADON. According to the Environmental Protection Agency, this naturally occurring, radioactive gas is created in soil and rock beneath 1 in 15 U.S. homes. Radon allegedly causes cancer in residents whose homes contain radon underneath.

3. ASBESTOS. Asbestos was routinely installed in millions of U.S. homes for fireproofing, insulation, roof shingles, and floor tile. In good condition, there is nothing harmful about asbestos. However, when it deteriorates and the particles become airborne, asbestos can cause fatal lung disease.

4. LEAD-BASED PAINT. Before 1978, lead-based paint was used in most homes. It can cause brain damage to young children who ingest it, usually from flaking paint chips. But it is not dangerous if the paint is in good condition.

Federal law requires sellers of homes built before 1978 to provide home buyers and tenants with (a) a federal booklet about lead-based paint dangers, and (b) a disclosure form if the seller or landlord had lead-based paint tests performed. If desired, home buyers have 10 days to have a lead-based paint inspection at the buyer’s expense.

5. FORMALDEHYDE. Many manufactured homes contain this material which causes eye, nose, and throat irritation, as well as coughing, rashes, headaches and dizziness in some people.

6. CARBON MONOXIDE. Malfunctioning furnaces, wood stoves, kerosene heaters and lamps, fireplaces, water heaters, and gas stoves can produce invisible but deadly carbon monoxide in homes. The easy solution is to install a carbon monoxide detector, usually costing $25 to $40.

7. DEFECTIVE WELL WATER. If the home being purchased depends on well water, be sure to include a purchase-offer contingency clause for a test of the well-water quality. Also, have the well’s pump tested to be certain it is in good working condition.

8. SEPTIC OR SEWER SYSTEM. A home that is not connected to a public sewer system probably has a septic system, which drains waste water into the soil. Be sure the septic system is located a substantial distance from any well. If the seller reports the home is connected to the public sewer, be sure to verify this and that the sewer pipe is not broken.

9. HIGH-VOLTAGE POWER LINES. Government tests have been inconclusive if adjacent high-voltage power lines cause cancer and other diseases. But they certainly don’t benefit health. The presence of nearby high-voltage power lines won’t enhance a home’s market value and can be considered a serious negative factor at resale time.

10. OTHER NEGATIVE INFLUENCES. There are many possible negative influences, sometimes beyond the home’s lot boundary, that can affect desirability. Examples include a high crime rate, heavy street traffic, poor location, poor-quality public schools, lack of public transportation, nearby noisy railroad tracks, poor floor plan, inadequate or dangerous wiring, galvanized pipes, an old furnace, leaky gutters, flood zone, high fire-hazard area, earthquake fault zone, seismic hazard zone, easements and encroachments and high property taxes.

SUMMARY: No house is perfect. To avoid buying a “bad house,” smart home buyers ask lots of questions and insist on a professional home-inspection contingency clause.

(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 2007 Inman News

Recently I received a letter from a reader who asked if having a tall water tower about 1,000 feet from his house would hurt his home’s market value. By coincidence, a few days later I saw an appraiser friend at the local post office so I confronted him with that question.

“It sure won’t help a home’s market value,” was his reply. Then, being an experienced appraiser, he reminded me the water tower is called “functional obsolescence.” That means it is a material fact that is virtually impossible to eliminate but has a significant impact on market value.

PurchaseBob Bruss reports online.

Functional obsolescence factors, whether within the property or outside, should always be considered when buying a home. Sometimes they “kill the sale.” But in other situations, the buyer doesn’t care or even likes the problem, which other buyers loathe.

For example, years ago I owned a rental house where the backyard adjoined a school playground. Although the house was in excellent condition, when prospective tenants spotted the playground hidden behind bushes, they suddenly lost interest. I quickly learned to advertise that house as “Close to elementary school.” Then I had no trouble renting to families with children.

Looking back, I now realize that house adjoining the noisy school playground was a “bad house.” It had an incurable defect that most prospective buyers and tenants disliked, thus affecting its desirability and market value.

EVEN NEW HOUSES HAVE DEFECTS. Fortunately, most on-site problems with new houses are correctable, such as paint scratches or doors that don’t close right. Buyers of new houses should (a) understand the terms of the builder’s warranty; (b) hire a professional inspector to thoroughly check the house before the sale closes; and (c) inspect the house with the builder (called checking a “punch list”) so both parties are aware of problems needing correction under the builder’s warranty. Realizing the importance of having satisfied customers, the best builders promptly take care of any defects reported by the buyers.

THE DUTY OF HOME SELLERS TO DISCLOSE DEFECTS. Most states now have either statutes or precedent court decisions that require home sellers and their real estate agents to disclose, in writing, known defects with the residence. However, some sellers and realty agents have “selective memory,” meaning they forget to reveal some defects, hoping the buyers won’t discover them.

When a home buyer can prove the seller and/or realty agent knew or should have known about a home defect, the buyer’s legal recourse is to either (a) seek rescission of the sale or (b) sue for monetary damages. However, the buyer’s difficulty is proving the defect was known before the sale closed.

PROFESSIONAL HOME INSPECTORS AREN’T PERFECT. In addition to obtaining a written home-defect disclosure report, even when a home is being purchased “as is” (meaning the seller won’t pay for any repairs), smart buyers insist their purchase offer include a contingency clause for their approval of a professional home inspector’s report.

When hiring a professional home inspector, be sure to inquire as to the inspector’s experience. Personally, I prefer members of the American Society of Home Inspectors (ASHI) because of their high membership standards. Local ASHI members can be found at www.ashi.com or 1-800-743-2744.

Home buyers should always accompany their professional inspectors. In addition, the realty agents and the seller are welcome to attend, just in case an unexpected serious defect is discovered and needs to be discussed.

When a serious undisclosed defect is found by the inspector and the buyer still wants to buy the house, a smart buyer will use the inspector’s report to (a) get the seller to pay for repairs; (b) reopen negotiations with the home seller to get a repair credit, or (c) go ahead with the purchase anyway, knowing of the defect, even if the seller won’t offer any compensation.

DON’T BE FOOLED BY HOME-WARRANTY POLICIES. Home sellers and their realty agents often buy, as a sales inducement, a one-year home-warranty policy. These policies pay for repairs to built-in appliances, plumbing, wiring, furnace, and the hot water heater. Often excluded, unless an extra premium is paid, from warranty coverage are the air conditioning, plumbing outside the home’s perimeter, roof, foundation and structure.

Home buyers should be aware warranty companies charge about $50 per service call, even if the defective component isn’t covered by the policy. A favorite ploy of many home-warranty companies, especially when the problem is very expensive to repair or replace, is to say the defect was a “pre-existing condition,” which is not covered by the policy. The best place to resolve such conflicts is in the local Small Claims Court where the home buyer usually is favored by the judge.

THE “TOP 10″ STEPS TO AVOID BUYING A “BAD HOUSE.” Although most professional home inspectors have these key factors on their checklists, savvy home buyers also should be on the lookout for these potential serious problems:

1. MOLD AND MOISTURE. Even the best homes, at one time or another, have mold or mildew. The cause is trapped moisture, usually due to poor ventilation. In excessive amounts, such as after a flood or water pipe break, it can ruin a home because mold can be extremely difficult or impossible to remove.

2. RADON. According to the Environmental Protection Agency, this naturally occurring, radioactive gas is created in soil and rock beneath 1 in 15 U.S. homes. Radon allegedly causes cancer in residents whose homes contain radon underneath.

3. ASBESTOS. Asbestos was routinely installed in millions of U.S. homes for fireproofing, insulation, roof shingles, and floor tile. In good condition, there is nothing harmful about asbestos. However, when it deteriorates and the particles become airborne, asbestos can cause fatal lung disease.

4. LEAD-BASED PAINT. Before 1978, lead-based paint was used in most homes. It can cause brain damage to young children who ingest it, usually from flaking paint chips. But it is not dangerous if the paint is in good condition.

Federal law requires sellers of homes built before 1978 to provide home buyers and tenants with (a) a federal booklet about lead-based paint dangers, and (b) a disclosure form if the seller or landlord had lead-based paint tests performed. If desired, home buyers have 10 days to have a lead-based paint inspection at the buyer’s expense.

5. FORMALDEHYDE. Many manufactured homes contain this material which causes eye, nose, and throat irritation, as well as coughing, rashes, headaches and dizziness in some people.

6. CARBON MONOXIDE. Malfunctioning furnaces, wood stoves, kerosene heaters and lamps, fireplaces, water heaters, and gas stoves can produce invisible but deadly carbon monoxide in homes. The easy solution is to install a carbon monoxide detector, usually costing $25 to $40.

7. DEFECTIVE WELL WATER. If the home being purchased depends on well water, be sure to include a purchase-offer contingency clause for a test of the well-water quality. Also, have the well’s pump tested to be certain it is in good working condition.

8. SEPTIC OR SEWER SYSTEM. A home that is not connected to a public sewer system probably has a septic system, which drains waste water into the soil. Be sure the septic system is located a substantial distance from any well. If the seller reports the home is connected to the public sewer, be sure to verify this and that the sewer pipe is not broken.

9. HIGH-VOLTAGE POWER LINES. Government tests have been inconclusive if adjacent high-voltage power lines cause cancer and other diseases. But they certainly don’t benefit health. The presence of nearby high-voltage power lines won’t enhance a home’s market value and can be considered a serious negative factor at resale time.

10. OTHER NEGATIVE INFLUENCES. There are many possible negative influences, sometimes beyond the home’s lot boundary, that can affect desirability. Examples include a high crime rate, heavy street traffic, poor location, poor-quality public schools, lack of public transportation, nearby noisy railroad tracks, poor floor plan, inadequate or dangerous wiring, galvanized pipes, an old furnace, leaky gutters, flood zone, high fire-hazard area, earthquake fault zone, seismic hazard zone, easements and encroachments and high property taxes.

SUMMARY: No house is perfect. To avoid buying a “bad house,” smart home buyers ask lots of questions and insist on a professional home-inspection contingency clause.

(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 2007 Inman News