Don't pay cash for a home
Publication Date: Friday Jul 18, 1997

Don't pay cash for a home

An 'easy qualifier' mortgage is a much less risky option

QI was recently promoted to executive vice president of a large company in Southern California. That means we must sell our current home and move. My employer will buy our current home at its market value, so that is not my problem. Thanks to the sales proceeds, plus a large bonus, we can pay cash for a home in the price range we are considering. But friends tell us not to pay cash. My tax advisor suggests getting a 75 percent "easy qualifier" mortgage. Would you pay cash for a house? ANo. Never pay cash for your residence. Don't put all your eggs in one basket, especially in Southern California, which is famous for earthquakes, fires and landslides. Your tax advisor gave you excellent advice. By making a 25 percent cash down payment, you can get an "easy qualifier" mortgage without the normal red tape hassle of qualifying for a home loan. Also, you will probably need the income tax deduction for the itemized mortgage interest. QMy goal is to get my house sold by October, as I have purchased a Florida condo, where I plan to move by Thanksgiving. I've been informally interviewing Realtors about listing my home for sale. The most successful one in our area sends mailers to my house at least twice a month. When she came over, she wanted to list it for sale immediately. After I told her I didn't want to sell until October, she became pushy about signing the listing now. She said homes take about six months to sell. But I know that isn't true because another agent had shown me statistics that the average time on the market in my area is about 65 days. When I asked the pushy agent how many listings she has, she vaguely said "about 30." I've only phoned her office twice, but each time I got a different "assistant." Does this sound like the type of agent I should hire? After she learned I wasn't ready to list my home for sale yet, she left within 10 minutes. AThe highly successful real estate agent you interviewed is known in the realty sales business as a "numbers agent." She lists a large number of homes for sale, knowing that a certain percentage will sell. By carrying 30 listings at one time, that agent can't possibly devote adequate time to getting each listing sold. Ask her for the names and phones of her last five home sellers and the names and phone numbers of her last five sellers whose listings expired. Call those people to ask "Were you in any way unhappy with this agent, and would you list your home for sale with the same agent again?" You will be amazed.

Many successful real estate agents hire office assistants to handle the detail work such as arranging inspections, obtaining mortgages for the buyers, and handling the escrow closing details. However, when the realty agent has too many listings it becomes impossible for the agent to devote adequate time to getting each home sold.

You are very wise to start shopping early for a realty agent. If you want to get your home sold by October, I suggest you list it for sale around Aug. 1 at its fair market value. Meanwhile, get it into tip-top condition and keep interviewing successful agents. QMy wife and I are adding extra principal to each mortgage payment and should be making the final payment in the summer of 1998. Is there anything we should be doing when we get closer to that final payment? Our lender also holds in escrow an extra amount to pay our property taxes. Will we get return of the excess funds? Do we need to notify the tax collector of our impending situation? AThere is nothing to do until you make your final mortgage payment. Within 30 days, the mortgage loan servicer should send you either a mortgage satisfaction or a deed of reconveyance to be recorded. The best loan servicers record these documents, and you receive them after recording. When you make your final payment, include a letter explaining it is your final payment and you expect prompt handling and receipt of your paid promissory note and mortgage or deed of trust. Also, ask for a prompt refund of your entire escrow impound account balance. At that time, notify the tax collector to send the tax bills directly to you rather than to the loan servicer. Until then, there's nothing to do. QI live in a depressed area with high unemployment. My home has been listed for sale almost one year with a fine Realtor. She says most of the sales are by foreclosing mortgage lenders who deeply discount their prices below market value just to get a sale. They offer nothing-down deals to lure buyers. I can't compete against sellers like that. But I need to sell, since I married a man with an excellent job in another city and I want to live with him. What would you do in a situation like mine? AI presume your house is priced at or even below its market value, but the local home sale market is severely depressed. When the local market for home sales isn't good, don't sell. Instead, rent your home. Better yet, lease it with an option to buy.

Give your tenants a generous rent credit of at least 33 percent, perhaps even 50 percent, to encourage them to exercise their purchase option. Details are in my special report "How to Quickly Buy or Sell Your Home With a Lease-Option" available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010. QAbout 11 years ago, just before my father died, he deeded his house to me. Shortly thereafter I got married. Now we have two children and have outgrown the house. We want to sell and move into a house my wife inherited when her mother died recently. What is my basis on the house my father gave me? How can I avoid paying profit tax?

AYour cost basis for the house your father gave you before he died is the same as your father's cost basis. The tax rule is a donee takes over the donor's basis. You probably would have been better off, tax-wise, inheriting the house at its market value on the day of your father's death rather than receiving it as a gift before he died.

Since you won't be buying a replacement principal residence, you won't be eligible for the ~rollover residence replacement rule. of Internal Revenue Code 1034. However, Congress is considering a $500,000 home sale tax exemption for married couples ($250,000 for single homeowners). I suggest you wait to sell your residence until Congress enacts this tax law rather than hope it will be retroactive to your sale. Please ask your tax advisor for more details.

QThank you for your article earlier this year about reverse mortgages. It was a godsend. I helped my father get one and he is very pleased with the $451 monthly income he is receiving. He also got a one-time grant of $9,500 for a new roof. Will this income be taxable to him?

ANo. Reverse mortgage income is not taxable unless it also includes an annuity feature. The reason is the loan must be repaid when the senior citizen dies or sells the home. Details are in my new special report for July. "How Senior Citizens Can Select the Best Reverse Mortgage for Tax-Free Income" is available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010.

Robert Bruss is a Bay Area real estate broker and attorney. His column appears the second and fifth Friday of the month. Send questions to Bruss care of Palo Alto Weekly, P.O. Box 1610, Palo Alto, CA 94302. On all tax-related matters, Bruss recommends that you consult your tax adviser for further details.

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