If Buying a New Home, Best to Start by Selling the Old

Question: We have decided to buy a home in the mountains, where we will move permanently. When we began looking for a home there, the real estate agent told us we must first sell our old home before we even try to buy a new one. Is that true? We certainly don’t want to sell our old home and literally be out on the street before we look for another home to purchase. Nor do we want to sell our current home and then have to waste money on rent. What are our options?

Answer: Lots of people buy a new home before selling their old home. However, I agree it is usually best to sell your old home before contracting to buy another home. The primary reason is if you buy a new home first, you could be under pressure to sell the old home. You might not get the best price and terms if you must sell quickly.

The best way to begin the home-purchase process is to get pre-approved for a mortgage (not just pre-qualified, which means nothing) by the actual lender, such as a bank, savings and loan or mortgage banker. You might be surprised to learn you can afford to buy a new home without first having to sell your old home to pay off its mortgage.

However, if you can’t get pre-approved for a mortgage until you sell your old home, you can still look for a new home in the area where you want to move. When you find a home you want to buy, you can make a purchase offer with a contingency for the sale of your old home. Most sellers and their agents don’t like such contingency purchase offers, but if the market is a little slow in the area where you are moving, your offer might be accepted. Then you don’t have to close the purchase until your old home sells.

Adult Child’s Name Can Be Added to Title

Q: I have a friend who was recently widowed. She wishes to place her home in her name and also in her only child’s name. The child is an adult. Is there any disadvantage? Will there be a gift tax involved?

A: Your friend can add her adult child’s name to the home title. If the net gift is below your friend’s $675,000 combined lifetime federal estate and gift tax exemption, no gift tax will be due. However, an IRS gift tax form should be filed. Your friend should consult her tax advisor before changing the title.

Clearing Up Tax Code on Selling Two Homes

Q: I own two homes. One is currently my primary residence. The other is a rental. Following the two-year residence requirement for each home, can I roll over the sales proceeds from both houses into one Starker tax-deferred exchange house that I would rent out before making it my ultimate primary residence?

A: You are a bit mixed up. You can sell your current primary residence without owing any capital gains tax on up to a $250,000 profit, or $500,000 if you’re married and file a joint tax return. To qualify, Internal Revenue Code 121 requires you must have owned and occupied your principal residence an “aggregate” two years during the five years before the sale.

As for the rental house you own, it can qualify for a Starker tax-deferred delayed exchange under Internal Revenue Code 1031(a)(3). All you have to do is sell it, have the sales proceeds held by a qualified third-party intermediary beyond your constructive receipt, designate the qualifying replacement rental property within 45 days and complete the acquisition within 180 days.

If you wish, you can add cash from your personal residence sale to the Starker exchange proceeds so you can acquire a grand rental property, which will eventually become your primary residence. However, most tax advisors suggest it should be a rental property for at least a year before converting it to your residence. Please consult your tax advisor for full details.

Intact Asbestos Can Pass Inspection

Q: My son, his wife and two children bought their first home with a small down payment and an FHA mortgage. The house is old, small and a real fixer-upper, but it has a lot of potential. When finances become available, they plan to fix it up.

The home had an inspection and passed. There was not any mention of asbestos, but when my son went into the attic after moving in, he found asbestos. Because the house was inspected and no mention was made of asbestos, does FHA have any liability?

A: No. Home sellers and mortgage lenders are not liable to buyers just because a home has asbestos. Millions of homes have asbestos. However, if the asbestos is in dangerous condition, called “friable,” and if the seller knew about it, it should be disclosed before purchase.

FHA does not incur any liability to the buyer for defects just because the FHA approves a mortgage on a home and the FHA appraiser makes a visual inspection. The asbestos in the attic might be perfectly safe. Of course, your son and his family should not spend any time there if it is deteriorating and in dangerous condition.

Pool Plans Hindered by Large Easement

Q: We bought our home in 1986. It is in a good neighborhood with great schools. We decided to look into installing an in-ground swimming pool in our backyard, but we learned the power company has an easement along the rear boundary. We thought it was a 10-foot easement; however, a survey shows it is a 100-foot easement, running the length of the entire block. The pool would be within the easement area.

The power company people said there are no plans to utilize the easement, but they will not allow a pool on “their property.” Do I have any recourse other than to build the pool without their approval, or should I give up on it?

A: Your lot is your property. Although the power company has an easement in gross over part of it, probably created at the time the subdivision was created, it’s your land, not the power company’s.

You probably will have difficulty obtaining a building permit for the pool if the easement becomes known to the local building officials. That 100-foot easement seems unusually wide. Perhaps you can ask the power company to reduce their easement to a 10-foot width, which is more normal for residential power-line easements. If that doesn’t work, consult a local real estate attorney, who might be able to get the easement size reduced.

Inside Photos Optional for Home Appraisal

Q: We recently applied to refinance our home mortgage. The lender’s appraiser wanted to take interior photos of our home. My wife felt this was an invasion of our privacy and refused to let him take photos. We have valuable antiques and don’t want unknown persons seeing our private property. The appraiser said it is now customary, but we got the mortgage anyway. Is it normal for appraisers to take interior photos of occupied homes?

A: Some mortgage lenders request their appraisers take interior photos when appraising a home. Like you, when I refinanced my home some time ago, I refused to allow the appraiser to take interior photos.

If my home had some special feature that added considerable market value, such as a dramatic curved staircase, a photo might be important to the appraised value, but mine is just an ordinary home. I agree with you that how your home looks inside is nobody’s business, since that has little to do with its appraised market value.

Blemished Credit? Try a Sub-Prime Loan

Q: My wife and I have been married almost three years. Before we got married, we both had bad credit. We have been trying to clean up our act and are doing much better, paying our credit cards and bills on time, but we still have a few blemishes. We earn a total of about $90,000 a year, so we think we can afford to buy a modest house or condo. In our situation, how can we find a mortgage lender interested in us?

A: Many “sub-prime” lenders will jump at the chance to approve you for a home loan. The interest rate won’t be the lowest, but at least you will get started with home ownership. Also, please don’t expect your first home to be your ultimate dream home.

If you are on the Internet, shop around among mortgage lenders. A reputable lender specializing in “sub-prime loans” (a subsidiary of Countrywide mortgage) is https://www.fullspectrumlending.com. They claim to be able to finance just about any potential home buyer. Get pre-approved for a mortgage before shopping for a home. Then you’ll know what price you can afford to pay for a house or condo.

As Loan Fee Goes Up, Interest Comes Down

Q: We are in the process of trying to buy a home. Now we are dealing with the mortgage company. The agent suggests we pay a loan fee of two points. Isn’t that rather high? But she says we will get a lower interest rate that way. Your advice, please.

A: The general rule is for each loan fee point paid, which equals 1% of the loan amount, your interest rate should be reduced by .25% from the “market rate.”

However, today nobody is quite sure what the home-mortgage market rate is. I suggest you ask the lender for a written APR (annual percentage rate) quote with one- and two-point loan fees. Compare it among several lenders for similar mortgages. Most buyers pay a one-point loan fee, so if you pay more, be sure you get a substantial reduction off the loan’s interest rate.

Too Soon to Reuse Tax Exemption

Q: My wife and I lived in our home since it was built in 1973, and we sold it in February 2000. In December 1996, we bought a Florida condo and used it at least six months every year. It has now become our only residence. We have lived in it a total of 25 months since purchase.

Now we have bought a new condo, which is under construction; it will be ready for occupancy in 2001. We want to then sell our current Florida residence. However, when I contacted the Internal Revenue Service, the nice lady said the profitable sale of our current Florida residence will not qualify for the $250,000 home-sale tax exemption. Why not?

A: That nice IRS lady is correct. The profitable sale of your Florida condo will not qualify for the $250,000 ($500,000 for a married couple filing jointly) principal residence tax exemption.

The reason is crystal clear. The sale of your former principal residence in February 2000 clearly qualifies for the home-sale tax exemption of Internal Revenue Code 121. I’ll presume you owned and occupied it as your principal residence an “aggregate” of two years during the last five years before its sale.

Internal Revenue Code 121 specifies that this wonderful home-sale tax exemption cannot be used more than once every 24 months. If you want to wait until February 2002 to sell your Florida condo, you can again qualify for the $250,000 per qualified owner home-sale tax exemption. For more details, please consult your tax advisor.

Family Ties Entangle Inherited House

Q: My mother died recently in Oklahoma. She left her house to my brother and me in joint tenancy. Meanwhile, our half-sister is living in the house, rent-free, and refuses to move out. My brother is upset with me because he expected to receive fee simple title to the house when our mother died.

I can’t sell the house without his consent, but he refuses to talk to me about this matter. How can I dispose of my 50% interest in the house? An Oklahoma attorney told me if I bring a partition lawsuit against my brother, it will cost me about $5,000 and could take up to a year. Neither of us lives in Oklahoma. How can I resolve this issue without spending a lot of money?

A: The obvious solution is to ask your brother to buy out your 50% share of the house. Give him a dollar amount based on the house’s current market value. Or, if you are financially able, offer to buy out your brother’s half. Maybe that’s what he wants. Then you could sell the house without having to negotiate with your brother.

If he refuses to buy out your half of the house or to sell his half to you, ask if he wants to sell the house. Maybe you can both agree to sell the house, presuming you both hold marketable title. You neglected to say if your late mother held title in a living trust or if the house must go through probate.

I agree with your Oklahoma attorney that a partition lawsuit should be your last alternative. However, if you and your brother cannot agree on what to do with the house, then a partition lawsuit can result in a court order to sell the house and to divide the sales proceeds. Then you can inform your half-sister she must move out due to the court’s order for the sale of the house.

Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to P.O. Box 280038, San Francisco, CA 94128. Bruss suggests consulting an attorney or tax advisor before making important real estate decisions.