Even thirtysomethings need living trusts

Untimely death means major assets must be probated

By Robert J. Bruss
Inman News

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.

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.

www.LagretRealEstate.com

Adding Curb Appeal: 6 Ways to Spruce Up the Yard

When a house for sale looks good outside, buyers are more likely to want to come inside, says Barb Schwarz, founder of the International Association of Home Staging Professionals.

Here are some of Schwarz’s suggestions for tidying up the yard.
• Make it neat and clutter-free. Get rid of children’s toys and limit the number of hanging flower baskets and yard art. "It's far better to have fewer bigger pots than the clutter of smaller hanging pots," Schwarz says. "They just weigh down the house."
• Mow, weed and edge. “If the yard doesn't look well-manicured, then [potential buyers] feel the home hasn't been well maintained," Schwarz says. If the dog urinated on the yard and killed a portion of it, Schwarz recommends painting it.
• Trim the greenery. Trim trees from the bottom so they create a canopy but don’t block the view. Trim foundation plantings from the top, so they don’t impede views of the windows.
• Add color. If there’s no color in the yard, plant something like brightly blooming impatiens along the walkway.
• In winter, place two small potted evergreen trees on either side of the door to brighten up the entrance. Also, make sure the walkways are clear of ice and snow.
• Buy a new welcome doormat to dress up the front door.

Don't buy a house with these problems

10 environmental, design factors to look for

By Robert J. Bruss
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.

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.

It pays to hire home inspector before selling

Dear Barry,

I'm getting ready to sell my home and would like to hire a home inspector before I put it on the market. It seems that a pre-marketing inspection would give me a better idea of needed improvements before I sell. Is this wise or not? --Marian

Dear Marian,

Your approach demonstrates a wisdom not commonly realized by sellers. Buyers typically hire the home inspector after the purchase contract has been signed. The inspector provides a list of defects, and then the buyers ask the sellers to make repairs, to reduce the price, or sometimes to cancel the sale. When you provide a home inspection report prior to signing the contract, you avert this process of renegotiation.

Essentially, there are three benefits for sellers who hire a home inspector prior to marketing a property:

1. The inspection report informs you, in advance, of any significant defects that might need attention and that could adversely affect your chances of selling the property. It affords you the opportunity to make repairs prior to sale.

2. The report enables you to provide a more thorough and complete disclosure of the property's condition. This lessens the likelihood of legal problems after the sale, when undisclosed defects might then be discovered.

3. The report provides the best basis for an as-is sale, if that is what you prefer. You can decline to make repairs while fully informing the buyers of the conditions that need repair.

Sellers would do themselves a great service by taking this proactive approach to the disclosure process.

www.LagretRealEstate.com

Are tenancy-in-common investments a 'good deal'?

Increased cash flow a prime concern

By Robert J. Bruss
Inman News

DEAR BOB: What is your opinion of TIC (tenancy-in-common) investments? Are they a good deal? I currently own a rental property worth about $1 million, with $800,000 in equity. My current net cash flow is about $11,000 per month. From what I have learned, a TIC "promises" increased cash flow and equity in grade A buildings. Do you recommend TICs or an independent Internal Revenue Code 1031 tax-deferred exchange into a larger building to increase my cash flow? --John D.

DEAR JOHN: If you make an Internal Revenue Code 1031 tax-deferred exchange into a TIC (tenancy-in-common) share of a large income property, such as an office building or a shopping center, you are at the mercy of the TIC syndicator and property manager who may be very good or very bad.

Check on the success record of the TIC company. Many have been in business only a few years without much of a track record. Also check on the quality of the commercial property tenants.

For example, I know TIC investors who are very happy with their TIC investments in several Applebee's restaurant buildings where they have been receiving monthly checks for more than 10 years. But I also know a TIC investor in another restaurant chain's building where the tenant filed Chapter 11 bankruptcy and canceled the lease on the now-vacant restaurant building.

Of course, you can instead make an IRC 1031 tax-deferred exchange into a larger income property with better cash flow. Then you get to manage and control the entire property, although I can't say which is your better alternative.

WILL THIS HOME SELLER FORFEIT $250,000 TAX-FREE SALES PROFIT?

DEAR BOB: We plan to sell our home in a few years. Then we will buy into a continuing-care retirement community, which requires a $125,000 founder's fee. Will we be taxed on our home-sale profit because we are not buying another home? --Marion B.

DEAR MARION: No. Whether or not you purchase a replacement principal residence has nothing to do with your Internal Revenue Code 121 home-sale tax-exemption eligibility.

To qualify for the exemption up to $250,000 (up to $500,000 for a married couple when both spouses meet the occupancy test), you must own and occupy your principal residence at least 24 of the last 60 months before its sale. Full details are available from your tax adviser.

TAX CONSEQUENCES OF RENTING A ROOM IN YOUR HOME

DEAR BOB: Does renting a room in my home turn my principal residence into rental property and cancel the $250,000 tax exemption when I decide to sell? --Shana N.

DEAR SHANA: No. Renting a room in your principal residence only affects the rental portion, which becomes ineligible for the IRC 121 tax exemption up to $250,000 (up to $500,000 for a qualified married couple).

However, at the time of home sale, any depreciation you deducted for the rental room is "recaptured" and taxed at the special 25 percent federal tax rate. Please consult your tax adviser for full details.

The new Robert Bruss special report, "Pros and Cons of Investing in Rental Houses and Condominiums," 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.

Borrowers get tips on dealing with mortgage brokers

Being prepared can rid experience of trickery

By Jack Guttentag
Inman News

Borrowers who don't know how to deal with mortgage brokers waste their own time as well as that of the brokers. Borrower ignorance also encourages brokers to be hustlers rather than professionals.

In general, borrowers should view brokers as providers of professional services for which they are paid a fee. That fee is the only price brokers control, and it is the only price that borrowers using brokers should shop.

Shopping Rates and Points With Brokers Is a Waste of Time. To provide accurate price quotes, brokers need to know many things about the borrower, the property and the transaction. This information must then be matched against the prices contained in voluminous price sheets the brokers receive every day from multiple lenders. This is a lot of work, and few brokers will do it for casual rate shoppers.

Brokers in this situation typically quote the best price possible -- if the information required to price accurately is not used, this price is as good as any other. Some brokers will go even further and price below the best price possible, a practice know as "low-balling." The intent is to encourage the shopper to select the low-balling broker, who if successful will later find ways to raise the price.

But even if borrowers receive accurate price quotes from brokers, price shopping is usually a waste of time. The market is so volatile that prices can change once or more before the day is over, and they will always be reset the following morning. The only effective way to price shop is to do it online where borrowers can compare quotes from multiple lenders within minutes of each other.

Borrowers should engage mortgage brokers in the same way that they engage other service providers, such as lawyers, architects or house painters: by assessing their ability to do the job effectively, the fee they charge for their services, and their guarantees or other assurances.

Assessing Brokers' Ability to Help. Brokers should be interviewed about their qualifications and experience in the same way you would interview any other service provider. Engage the broker in a dialogue regarding your problem, and assess the response. Does this broker listen and respond thoughtfully? Or do you have the feeling he is trying to shoehorn you into something whether it fits or not?

You should also ask whether the broker will commit to a fee set in advance, and whether any guarantees are provided. Broker practice with regard to third-party services is a particularly telling indicator of service quality (see below).

Pricing the Broker's Services. The fee for the broker's services should be agreed to by both parties, in advance and in writing. If there is a separate processing fee, it should be included in the agreement. Upfront Mortgage Brokers follow these rules as a matter of course, and most other brokers will as well if the borrower insists on it. Don't waste any more of your time on a broker who refuses.

The broker's fee may be paid by you, by the lender, or by both. The fee is a negotiated item, but determining whether the fee will be paid by you or by the lender should be your decision alone. If you are short of cash and/or don't expect to have the house very long, you may want to pay a slightly higher interest rate in order to have the lender pay the broker's fee. If you have a long time horizon and enough cash, pay the broker yourself in order to get the lower rate.

Broker Guarantees: Upfront Mortgage Brokers provide four guarantees to borrowers that all brokers can and would provide if borrowers insisted on them.

--The broker's total income from the transaction will not exceed the fee agreed upon with the borrower, as discussed above.

--The broker will provide the borrower with a copy of the rate-lock commitment from the lender as soon as it is received. This prevents the broker from substituting his or her own lock for the lender's, a practice that puts a few additional dollars in the broker's pocket but leaves the borrower unprotected against a serious spike in interest rates.

--The fixed-dollar lender charges shown on the Good Faith Estimate, which are usually not part of the lock commitment, will not be changed so long as the transaction is not changed.

--Third-party fees will be passed along with no direct or indirect markup by the broker.

Some brokers go beyond strict neutrality on third-party services, negotiating preferential prices with service providers and/or guaranteeing third-party charges. Brokers who do either are very likely to be superior in other dimensions of service as well.

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.

House OK's Expanding Low-Income Housing Aid Program

Daily Real Estate News
House OK's Expanding Low-Income Housing Aid Program

The House voted this week to overhaul the Section 8 voucher program, the federal government’s largest effort to fund housing for low-income families.

The legislation seeks to make the aid program available to more families and make it easier for first-time home buyers to use the program. It also creates incentives for seeking education and employment.

Under the program, eligible tenants pay 30 percent of their income toward their rent, with the federal government paying the remainder.

Section 8 provides housing assistance for 2 million low-income families. It costs about $16 billion a year — about 60 percent of the budget of the Department of Housing and Urban Development.

The bill next goes to the Senate where it’s likely to encounter resistance. The main dispute is over how the proposed new formula allocates funds. The White House supports the status quo, while the new bill allocates money based on previous year’s spending.

Supporters say the new plan will eliminate a backlog that prevents many families from getting housing. The opposition, however, says the new plan wastes money.

Source: The Associated Press, Jim Abrams (07/12/07)

Navigating today's mortgage market

Part 1 of 2: Loan approval tougher for prime borrowers, self-employed

By Bernice Ross
Inman News

(This is Part 1 of a two-part series.)

You have a buyer purchasing a high-quality new home with 20 percent down, excellent credit and fully documented income, including two years of documented tax returns -- it's a no-brainer on getting loan approval. If you think that's statement is true, think again.

Today's lending environment is rapidly evolving from one where almost anyone could obtain a loan to one where even the most qualified borrowers may be sweating about obtaining loan approval. The "good old days" of taking orders are dead. Instead, to survive in this new and often hostile environment, you will need strong negotiation skills coupled with strategies on how to avoid loan problems. As credit standards tighten, expect to see more of the following types of scenarios:

1. "Stated-income" loans: RIP

"Stated-income," or "easy qualifier," loans are becoming harder to find. In the past, lenders made an approval based upon the strength of the buyer's down payment and credit history. They did not verify tax returns. Due to the increase in interest rates coupled with the subprime fiasco, even A+ borrowers are now encountering closer scrutiny. Don't be surprised if your buyer applies for a "stated-income" loan and the lender comes back requesting tax returns and complete documentation. These fully documented loans, where the lender carefully scrutinizes the borrower's credit and fully documents the borrower's income, are the new gold standard for making loans. As a result, both agents and clients will have to cope with tougher underwriting standards and more borrowers who will fail to qualify.

In order to make sure your transactions close, have buyers preapproved, not just prequalified. "Preapproval" means that the lender has checked the borrower's credit and verified income. All that is necessary to close the transaction is the appraisal on the property and the title report. In contrast, when buyers are "prequalified," the lender has seen the buyer's loan application but has not verified credit. Prequalification means that the lender will approve the loan, provided the credit, appraisal and title check out properly. Thus, it's smart to have all buyers obtain preapproval before ever taking them out to look at property. If the buyers resist this process, chances are they have problems that will prevent them from closing a transaction. Don't waste your time. If you are representing a seller, don't take one of your listings off the market until the buyer has obtained loan approval. An even better solution is to make a note in the Multiple Listing Service that the seller requests a preapproval letter with any offer.

2. Tax returns are no longer an option for the self-employed

When lenders do a fully documented loan, they thoroughly examine the borrower's tax returns. This is especially true for anyone who is self-employed. Part of the challenge in working with self-employed buyers is that they tend to be aggressive on their deductions. This brings their net income down, which makes it harder for them to qualify.

If the buyers decide to address this issue by doctoring their tax return data, they can end up in serious trouble. "Defrauding a lender" can result in serious fines and even imprisonment. Furthermore, they also run the risk of the IRS prosecuting them for tax evasion. In the past, it was difficult for lenders to cross check what was filed with the IRS. Today, lenders can call the IRS to verify whether the income the buyer claimed is the same number he or she filed with the IRS. Again, working with preapproved buyers can help you reduce many lending hassles.

3. Protect your sellers from rising interest rates

When I started in the business in 1978, interest rates were rising. (To put this in context, fixed rates were 10 percent and "variable" rates were 9.75 percent.) By early 1979, rates were above 10 percent and no one ever thought we would see single-digit rates again. There are two important practices from the past that are critical in today's mortgage environment.

First, if you are representing the seller and the buyer's agent writes in an interest rate of 6.75 percent, it's smart to counter that the buyer will accept up to a 7.25 interest rate. Be sure to request documentation that the buyer can qualify for a loan at the higher rate. It's also smart to counter that they will take an adjustable-rate mortgage in case they don't qualify for a fixed-rate mortgage. Remember, if the interest rate exceeds the amount in the contract, the buyer has the right to cancel the transaction.

Second, never write in "prevailing rate." You don't want your buyers applying for a 7 percent loan and learning they have to take a 9 percent or 10 percent loan because they have poor credit.

Insider secrets borrowers aren't supposed to know

Loan officer tells all in new book

By Robert J. Bruss
Inman News

If you are a home buyer, homeowner, real estate agent or involved with the mortgage industry, "Mortgage Rip-Offs and Money Savers" by Carolyn Warren will be an eye-opening read. The author knows the residential mortgage business as an insider, having worked in retail and wholesale lending as a bank mortgage loan officer for a direct lender, a mortgage brokerage, a finance company and a nationwide home-loan lender.

Just for fun, Warren also worked as a licensed notary public, attending loan closings involving many mortgage lenders who created outrageous rip-offs. Although she kept her mouth shut at such closings, where she was hired just to notarize the borrower's signatures, she shares the one closing where she spoke up to warn the borrower he was paying too much for the mortgage.

There are many excellent "how to get a mortgage" books, but this one is vastly different because it reveals the insider secrets even many mortgage professionals don't know. Warren reveals what really goes on in the home-loan business to get mortgages approved, and how borrowers can avoid becoming victims of their lenders.

The book begins with eight chapters explaining how borrowers can get the best interest rate and terms, as well as protecting themselves from lender scams. Along the way, Warren shares many real-life experiences of how some mortgage lenders make outrageous commissions by taking advantage of their naive borrowers who often don't know they vastly overpaid by thousands of dollars to obtain the loan.

The author is on the side of mortgage borrowers so she doesn't hesitate to explain how even "credit challenged" borrowers can obtain mortgages without being ripped off by their lenders. Rather than shopping for mortgages among all lenders in the phone book, Warren suggests limiting the loan-comparison shopping to just three lenders: two mortgage brokers and one direct lender.

The book's best chapter explains how many mortgage loan officers earn more than doctors and how they can earn $20,000 or more from a borrower who doesn't have the slightest clue. "Prepare to be outraged … I'm talking about the back-end commission you never saw on your paperwork. It's the money the wholesale lender passes under the table to the loan officer after your deal closes," Warren explains.

Then she emphasizes the dirty tricks some lenders use to conceal the compensation paid to mortgage brokers. In addition, she ruthlessly exposes unnecessary mortgage loan junk and garbage fees, which can often be negotiated away or at least greatly reduced.

She provides a valuable list of these 100 percent profit fees with creative names such as administrative fee, ancillary fee, document review fee, e-mail fee, title review fee, settlement fee, and even a photo review fee.

Toward the end of the book, Warren emphasizes why it is so important for borrowers to know the current "par rate" for mortgages so they won't be overcharged by their lenders.

As a former mortgage broker, she understands these individuals deserve to earn high-paying incomes. The author even explains how she won several trips from her employers for outstanding loan production work without ripping off her borrowers.

Although most of the book applies to home buyers, the last quarter of the book is devoted to home-loan refinancing and the pitfalls to avoid. Heavy emphasis is placed on the unexpected prepayment penalty some lenders try to implement at the last minute and how to combat lender dirty tricks.

Chapter topics include "Boost Your Credit Rating and Prequalify"; "Create a Short List of Three Honest Mortgage Lenders"; "Choose the Right Type of Loan for Your Situation"; "Request Three Good Faith Estimates and Compare the Costs"; "Uncover the Best-Kept Secret of the Mortgage Industry"; "Decide Whether It Makes Sense to Pay Points and Lock-in Your Rate"; "Avoid the Five Most Common Unpleasant Closing Surprises"; and "What You Must Know Before You Refinance -- How the Smooth-Talkers Work."

This is much more than an ordinary mortgage book because it reveals, from an insider's viewpoint, the costly dirty tricks some mortgage lenders play on their borrowers. It also reveals what borrowers need to know to get great deals on below-market-rate loans, how to handle subprime mortgage situations, and what to do if you get turned down for a loan or the loan doesn't close. On my scale of one to 10, this superb new book rates an off-the-chart 12.

"Mortgage Rip-Offs and Money Savers," by Carolyn Warren (John Wiley and Sons, Hoboken, NJ), 2007, $17.95, 222 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

Pros and cons of owning rental houses

A closer look at investment purchases

By Robert J. Bruss
Inman News

What is the best investment you ever made? Common stocks? Bonds? A small business? Your house? Other real estate?

Chances are your most profitable investment has been your personal residence. If you have yet to purchase your own home, today's "buyer's market" is an excellent time to do so.

However, if you already own your house, why not take advantage of current market conditions to buy one or more houses as rental investments? Let your tenants buy those houses for you by using their rent payments to pay the mortgage and other expenses.

WHY BUY RENTAL HOUSES? Realizing that profitable rental houses (and most other real estate investments) are long-term investments for at least five years, consider the advantages of such investments.

Your list of benefits will likely include probable appreciation in market value (although the home sale market is "flat" in many cities today), income tax shelter, maximum leverage to control the property with little cash, tax-free and tax-deferred sales benefits, and pride of ownership.

Yes, there are possible rental-house disadvantages unless you carefully qualify tenants before they move in to ensure they pay the rent on time and won't "trash" your property. But sound property management techniques minimize this risk and hold repair costs down by providing tenant incentives to avoid damaging your rental houses.

HOW TO GET STARTED BUYING RENTAL HOUSES. The easiest way to acquire a sound, well-located rental house is to buy one as your personal residence.

That might sound unusual. However, the key reason is buying your own home for owner-occupancy is the simplest way to purchase for little or no cash on the most affordable mortgage finance terms.

After owning and living in your home for a few years, perhaps fixing it up to add market value, then you can convert it to a rental house and move on to another house purchased the same way, eventually establishing a portfolio of rental houses.

Or, thanks to the tax magic of Internal Revenue Code 121, after living in the house at least 24 months and then moving out to rent it to tenants, you will have up to 36 months to decide if you want to keep the house as a rental or sell it and claim up to $250,000 (up to $500,000 for a qualified married couple) tax-free principal-residence-sale profits.

THE FORGOTTEN RENTAL-HOUSE TAX-SHELTER BENEFITS. Most prospective rental-house investors realize these properties can provide income tax benefits, but they are often hazy as to the details.

Thanks to the unusual benefits of the depreciation tax deduction for estimated wear, tear and obsolescence, most rental houses show a paper tax loss. The reason is that depreciation is a noncash-expense tax deduction, which requires no actual payment, as is necessary for mortgage payments, property taxes, insurance and repairs.

Current tax law allows depreciation deductions for rental properties over 27.5 years. Commercial properties require a 39-year depreciable useful life.

For example, suppose you buy a $250,000 rental house, allocating $50,000 to the nondepreciable land value. Dividing the $200,000 cost of the structure, each year for 27.5 years you can deduct on Schedule E of your income tax returns about $7,300 without having to pay in cash even $1 for any actual depreciation expense.

The likely resulting tax loss from the rental house, after paying the operating expenses from the rental income, is deductible up to $25,000 annually if your adjusted gross income (AGI) from other sources is less than $100,000. Between $100,000 and $150,000 AGI, the amount of deductible rental-property loss gradually declines.

But any unused rental-property tax loss can be "suspended" and saved for use in future tax years or when the property is eventually sold.

UNLIMITED DEDUCTIONS FOR REALTY PROS. However, "real estate professionals" can claim unlimited property-loss deductions from their other ordinary taxable income. If you spend at least 750 hours per year (about 14 hours per week) on your real estate activities, you may qualify for unlimited Schedule E deductions from your rental houses and other realty investments.

A real estate sales license is not required. Full-time real estate investors, property managers, builders, contractors and leasing agents can qualify. Either spouse is eligible.

For example, suppose a married physician earns $500,000 AGI. Normally, he would not be entitled to any Schedule E tax loss deduction from his rental houses because his AGI exceeds $150,000. However, if his wife manages their properties and she spends more than 750 hours annually supervising those investments, making management decisions, inspecting properties for possible purchase, and supervising sales and exchanges of their properties, they can qualify for unlimited "real estate professional" deductions on their joint income tax returns.

AVOID TAX WHEN SELLING YOUR RENTAL HOUSES. If you quickly buy and sell rental houses or other real estate after fewer than 12 months of ownership (called "flippers"), your capital gains will be taxed at ordinary income tax rates up to 35 percent plus state taxes.

However, if you own the property more than 12 months, then the maximum federal capital gain tax rate is currently only 15 percent, plus state taxes.

But various tax-avoidance methods are available to cut or eliminate these taxes. In addition to the principal-residence-sale tax exemption of Internal Revenue Code 121 (if the house was owner-occupied to meet the statute's requirements), tax-avoidance consideration should be given to tax-deferred exchanges and installment sales.

Also, remember that any unused annual property-tax losses from rental properties are "suspended" for use in future tax years or when a property is sold. Your tax adviser can provide full details.

Personally, I have sold several rental houses at considerable profits with no tax due because my suspended tax losses sheltered my capital gains from taxation. More information is available in my brand-new special report, "Pros and Cons of Investing in Rental Houses and Condominiums," available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010, or by credit card at 1-800-736-1736 or instant delivery at www.BobBruss.com.

Home staging pays off

Success secrets revealed in new book

By Robert J. Bruss
Inman News

"Staging Your Home to Sell" by Julie Dana and Marcia Layton Turner is a "must read" new book for home sellers and their real estate agents. Especially useful in the current buyer's market, it reveals details how to increase a homes net sales price and shorten its time on the market for sale by "staging."

This "how-to" book explains the concept of staging, which is unknown to most home sellers (and even some real estate agents). The basic idea of staging is to make a house or condominium listed for sale into a model home. Prospective buyers can then see, rather than just imagine, how attractive a home can be.

According to the authors, the cost of typical home staging should be 1 percent to 3 percent of the home's market value. They are not talking about major renovation. Instead, they recommend "decluttering" homes to make them appear as attractive as possible without spending major amounts of money.

This new book provides a room-by-room look at the most profitable staging for each of the major rooms in a typical home. Heavy emphasis is placed on the entry foyer, kitchen, bedrooms and bathrooms. Curb appeal also receives special attention because many prospective home buyers won't even inspect a house that isn't attractive from the exterior.

The dozens of before-and-after photos show the results of tasteful home staging. Although few homeowners actually live in a "picture-perfect" staged home where everything is in its place and there is no junk, the book's goal is to show how a staged home will appeal to a wide group of buyers.

Home staging, in addition to cleaning and repairing, often involves purchasing or renting furniture to make the rooms appear brighter and larger than the way the seller actually uses the home. Because most home buyers have little or no imagination with how nice a home can look, home stagers solve that problem by showing buyers the residence at its best.

Dana and Turner report the most profitable home-staging steps include lightening and brightening rooms, cleaning and de-cluttering, fixing plumbing and electrical, landscaping, and kitchen or bathroom upgrades. Although many home sellers do the work themselves, the authors emphasize that home staging costs money, but it is very profitable when done right.

But a glaring fault of the book is it presumes the home seller wants to do the home-staging work without hiring a professional home stager. Although the book mentions these professional home-makeover specialists, it completely fails to explain how home sellers and their realty agents can locate and hire successful home stagers.

Ironically, co-author Julia Dana is an accredited home-staging professional, but she fails to explain what to look for and avoid when hiring a home stager.

Chapter topics include "What is Staging?" "Setting Budgets and Priorities"; "To Declutter is Divine"; "Curb Appeal"; "Entrances and Exits"; "Living and Family Rooms"; "The Dining Room"; "The Kitchen"; "The Bedrooms"; "The Bathrooms"; "The Closets"; "The Home Office"; "The Basement, Garage, and Attic"; and "Staging the Exceptional Home."

In today's very competitive home-sale market where buyers are kings and queens, home staging often determines which homes sell first and for top dollar. This guidebook counsels home sellers and realty agents about the importance of showing off homes at their most attractive potentials. On my scale of one to 10, this new book rates a solid 10.

"Staging Your Home to Sell," by Julie Dana and Marcia Layton Turner (Alpha-Penguin Group, New York), 2007, $18.95, 251 pages; available in stock or by special order at local bookstores, public libraries and www.Amazon.com.

Finding perfect house is all about timing

Have I been looking long enough?

By Dian Hymer
Inman News

It's not uncommon for buyers to look for six months or more before finding the right house or condo to buy. Sometimes, it takes even longer if listings are in short supply. Lucky are the home buyers who find a great property that suits their needs soon after they start their search. But, finding the right property earlier than anticipated can pose a problem for some buyers.

Common concerns are: Have I looked long enough to understand the local market and the range of housing options available? Could there be another, even better listing on the market, perhaps at a better price? Will an upcoming listing be more appealing? Should I wait and see what else might come along, or should I go for it?

HOUSE HUNTING TIP: Don't pass over an ideal property just because you found it quickly. Instead, complete due-diligence investigations to satisfy any concerns you may have about the property before you make an offer. You could regret it if you don't buy the listing and it takes years to find another suitable property.

First, search the Internet, if you haven't already, to see if there are similar listings on the market in the area where you want to live. Ask your agent to show you as many of these as possible, unless you can rule out a listing based on your criteria without having to a look at it.

For example, you may need a main-floor bedroom and bath for an aging parent who visits frequently. You can usually get a sense of the floor plan of a house from the information provided on the Internet. If critical information isn't provided online, your agent can check for you. Look at as many homes as possible that might suit your needs. This will help you to decide whether to go ahead or wait for something better.

A critical variable to consider before making your decision is how often listings like the one you're considering become available. Ask your agent to provide you with a list of similar listings that sold within the last six months or one year.

You won't be able preview these listings. So, ask for your agent to give you as many details about the properties as possible, including how long they took to sell and whether they sold for more or less than the list price. You might want to drive by the listings so that you can at least get a curbside impression of how they compare with the listing you're considering.

You may find that listings similar to the one you like come along frequently. They don't sell quickly and rarely for over the list price. In this case, there's no urgency to buy quickly.

However, if you discover that listings like the one you covet come on the market infrequently, you should seriously consider going ahead with an offer. Certain kinds of properties in certain areas are always difficult to find. An example would be a charming home in move-in condition in a popular neighborhood that is within walking distance of great restaurants.

When these homes come on the market, there is often pent-up demand. You may not be the only buyer who has been waiting for just such a listing. This means that you could end up paying more than the asking price if you end up bidding in competition with other buyers who want the same kind of a property you do.

THE CLOSING: Don't pass up a good listing because you don't think you know enough to make an informed decision. Instead, accelerate your due-diligence investigations so that you are prepared to make an informed decision.