Reasons to Sell First and Then Buy

From Elizabeth Weintraub,


Simultaneous Home Buying and Selling

Homeowners who are planning to move up often wrestle with the dilemma: "Should we sell first or buy first?" You'll find plenty of agents advising you to buy before you sell, but that's rarely in your best interest. It's in the agent's best interest because if you buy, you will need to sell, and the agent will be guaranteed two sales, regardless of how much it cost you to do it this way.
If you decide to sell first and then buy but, say, your home doesn't sell or it attracts very low offers that you do not want to accept, the agent will get nothing. Think about it.

Of course, which comes first, the chicken or the egg, depends on the market -- is it a buyer's or a seller's market -- and your personal motivation. However, for most sellers and buyers, the smart thing to do is to sell before you buy.

Ability to Negotiate.

By selling first, you have the luxury of time. You don't have to take the first offer that comes along because you already have a place to live. It's called your home.

Higher Sales Price.
Sellers who aren't under pressure to sell often obtain higher sales prices because buyers realize the sellers are not desperate. Nothing yells "discount your offer" like a listing that reads: "seller motivated, bought another."


Contingent on Concurrent Closing.
By making the sale of your home contingent on closing concurrently with your new purchase, you have basically said to the buyer, "If I can't find the home I want to buy, I'm under no obligation to sell to you." You don't have to name the property address. You can simply state: "This sale contingent on closing concurrently with the purchase of seller's replacement home."

In fairness, a smart buyer's agent won't let a buyer sign a contract with a contingency clause like that; however, I get away with inserting that clause because few agents understand its implication.


Contingency Period.
OK, let's say the buyer's agent is smart enough to strike a concurrent closing clause from the contract. The next best thing to ask for is a time period during which you are free to look for a replacement home. A contingency period will give you the right to cancel the contract during that time period if you so choose, which can range, on average, from 7 to 21 days.


Renting After Closing.
Some sellers who want to take their time to find the perfect home, that one-in-a-million, will often opt to rent after closing. If the buyer doesn't require immediate occupancy, the seller might rent back their own home for the amount of the buyer's new mortgage payment. Or the seller might move out, put their belongings into storage and rent a furnished, short-term apartment.

Can we claim $500K tax break if renting to tenants?

Couple learns tax implications of selling primary home, rental

By Robert J. Bruss
Inman News

DEAR BOB: We have rented out a legal apartment in our primary residence for 17 years. My wife and I intend to sell our house and shelter $500,000 of our gain. In order to do so, must we be "tenant free" for 24 of the last 60 months? --Bruce C.

DEAR BRUCE: No. You can sell your principal residence with the tenant still living in the apartment.

For capital gains tax purposes you will be making two sales. One is the sale price of your principal-residence portion. The other sale is the sales price of the rental apartment.

But the Internal Revenue Code 121 principal-residence-sale tax exemption up to $500,000 for a qualified married couple (up to $250,000 for a single home seller) applies only to your capital gain profit on the principal-residence portion. That's presuming you both occupied your primary residence at least 24 of the last 60 months before the sale.

The capital gain on the sale of the rental apartment has two components. One is the "recapture" tax at the special federal tax rate of 25 percent for the depreciation you deducted after May 6, 1997. The other part of the capital gain on the rental apartment is taxed at a maximum federal tax rate of 15 percent. For full details, please consult your tax adviser.

EVICT TENANTS IF YOU FEEL STRONGLY ABOUT THEIR BREACH OF LEASE

DEAR BOB: What recourse do I have when my rental tenants don't honor the terms of their lease? The house they rent from me has a nice yard. The lease terms require them to maintain the property. But the trees look like they are dying. I asked my tenants to water the trees, but they say they don't have time. What are my options to have them honor their agreement to maintain the property? --Lisa D.

DEAR LISA: Even if your tenants have a lease, if it requires them to maintain the yard and they fail to do so, you can evict them if you feel strongly about their breach of the lease terms.

Just follow the state unlawful detainer (eviction) procedure, such as delivering a "Notice to Quit" and then filing the court lawsuit. If this is your first eviction, I suggest you hire a local attorney who specializes in evictions so you can learn how it is done.

If the lease is about to expire and you don't want to evict, you have another alternative. It is to substantially raise the rent (presuming no rent-control limit applies). The tenants will then either move out or you will have the extra rent money to hire a gardener to keep the yard and trees looking good.

CHECK SPOUSE'S DEBTS BEFORE ADDING HER TO HOME TITLE

DEAR BOB: I want to add my spouse (not married) to my deed. We want to take advantage of that $500,000 tax break when I sell our home. But I want to be sure she has no liens before I do this. She had several loans with her ex-husband and then a bankruptcy. She went to our local courthouse and was told there were a couple of liens but it looks like they were cleared. How can I verify this before proceeding? --Harry G.

DEAR HARRY: You say you want to add your spouse's name to your deed but you're not married. If she is not married to you, she is not your spouse.

The only way to be sure she doesn't have any liens that could attach to your home's title if you add her name is to obtain a new owner's title insurance policy. Before issuing such a policy, the title insurer will thoroughly check for possible judgments and other liens against her. Her informal search at the courthouse was a waste of time.

However, if you are legally married to her and you want to claim the Internal Revenue Code 121 principal-residence-sale tax exemption up to $500,000 (instead of $250,000 for a single home seller), her name does not have to be on the title. However, to qualify for the $500,000 exemption, you both must occupy your principal residence at least 24 of the last 60 months before its sale. For full details, please consult your tax adviser.

www.LagretRealEstate.com

It's not a gift, it's an investment

Family member seeks healthy return for help with down payment, mortgage

By Jack Guttentag
Inman News

Gifts of equity within the family are common. Parents often provide the down payment on their child's first home purchase. Many parents, however, can't afford a sizeable gift -- among other things, they may be concerned about the adequacy of their assets for retirement. Yet they might welcome an opportunity to help their children if it took the form of a reasonably safe investment yielding an adequate rate of return.

A house purchase by a family member may provide such an investment. Over the years, I have advised a number of families who asked me about how to set up a plan that would meet their particular needs. I even wrote a few articles describing such plans. On reading these articles now, however, I am not very pleased because they provide limited help when the individual circumstances differ from those in the article, as they often do.

Usually the investor contributes to the down payment, but some home buyers may need help with the monthly payment as well. In addition, sometimes the investor is a co-occupant, though not necessarily for half the house.

I have come to believe that there is a large untapped market for intrafamily investments in house purchases. The reason that so few actually materialize is that every deal is different, and designing it properly is very complicated. To remedy this, I have developed a spreadsheet that accommodates a wide variety of preferences of the home buyer and the investor.

The spreadsheet calculates the percent of the home equity (property value less mortgage balance) that is owned by each party at the end of each year. The respective ownership shares depend on the amount they each contribute to the initial cost of the home, the amount they each contribute monthly, the rent that is credited to the investor, and the interest rate that is used to calculate the future value of each party's contributions, including the rent credit.

The spreadsheet has two purposes. First, it is a simulation tool that allows the buyer and investor to see how each will fare under alternative combinations of interest rate, rent credit, investor contribution and property appreciation rate. They can try different scenarios to find the one that leaves them both satisfied.

Second, the spreadsheet provides the accounting record of where the parties stand at any point in time. They can watch their equity shares change over time, and can use the simulation capacity to forecast what they will be in the future.

The spreadsheet is a tool, not a contract. To use the tool effectively, the parties should have a contract that addresses four major issues.

Rent Credit: The parties must agree on the rent payment credited each month to the investor. The rent credit ought to approximate what the home could be rented for in the market, net of taxes, insurance, utilities and routine maintenance, all of which the occupant should pay. If both parties are occupants, the rent credit disappears or, if they occupy different amounts of space, is scaled down.

In addition, there must be agreement on how often the rent will be adjusted, and how. One possibility is to adjust the rent credit every year in line with changes in the rental component of the Consumer Price Index.

Interest Rate: The parties must agree on the interest rate used to calculate the future value of the contributions. The rate should approximate what the investor could earn if the funds were placed in investments of comparable risk. In many cases, the mortgage rate might serve quite well as the investment rate.

Property Improvements: Because of the potential for conflict, it is useful for the parties to agree beforehand on how improvements are to be handled. The spreadsheet treats expenditures on improvements in the same manner as other payments, recording a credit to the party making the expenditure. However, investors and occupants won't necessarily have the same interest in an improvement. For example, the occupant might want a swimming pool, which might add little to the value of the property.

One approach would be to reduce the credit on improvements initiated and paid for by the occupant using a credit schedule based on general experience. For example, an added bedroom might be a 100 percent credit while a swimming pool might come in at 40 percent.

Termination: Most investors, even within the family, want to terminate the deal and get their money after 5-10 years, so a termination provision needs to be included. Assuming the buyer has not sold the house before the termination date, the investor must be paid off. This may require the buyer to do a cash-out refinance based on the equity remaining after the investor has been paid off.

Where to market your home on your own

Craigslist.org: Craigslist has listings for cities all over the world and posting is simple. A recent look at the London and Frankfurt Craigslists found many Florida homes for sale. Be sure to list your home in euros or British pounds, not U.S. dollars.

Homesonsale.co.uk: A UK-based site offers free advertisement of a home for 365 days or until home is sold with up to five photographs. Forums include discussions about buying homes abroad.

Listnlook.com: Free listing with one photo, $25 for Web site with four photos, $50 for two-page Web site with up to 16 photos, virtual tour and featured on home page. Listings remain active until sold.

Homesgofast.com: Based in UK with an office in Florida. Lists houses offered by real estate agents. Individuals can also list homes for sale. One-time fee of $69, $129 or $189 depending on services you choose, but all listings include eight photographs and no commission.

When home won't sell, consider 'rent-to-own'

Despite above-market rent, all parties benefit

By Robert J. Bruss
Inman News

You've been looking for months for your first home, or you want to upgrade to a nicer home in a better community. It's a great time to buy a home, everybody tells you.

Finally, you find the ideal home for sale, which has most of what you want (there is no such thing as the "perfect home.")

But when you sit down with the mortgage lender to go over your income and credit to see if you can obtain the home loan you need, the lender says your FICO (Fair Isaac Corp.) credit score is too low to get an affordable interest rate. A mortgage at 7.5 percent interest is the best he can arrange, but he's not sure you can qualify for the high payment.

Will you give up, resigned to waiting a year or two before buying a home? Of course not.

You know the house you want to buy has been listed for sale three or four months so the sellers must be anxious. The eager real estate agent phones to ask if you got your mortgage preapproval. You report the bad news that you're not willing to pay 7.5 percent interest.

Fortunately, you're working with an experienced realty agent. She suggests renting the house for up to two years until you can improve your FICO score. Then she explains you can lock in the purchase price at today's market value. "Tell me more" is your swift reply.

WHAT IS A LEASE-OPTION? Your real estate agent then explains a lease-option, also known as "rent to own" in many communities, is a combination rental, sales and finance technique that has been used by thousands of home buyers and sellers.

However, a lease-option is not the same as a lease-purchase, which obligates the buyer to buy, usually within a year or two. With a lease-option, if home prices plummet, the buyer doesn't have to exercise the option to buy.

Personally, I bought my current residence with a lease-option when I realized I was "cash challenged" without enough money for a down payment. Through my buyer's agent, I offered the sellers a 12-month lease at $1,500 per month with $10,000 nonrefundable option money. As the vacant house had been listed for sale about six months, I asked for a 100 percent rent credit toward my option purchase price, which was just slightly below the asking price.

After hesitating about 10 days, my sellers accepted, but only for a six-month rental term. I readily agreed. Three days later, I hired a moving van and moved into my new home. About five months later, I exercised my purchase option and took title. At the closing, I received credit against the option price for my $10,000 option money plus the $7,500 total rent paid for five months.

Lease-options work especially well when there is an oversupply of homes listed for sale, such as the current "buyer's market" in many cities. When a home seller needs someone to pay enough rent to cover the mortgage payment but doesn't require an immediate cash sale, a lease-option can be ideal.

THERE ARE ALWAYS MORE LEASE-OPTION BUYERS THAN SELLERS. For some unexplained reason, there are usually more "rent to own" buyers than sellers. Having used lease-options to buy and sell houses for almost 30 years, I've learned a properly marketed lease-option can solve problems for both buyers and sellers.

The key to lease-option success is the amount of rent credit the tenant will earn each month toward the down payment. Although I negotiated a 100 percent rent credit when I bought my present home, as a seller I usually agree to only a 33 percent rent credit. As a motivated seller, I've agreed to 50 and even 100 percent rent credits.

Although the lease-option buyer doesn't get any income-tax deductions, the buyer's rent credit is far better, like a "forced savings account." Of course, if the buyer doesn't exercise the purchase option, the rent credit plus the option money is forfeited.

Here is an example of how to advertise lease-options in the newspaper under the "Houses for Sale" and "Houses for Rent" classified ad categories:

$5,000 MOVES YOU IN
3 BR, 2 BA home, Rent-to-Own, $2,000 Total Monthly Rent
$500 per month Rent Credit Toward Purchase Price
Open Sunday 1-3 PM, Bring Your Checkbook; Won't Last!
777 Easy Street, Pleasant Heights

Of course, the numbers should be adjusted, depending on the market value of the home and its monthly rent. My experience has been, as a seller, lease-option renters are willing to pay at least 10 percent above fair market rent in return for the rent credit and locking in the option purchase price at today's market value. As a seller, I prefer a one-year lease-option, but I have been known to agree to a two-year term.

LEASE-OPTION PROS AND CONS FOR SELLERS. If your home hasn't sold "the regular way," consider the lease-option "rent to own" advantages for sellers: (a) continued income-tax-deduction benefits, including depreciation, until the option is exercised; (b) upfront cash from the buyer, which is the first month's rent plus the nonrefundable option money; (c) monthly rent cash flow instead of having a vacant house or condominium; (d) there are usually more lease-option buyers than sellers; (e) above-market rent; (f) lease-option tenants usually treat the property very well; and (g) lease-option buyers will agree to a top-dollar option purchase price. The only significant seller disadvantage is the lack of an immediate cash sale.

LEASE-OPTION PROS AND CONS FOR BUYERS. Among the many lease-option benefits for buyers are (a) low upfront cash requirement as compared to buying; (b) it's usually cheaper to rent than own; (c) the rent credit toward the down payment is like a "forced savings account"; (d) if the home goes up in market value, the buyer benefits from the locked-in option purchase price; and (e) buyers can try out the home before buying.

Possible disadvantages for buyers include no itemized income-tax deductions (this is more than offset by the rent credit) and uncertainty knowing if you will be able to afford to buy before the purchase option expires.

HOW DOES THE REALTY AGENT GET PAID? When a house is listed for sale but it hasn't sold, some listing agents are reluctant to recommend a lease-option because they won't immediately receive a full sales commission.

But I often suggest to agents, "Isn't it better to take part of the commission now and part of the commission when the option is exercised, rather than earn no sales commission at all?"

HOW TO FIND HOUSES AND CONDOS TO LEASE-OPTION. Because there is usually a shortage of lease-options, buyers need to get creative. One strategy is to read the "houses for rent" and "houses for sale" classified newspaper ads for clues. Often a landlord can be converted to a lease-option seller by dangling some nonrefundable option money (after you decide you want to "rent to own" the house or condo).

Another strategy is to run your own "House for Rent Wanted" or "House Wanted" classified ad. I learned this technique from a real estate investor who advertises "Executive needs 3 BR, 2 BA house on five-year rent to own. $5,000 option money. Call Jimmy (555) 555-5555." He doesn't get many phone calls, but one or two from motivated home sellers, landlords and real estate agents will be enough.


www.LagretRealEstate.com

Buying distressed homes not easy in today's market

How to get it on foreclosure, short-sale properties


By Robert J. Bruss
Inman News

Are there any foreclosures, short sales or distress properties in your town or neighborhood? If you answered "no," you probably aren't paying close attention to the local real estate market.

Good times or bad, these situations always occur. Even during the peak years of 2004 and 2005 for home sales, there were still mortgage lender foreclosures and distress property sales. Today, the numbers of these sales are rapidly rising. If you're interested, the current buyer's market in most cities is a great time to acquire these below-market-value properties.

WHAT CAUSES FORECLOSURES AND DISTRESS PROPERTIES? There are many reasons, but the cause usually is the property owner isn't thinking straight. Reasons for foreclosures include divorce, unemployment, drugs, alcohol, death or serious illness in the family, disputes between owners, local economic conditions, mental problems, and good old-fashioned greed.

But the real reason for foreclosures and distress property situations usually is the borrower isn't acting rationally to solve the problem. Imagine you can't afford the increased monthly payments because your adjustable-rate mortgage just "adjusted" and your payment went up by $300. To make matters worse, home market values in your neighborhood are stagnant or slipping so your market value is no longer appreciating.

You consider selling. But local Realtors tell you there is a glut of listings for sale nearby and you would be lucky to sell for the amount of your mortgage balance. Should you stop making mortgage payments and walk away? Of course not. That would ruin your credit and you need a place for your family to live.

Rather than face foreclosure, the obvious solution is to increase your monthly income by at least $300. Maybe you can get a part-time evening job. Or perhaps your spouse or teenage child can get a part-time job to help out. One way or another, virtually every foreclosure and distress property situation can be avoided.

SOMEONE PROFITS FROM EVERY FORECLOSURE. The grim reality is somebody will profit from every foreclosure and distress property situation. If you didn't cause the problem, you might as well profit from someone else's problem.

Most institutional mortgage lenders do not want to foreclose and acquire the property. It costs lenders thousands of dollars to hold foreclosure property instead of keeping their mortgage money earning interest.

However, if you understand the simple foreclosure rules, you can profit from someone else's distress. That's why it pays to understand the basic foreclosure profit opportunities.

STEP 1 -- THE JUDICIAL FORECLOSURE LAWSUIT OR NOTICE OF DEFAULT. Until the mortgage lender gives up on the borrower, the public usually does not know there is a problem. But when the lender records a judicial foreclosure lawsuit on a mortgage, or files a notice of default on a deed of trust, the borrower's default becomes public knowledge at the local court house.

At this point, bargain hunters swing into action to contact defaulting borrowers to see if there is a "preforeclosure opportunity" during the lender's reinstatement period before the official foreclosure auction.

This reinstatement period, which can be as short as 21 days in Texas but generally is three to six months in most states, gives borrowers time to either sell the property or reinstate the mortgage before losing the property at a foreclosure sale.

SHORT SALES USUALLY ARE NOT BARGAINS. Sometimes during the mortgage reinstatement period it becomes evident the home's fair market value is less than its mortgage balance. When that happens, the real estate listing agent confronts the mortgage lender to accept a "short sale." That means the lender agrees to accept less than the mortgage balance as full payment of the mortgage.

For example, suppose a mortgage balance is $250,000 but recent comparable sales prices of similar nearby homes are only $225,000. If the mortgage lender agrees to a $225,000 short sale, the buyer can purchase for $25,000 less than the existing mortgage balance.

The defaulting borrower on a short sale walks away with nothing. However, the borrower gets rid of his mortgage obligation without a foreclosure on his credit record. But the downside, in this example, occurs when the lender sends the borrower an IRS 1099 form showing $25,000 of taxable debt-forgiveness income.

As a general rule, the buyer of a short-sale house does not get a bargain purchase price. Lenders are usually very demanding to insist that the home sell for as much as can be obtained.

Another problem with short sales is lenders often take 30 to 90 days before deciding to accept or reject a short sale purchase offer. For this reason, smart buyers set a reasonable deadline, such as 15 days, for the lender to accept or reject a short sale offer.

STEP 2 -- BUY AT THE FORECLOSURE AUCTION. If a property buyer cannot purchase the home from the defaulting borrower during the reinstatement period, the house will go to either a judicial court foreclosure sale or a nonjudicial trustee's sale.

The advantage of buying at such an auction is any junior liens are wiped out. To illustrate, if a house has a first, second and third mortgage, plus a judgment lien and a mechanics' lien, they will all be wiped out when the first mortgage lender holds a foreclosure sale.

But the disadvantage of buying at a foreclosure auction is cash (actually cashier's checks) are required either at the sale or shortly thereafter. This is one place your MasterCard, Visa and American Express cards are not welcome.

Raising enough cash to bid at a foreclosure sale can be difficult, especially when the amount of the defaulted mortgage is large, often $100,000 or more.

Another problem is foreclosure auctions are "as is," meaning there is no opportunity to inspect the house before purchase and the foreclosing lender will not pay for any repairs. In most states, foreclosure-sale sellers are not required to disclose even known defects at the auction.

STEP 3 -- BUY AFTER THE FORECLOSURE AUCTION. When there are no bidders at the foreclosure auction, title to the property then goes to the foreclosing lender. This is called REO (real estate owned) property. Lenders are usually very anxious to get rid of REO property, which costs money to maintain and incurs liability risks.

Astute buyers often approach foreclosing lenders who acquired property immediately after the sale to make a purchase offer. My favorite tactic is to send a FedEx overnight letter to the lender's president, offering to purchase for the amount of the foreclosed mortgage (presuming the property is worth that much).

Of course, the lender's president never sees the letter, but it will get referred to the right decision-maker in the REO department.

www.LagretRealEstate.com