'Creative financing' tactics to lure home buyers

Retired seller moving abroad not looking to make big profit


By Benny L. Kass
Inman News

DEAR BENNY: I recently retired and am planning to move out of the country. I own a single-family house in a desirable area. I owe only about $70,000 on my current mortgage. The value of the house before the recent market crash was about $470,000. Despite the current market, numerous people have looked at the house, but only one has made an offer (a very lowball offer). I am not desperate to sell, but I want to move on with my retirement plans. The house is older, but has recently had about $30,000 in improvements in order to appeal to buyers.

Since I will not need the money from the sale of the house, how could I offer a very appealing owner-financed mortgage, perhaps with an introductory "teaser rate"? I called the bank that holds my mortgage, but it does not have anything in place to assist individuals with owner-financing. I could offer the house with a fair rate, but I do not want to have to fly back from another country to collect late payments, foreclose, make repairs or redo legal paperwork. Therefore, I am apprehensive about renting or offering a mortgage to anyone with less-than-perfect credit. Any suggestions you could offer would be appreciated. --Bob

DEAR BOB: There are a number of ways that you can market your house with what I call "creative financing."

First -- a land sales contract. Here, you enter into an agreement with your buyer that he or she will start making monthly payments. Your attorney will hold the deed to the property in escrow. When the buyer is able to obtain sufficient funds to pay the entire contract price, the deed will be recorded in the buyer's name. If the buyer does not make the payments, the agreement states that he or she will immediately move out, and you still own the house and keep the moneys that have been paid thus far.

Second -- a wraparound mortgage. You sell the house and take back a mortgage (deed of trust). Since you already have a mortgage that has not been paid in full, this would be a second trust.

Example: You sell the property for $470,000; the buyer pays you $20,000; and this second trust is for $450,000. Let's assume your current mortgage carries an interest rate of 5.5 percent, and the new mortgage is at 6.5 percent. You receive payments based on the higher mortgage rate, but pay off your lender at the existing rate. In my example, you will make 1 percent on the money you owe your bank, and 6.5 percent on the difference.

Third -- a seller take-back. If you -- or your buyer -- can come up with the money to pay off your outstanding mortgage, then you can take back a first deed of trust at an interest rate to be negotiated. You can start off with a low rate for a couple of years, and have it increase periodically.

You do not have to worry about flying back to handle these issues. You can appoint a bank or an attorney to handle all of these issues, including collecting the monthly mortgage payments or assessing any late fees, and you can enjoy your retirement wherever you are.

DEAR BENNY: I am on the board of directors of a 112-townhome development. A new development is being built right next to ours, and the developer has requested permission to tap into our water line. I assume that since he asked we must have some rights. We have an attorney researching this. Our development is approximately 22 years old. What are the pros and cons for allowing this and should we charge a fee? Thanks for your advice. --J.D.

DEAR J.D.: It appears obvious to me that your association has certain rights; otherwise, the developer would not be asking for your permission.

The very first thing I would have your attorney do is contact the water authority in your county, which must be involved in any discussion and decision that is made.

It concerns me that your water line will be used by another development. Is this only a temporary request (which under certain conditions would not bother me as much) or is this a permanent situation (which in my opinion is not acceptable)?

Yes, if the association and the developer enter into a written agreement, the developer should pay for the use of your water. But I am not sure how this can be determined. I suspect that a submeter will have to be installed, which must be at the expense of the developer and subject to the approval of the local water authority.

Bottom line: It's not a good idea.

DEAR BENNY: My daughter and her boyfriend are thinking about buying a house, and she is putting a larger down payment. Is this a good idea? --Doug

DEAR DOUG: There are ways to protect your daughter should they end up separating before marriage. As you no doubt recognize, that is always a possibility.

There are two ways they can take title -- either as tenants in common or joint tenants with right of survivorship.

Under the latter arrangement, should one of the owners die, the other owner will automatically -- by what is known as "operation of law" -- become the owner of the entire property. Unfortunately, very few states (to my knowledge) allow a disproportionate interest with such a tenancy. Basically, both parties own the entire property equally. So there is no guarantee that your daughter's investment in the property will be protected.

In a tenants-in-common arrangement, ownership can be based on the amount of money that each party invests in the property. So, for example, if your daughter is putting up 75 percent of the down payment, title can be held as tenants in common, 75-25.

With that arrangement, should one of the parties die, his or her interest will be distributed in accordance with that person's last will and testament, and probate is required. So if your daughter has a larger interest, her share will go by way of her will.

Accordingly, at least until the couple gets married, I would recommend a tenant-in-common arrangement. Once they get married, if they so desire, they can change the title into tenants by the entirety, which is reserved for husband and wife.

I also suggest that they enter into a "partnership arrangement," which would spell out such matters as what happens if one party wants out of the deal, dies or cannot afford to assist with the house payments.

DEAR BENNY: My husband and his mother bought a commercial property as joint tenants seven years ago. His mother has developed a mental illness and has announced that she wants to file bankruptcy. What are his legal options? His mother's business is located in the building, which she is going to include in bankruptcy. She has quit making mortgage payments but will not agree to sell. --Leigh

DEAR LEIGH: This is obviously a difficult problem for you and your husband, especially since his mother is involved. I am not a bankruptcy attorney and suggest that you immediately consult an attorney with that expertise.

Did your mother-in-law ever give anyone her power of attorney? That should be investigated. If there is such a document, the holder of that power may be able to take appropriate action and resolve the situation.

If there is no such power, you may want to consider going to your local court to have a conservator and guardian appointed to act on her behalf. Your mother-in-law will have to be in court, if she is able to do so, and the judge will have to find that she is incapacitated -- meaning that she does not have the capacity to make financial or personal decision on her own. Again, your attorney should be able to assist you.

Depending on what conditions the judge puts in the court order, a conservator will have full authority to investigate the matter and take all appropriate action. However, the conservator must act in the best interests of your mother -- and not your husband.

DEAR BENNY: We want to accept a contract on our property. The buyers disclosed on their financial statement that they have $10,000 in a checking account. They wrote the earnest money check for $20,000 from that account. All other items on the contract are acceptable. Do we have a contract at this point? --Greg

DEAR GREG: In order to have a binding, legal contract, there must be (1) an offer, (2) acceptance and (3) consideration. Money -- the earnest money deposit -- is the consideration.

In a follow-up e-mail, you told me that you do not want to sell the house now. So if you have not signed the document, there is no contract. You may have a problem with your real estate agent who may claim that you owe a commission based on your listing agreement, but that's a different issue.

If you have already signed, there is a contract. You should demand that the real estate agent holding the check deposit it immediately. Agents generally have the legal obligation to deposit those checks within a certain period of time -- usually five to seven days from receipt.

If the check is good, you have a valid, binding contract and it will be difficult to get out from under it. If the check is not good, there was no "consideration" and thus no binding sales contract.

I don't know why they wrote a check for $20,000 when they disclosed that they have only $10,000 in their checking account. It could be that they deducted the deposit check and then disclosed the difference on their financial statement.

IRS to step up enforcement of Starker exchanges

Survey finds property owners abusing tax rules

By Benny L. Kass
Inman News

If you are considering a 1031 exchange (also known as a "Starker exchange"), you better make sure that you do it right. The Internal Revenue Service plans to increase its audits and its enforcement of these exchanges by the summer of 2008.

Usually, when a taxpayer sells a business or investment property, the taxpayer must pay a tax on any profit that is made. If the property was owned for more than one year, it will normally be considered a long-term capital gain and the tax will be based on your income. Currently, the highest tax rate is 15 percent.

However, if the taxpayer engages in an exchange, and strictly follows the complex rules, this gain can be postponed. For example, if you purchased your investment property for $100,000 and sold it for $200,000, you would in most cases have to pay the IRS $15,000 in addition to any state or local tax. However, if this property was sold in connection with a Starker exchange and you obtained another investment property worth $300,000, you would not have to pay any capital gains tax. Instead, the basis of the old property would be transferred to the new one; you would have to pay the tax only when you ultimately sold the replacement property and did not engage in yet another 1031 exchange.

But you must understand that a 1031 is not a "tax-free" process; it only defers the time when you have to pay the capital gains tax.

In a report issued last month, the Treasury Inspector General for Tax Administration (TIGTA) advised the IRS that "there appears to be little IRS oversight of the capital gains (or losses) deferred through like-kind exchanges."

When a taxpayer engages in a 1031 exchange, he or she must file Form 8824 with the IRS for the year in which the exchange took place. The Inspector General reported that more than 338,500 forms were filed in 2004 (the year of the TIGTA's study). This amounted to deferred gains or losses of more than $73.6 billion. According to the report, "while this represents a doubling of the number of like-kind exchanges reported in 1998, the total dollars amounts deferred more than tripled."

Like-kind 1031 exchanges serve a valuable function. According to the TIGTA report:

Taxpayers who take advantage of like-kind exchanges increase their purchasing power, as well as their financing and leverage capabilities, because payment of federal tax on the gains is deferred ... with additional equity to reinvest, taxpayers can execute exchange after exchange to create a pyramiding effect. The tax liability may be forgiven upon the death of the investor because the heirs may qualify for a stepped-up basis on the inherited property.

But because of the lack of enforcement by the IRS, taxpayers have been taking advantage of these favorable tax rules. For example, the Government Accountability Office (GAO) conducted a similar survey and found that taxpayers often made misrepresentations of the assets that were being exchanged. In order to have a successful 1031 exchange, real property must be exchanged for like-kind property. While this is a very broad category -- you can exchange a single-family investment property for raw land, an office building for a shopping center, or a condominium unit for a cooperative apartment -- the exchange will not be accepted if you want to exchange your principal residence for some other kind of property. Nor can you exchange a business for real property: it is not "like-kind."

However, the Inspector General discovered that the IRS generally will not impose any penalties if a taxpayer does not file Form 8824.

The report also highlighted other abuses, such as related party exchanges, incorrect basis figures, and partial, step and bartering exchanges. These are highly complex technical issues that will not be discussed or explained in this column.

Based on its findings, the Inspector General made three specific recommendations, all of which have been accepted by the IRS.

1. The IRS should study tax-reporting and compliance issues involved with like-kind exchanges The IRS agreed to conduct research studies and complete its work by Aug. 15, 2008. Based on the outcome of this research, it appears likely that exchanges that take place this year will be given greater scrutiny.

2. The IRS should provide better information and guidance to taxpayers on how to conduct a proper 1031 exchange. The IRS has agreed that by Jan. 15, 2008, it will provide more information on a number of its publications and forms so as to assist taxpayers in understanding how the exchange process works. Specifically, Publication 17 (entitled Your Federal Income Tax) will be updated to specifically remind taxpayers that they must file Form 8824 with their income tax return if they have been involved in a 1031 exchange during the previous year.

3. The IRS must provide clear guidance to taxpayers regarding the rules and regulations governing like-kind exchanges with respect to second and vacation homes that were not used exclusively by owners.

This is an area that is extremely complex. According to the Inspector General, "the absence of clarification on this issue leaves unrebutted the sales pitch of like-kind exchange promoters who may encourage taxpayers to improperly claim deferral of capital gains tax by selling nonqualified second and vacation homes through 'tax-free' exchanges."

Here, too, the IRS agreed. By March 15, 2008, the IRS will provide additional information to consumers and to tax practitioners about the filing requirements for Form 8824. More importantly, the IRS will increase its "consumer warnings" so as to caution taxpayers to be "wary of individuals promoting improper use of like-kind exchanges."

The IRS will not discourage the use of the Starker exchange. This process is specifically authorized in Section 1031 of the Internal Revenue Code. But investors must be on their guard against deceptive and fraudulent promotional schemes. Keep in mind that a Starker exchange is not a "tax-free" exchange; it is a "tax-deferral." If done properly, it will allow the taxpayer to use the moneys that otherwise would go to Uncle Sam for additional investments.

If you plan to get involved in a 1031 exchange, you should make sure your own lawyer and accountant review the process at every step.

In fact, depending on the amount of your gain, it may be best to just pay the capital gains tax and not become a landlord on the new replacement property. Your financial advisors will be able to assess and assist you in making this important decision.

(Note: The entire report can be located on the Web at www.tigta.gov; click on 2007 audit reports. It is report 2007-301-72).

10 ways to sell your home faster

A few basic elements can make the difference between a quick home sale and a frustrating ordeal. The experts offer their best tips.

By Liz Pulliam Weston

No matter how long your home lingers unsold, you can comfort yourself that at least you're not Mark Twain.

The celebrated author put his Hartford, Conn., home on the market for $60,000 in 1901, according to biographer Fred Kaplan. Despite repeated markdowns, the elaborate house failed to attract a buyer until the price was finally slashed to $25,000 two years later.

What was a once a much-loved home -- and one in which Twain estimated he'd invested more than $100,000 -- became a painful albatross.

"I would rather go to hell," Twain wrote the friend who was helping him sell the place, "than own it 50 days longer."

If you want to avoid Twain's agony, you'd be smart to do some work up front to make sure your house sells fast. That's particularly important these days as some of the hottest real-estate markets show signs of cooling and homes start to linger on the market longer than their sellers expected.

10 tips from the experts
Here is some of what experts advise to speed up your sale:

Finish the "honey do" list. Just about every homeowner has a string of little repairs that never quite get done. Now's the time. Fix the screens, oil that squeak, patch the cracks, paint the trim. Stuff that you've long since stopped noticing could be shouting "Deferred maintenance!" to every potential buyer.

The cost: A few bucks if you're handy, a couple of hundred or so if you hire someone who is.

Get inspected. A pre-sale inspection can help in two ways, says real-estate columnist Tom Kelly. Professional inspections can identify problems that could thwart a sale in time to fix them. And if there are no major problems, he said, an inspection can publicize that fact to skittish buyers.

"Having an inspection (report) right on the counter during the open house… shows the buyers that the seller's got nothing to hide," said Kelly, author of several real-estate books, including "Cashing in on a Second Home in Mexico."

The cost: Around $400.

Pack up the clutter. "Clutter eats equity," said real-estate broker Barb Schwarz, CEO of StagedHomes.com and a pioneer of the concept of professionally preparing houses for sale.

Too much stuff makes rooms look smaller and focuses buyers' attention on your possessions rather than the home you're trying to sell. That's why many professional stagers recommend removing as much as a third of your things to better show off rooms and closets.

"Since you're going to have to pack it up anyway, do it now," advised Schwarz, who said she has staged more than 5,000 homes. Buyers "can't imagine themselves living there if they can't see the space."

The cost: $150 to $300 a month for three months' storage.

Depersonalize and neutralize. The first items that should go in those packing boxes: family photos, collections and just about anything else that says "you." Streamline your artwork and consider toning down bold decorating statements, said Ilyce Glink, author of "50 Simple Steps You Can Take to Sell Your Home Faster and for More Money in Any Market." That means neutral shades if you need to repaint walls or replace carpets.

"Buyers have a hard enough time envisioning how their stuff will look on your walls," Glink said. "By neutralizing your decor, you can help give them the blank canvas they need to imagine your house as theirs."

The cost: $10 and up for paint; $500 and up for new carpet.

Clean like a fiend. "I mean Q-Tip clean," said Schwarz, who recommends taking a cotton swab to faucets and fixtures, scouring fingerprints from all the switch plates, shining windows until they're spotless and vacuuming up every last dog hair from the baseboards. "You should be able to eat off the kitchen floor, the bathroom floor."

You'll need to banish suspect smells as well; you don't want your house to become known in real-estate circles as "the cat pee place." If your pets have had one too many accidents, you may need to replace the affected carpet and padding and have the underlying floor sealed. If you're not sure how your place smells, get your least tactful friend to take a few whiffs and tell you the honest truth.

The cost: $10 or so in home cleaning products, if you do it yourself; $75 and up if you hire help.

Stage the rooms. Stand in the doorway to find each room's focal point, and use furniture placement to highlight that. The back of your sofa shouldn't block the view of the fireplace, for example, and the dining room table shouldn't be sharing space with a stair climber.

You should remove any extraneous pieces of furniture, but you may be able to "repurpose" them in another room. A wingback chair that's crowding the family room might help create a nice reading nook in the master bedroom, Schwarz suggested. The cost: Nothing, if you do it yourself; $1,500 and up if you hire a professional stager.

Tend to the floors. Keeping them spotless won't help if they're dated, worn or impossibly stained. You shouldn't spend a fortune installing hardwood or tile, though, since you're unlikely to recoup the cost. Look for compromises that can improve the home's appearance without busting your wallet. If the damage to a tile floor is limited, for instance, replacing a few tiles and regrouting might do the trick, according to home-improvement expert Joseph Celli, author of "First Aid for Home Sellers." (Available through his Web site.) If it's extensive, he recommends replacing the floor with high-quality vinyl as a more cost-effective option.

Carpets should be steam-cleaned to see if they're salvageable, Celli said. If not, you may be able to reduce the costs of replacement by offering to do some of the work, such as removing the old carpet and moving furniture.

And banish scatter rugs, Schwarz advised. Little rugs add to the visual clutter and can be dangerous besides.

The cost: Anywhere from a few bucks to a few hundred bucks.

Kick up the curb appeal. By now, you probably realize the garden gnomes are a no-no. But you may not realize how many sales you're losing before potential buyers even get to the front door.

"Most people will start their search for a home on the Internet. If your house's Internet photo doesn't 'wow!' them, they might never call for a showing," Glink said. "That's why your front landscaping needs to be in perfect condition."

Given the pressure to make a good first impression, you'll need to do more than trim back the hedges and plant a few pansies.

"Hire a professional landscaper to clean up the leaves, plant some fall flowers, trim the bushes and trees, and really manicure your lawn," Glink suggested. "If your front walkway is cracked, now might be the time to replace it."

The cost: $300 to $500 for the landscaping, more if you need to fix walkways or driveways.

If you're going to try to sell your home yourself, make sure you're up for the job. Hawking a home, especially in a slowing market, can be hard work.

The cost: 3% to 6% of the sale price of your home.

Set the right price. In frenzied markets, sellers who put outrageous price tags on their homes sometimes are rewarded. As markets cool, however, a too-high asking price can lead to a home being shunned by agents and buyers. A seller may think she's just testing the market, assuming buyers will at least make an offer, but buyers may assume she's unreasonable and move on.

Your goal should be a fair price -- something that's reasonable given the price of other homes in your area.

"Buyers who are actively searching for a fairly-priced home," Glink said, "will pounce on what they perceive is fair value."

How to prevent foreclosure

Contacting lender before missing payments offers advantage


By Ilyce R. Glink
Inman News
I received a call to my radio show just before the end of the year from a woman who had just received a letter from the bank that it was starting foreclosure proceedings.

Let's just say that it wasn't the year-end gift she was hoping for.

She told me how she had lost her job and used up all her savings to keep making her mortgage, home equity line of credit, and credit-card payments each month. After awhile, it was too much to manage, even after she got a new job.

What she wanted to know was where she could go to get help that would stop the foreclosure proceedings.

By the time you get a court date, it's a little late to unwind the clock. Instead, if you want to stop the bank from foreclosing on your house, the time to get help is before you've missed a single payment.

Most people know how to account for every dollar that comes in. It may not be your favorite task each month, but if money is tight and you're trying to make ends meet, you know when the budget is about to snap.

When you have a list of debts and bills, you should sort them from most important to least important. While all of the bills should be paid, the one that goes at the top of the list is the one that will cause your family the most damage if it isn't paid on time.

If I were organizing a list, it would read: mortgage payment; home equity loan/line of credit payment; utility bills; car payment(s); credit-card debt(s); and other bills.

Once you know that you won't have enough cash to go around, it's tempting to skip the biggest bill, which is typically your mortgage payment. But in some states, foreclosure is fast-tracked, which means you could find yourself receiving a foreclosure notice from your lender in as little as 60 days.

So let's back up: Once you know there isn't enough money to go around, and you know you'll be missing a payment, you need to call your lender. If you've already missed a payment, and your lender has called you, you need to pick up the phone and return the call. Talking to your lender is the best way to stop foreclosure.

Many borrowers have complained that when they call their mortgage company, no one picks up the phone. Or, they get transferred from department to department.

The truth is, if you don't talk to the lender, and it doesn't get recorded in your file, it doesn't matter how often you tried to call. When it comes to foreclosure, "trying" doesn't count.

If you're having trouble reaching your lender, call a HUD-certified housing counselor, who may be able to reach out to your lender on your behalf. The toll-free number is (800) 569-4287, or go online to www.HUD.gov/foreclosure/index.cfm.

Once you miss a payment, your lender will start sending you letters. If you want to avoid foreclosure, open the letters. These are supposed to contain information on how you can save your home.

In order to help you save your home, lenders can make changes to the terms of your loan agreement. The best time to do this is either just before or just after you miss your first payment.

Lenders can: (1) reinstate your loan (you'll catch up with everything you owe by a certain date; (2) offer forbearance (give you a few months off from making payments, while developing a plan to get you current on your loan down the line; (3) set up a repayment plan (where you agree to pay a little each month for the next six months or a year until you're caught up); or (4) modify your loan (this will change the terms so that the payments are more affordable).

All of the talk you're hearing about the government-sponsored solution to the mortgage crisis deals with loan modifications. The federal government is pushing investors who bought your loan to agree to modify the terms for the next few years. When a lender agrees to modify your loan, it could mean that the missed payments will be added to the loan amount, or that the interest rate will be changed from a variable rate to a fixed, or perhaps it will be lowered to a different interest rate. A final loan modification option is to adjust the amortization schedule, so that you have a longer loan term, but your payments each month are smaller.

For some borrowers, there's one other way to save your home: It's called a partial claim. A partial claim may be available only on certain loans and in limited circumstances. If you and your loan are eligible, you can set up an additional loan that will help you make up your missing payments.

This limited program is available to people who are several months behind in their home loan payments, and it allows them to become current on the loan. But the borrowers' circumstances must be such that they have overcome the reasons why they couldn't make their payments and can make the future payments on their loan. For more information, you can contact your current lender or get more information from HUD at http://www.hud.gov/offices/hsg/sfh/nsc/faqpc.cfm.

But don't delay in contacting your lender. The longer you wait, the tougher it will be to stop the lender from foreclosing on your property.