Home Buyers Today Have Several Protections From Buying ‘Lemon’

QUESTION: Many years ago, my mother and father bought their first home, which turned out to be a lemon. I grew up in that house and remember most of the problems, such as bad plumbing, defective wiring, which almost burned the house down; a water heater that exploded shortly after we moved in, a roof that continuously developed new leaks, and a furnace that never worked right.

Now my husband and I are talking about buying our first house and we want to avoid buying one with unexpected problems like my parents encountered. Is there any way to avoid such problems?

ANSWER: Yes. Home buyers today have many ways to protect themselves against buying a defective home. After you find the home you want to buy, just take some simple precautions.

--Inspect the home very carefully. Note all visible defects. Most will be minor problems, such as small cracks. Consider the cost of repairing these obvious defects when you make your written purchase offer.

--In your written purchase offer, if the seller has not given you a written disclosure statement (as some states, such as California now require by law) make your offer contingent upon the seller disclosing in writing all known defects and your acceptance of such disclosure.

--Also include in your written offer a contingency clause such as “This purchase offer contingent upon buyer obtaining and approving a professional inspection report of the house.” Such an inspection will cost around $200, but will be well worthwhile. Be sure to accompany the inspector, who will point out and explain all defects observed.

--If possible, get the seller or the real estate agent to pay for a one-year home warranty policy. This protection, available from most realty agents, pays for repairs to built-in appliances, plumbing, wiring, water heater and furnace during the year after purchase.

The old days of caveat emptor , or buyer beware, which prevailed when your parents bought their home, are long gone. Today, home sellers must disclose all known defects or risk being liable to their buyers for the costs of repairs. But smart buyers use the methods above to protect themselves just in case the home seller “forgets” to disclose a known defect. Ask a real estate attorney to explain further.

Elderly Sellers Miss Out on Tax Break

Q: I am 66 and my bride, whom I married almost a year ago, is 62. She didn’t like my house, so I reluctantly agreed to sell it so we can buy a new townhouse together. However, when I talked to my tax adviser he said I cannot use my $125,000 tax exemption because my new wife used her exemption when she and her late husband sold their home several years ago. This doesn’t seem fair. Please tell me it isn’t true.

A: I regret to inform you that your tax adviser is correct. You are a victim of legal age discrimination by the federal government. Internal Revenue Code section 121, the “over 55 rule” $125,000 home sale tax exemption is available when the seller is 55 or older on the day of sale, has owned and lived in the principal residence at least three of the five years before sale, and has never used this tax break before.

Unfortunately, the last requirement ruins your use of the “over 55 rule” because your new wife used her once-per-lifetime $125,000 home sale exemption when she was married to her late husband. Since she used her entitlement and she is now married to you that means you cannot claim the exemption.

Your situation is a classic example of why persons 55 or older who plan to get married should ask their new spouse before marriage, “Honey, have you used your once-per-lifetime $125,000 ‘over 55 rule’ home sale tax exemption yet?” If the answer is “yes,” the new spouse should consider selling their old home before the marriage. Your tax adviser has further details.

Use Lease-Option to Sell Condominium

Q: We own a condo that has been listed with three fine realty agents over the past year. None has been able to sell it. As we must sell to stop our negative cash flow we were thinking of advertising “nothing down” and just walking away. However, the lender doesn’t want our mortgage to be assumed by a buyer. What should we do to get rid of this condo?

A: Please don’t walk away from your condo because the consequences to your credit would be very adverse. A better alternative is to lease the condo with an option to buy. I have yet to see a situation where a lease-option, properly used, can’t find a buyer for a property.

My suggestion is to run a classified newspaper ad under both the For Sale and For Rent headings. A headline such as “$1,000 moves you in” makes your ad stand out from the crowd. Be sure to list all the condo benefits and the words “100% rent credit toward down payment.” Of course, a lesser rent credit would be used if you weren’t so eager to sell.

No Extension Given for Replacement Home

Q: We sold our home almost two years ago. But due to family problems, we were unable to buy a replacement home to qualify for tax deferral on our home sale profit. It looks like we won’t meet our 24-month deadline. I called the local IRS office for a time extension but they refused. How can we get a six-month extension?

A: Sorry, but IRC 1034 does not have any provision for extension of the 24-month tax-deferral home replacement period unless you join the military or are living overseas. Please ask your tax adviser for further details.

Improving Rural Lot Could Be Big Mistake

Q: Almost five years ago, my husband wanted to buy a lot in the country. I didn’t like the idea, but since the cost was only $3,500, I went along with the idea. Now he wants to spend about $40,000 to build a house on the lot. In my opinion, the lot offers nothing special.

It is not in a recreational area and we probably would rent the house to tenants. My husband keeps saying this will be a great investment. But nearby homes sell for $35,000 to $45,000 so I don’t see any profit potential, do you?

A: No. Improving a rural lot by building a house on it that offers no profit potential appears to not be a very smart idea. If the lot has some redeeming quality, such as recreational use or excellent potential for appreciation in market value, that would be different, but it doesn’t make sense to invest $43,500 to possibly sell for $45,000. Since you will presumably be obligated on the mortgage, maybe you should say “no.”

Open Listings Don’t Benefit Home Sellers

Q: My neighbor is trying to sell his home and save half the sales commission. I’m watching what he’s doing because next year I plan to sell my house. He told me he sent letters to about 20 real estate brokers in town, giving the details of his home and his asking price.

Most came to inspect the house, and several brought prospective buyers. The neighbor tells me he made a counteroffer to a purchase offer and is waiting for the response. What do you think of this idea?

A: Not much. Your neighbor is using an open listing. It is really no listing at all because if the seller finds a buyer, without any agent’s help, then the seller owes no sales commission.

Since the agents lack control over the open listing, most will not work very hard to sell your neighbor’s house. A better alternative for you to use when you are ready to sell your home is to invite at least three local realty agents to give you their listing presentations.

Select these agents by asking friends for recommendations, watching which agents sell nearby homes, and following the newspaper ads of agents advertising homes in your neighborhood.

Each agent should give you a written “competitive market analysis” showing recent sales prices of homes like yours, asking prices of similar nearby homes for sale (your competition), asking prices of recent comparable expired listings, and the agent’s recommended asking price for your home. After checking each agent’s references of recent sellers, then select the best agent to receive your exclusive listing.

Be Sure You Record Your Land Contract

Q: We are buying a house with nothing down on a land contract in which the seller continues to hold the title until we complete our payments. When I asked the seller about recording the contract, she said that wasn’t necessary. Do you agree?

A: No. If you are dealing with an unscrupulous seller, she might try to sell the house for a second time to another buyer. Then you could be caught in the middle of a mess. Recording your land contract establishes your priority date in the event of a dispute.

If you are living in the house, you are legally protected because anyone dealing with that house, as a buyer or lender, does so subject to the rights of the tenants. But for your safety, you should record your land contract. For full details, please consult a real estate attorney.

How to Cancel Your Real Estate Listing

Q: We stupidly signed a six-month listing for the sale of our home. Now we realize that was a bad mistake because the agent is doing practically nothing to get our home sold. How can we get out of this listing so we can either forget about selling or list with a better agent?

A: Most reputable real estate agents will let their home sellers cancel a listing without penalty. However, a few agents insist on receiving a cancellation fee.

But if you can show the agent did little or nothing to effectively market your home, you might wish to cancel the listing for failure of consideration, also known as lack of due diligence.

However, please consult a real estate attorney before canceling your listing because such action might incur legal liability to the first agent.

If you plan to list your home for sale with another agent, you may be able to get the first agent to transfer the listing to the second agent. Then the first agent gets a referral fee when the second agent finds a buyer for the home.

In the future, please don’t sign a long listing. The maximum should be 90 days, but a 60- or even 30-day term keeps the agent working hard to get the listing sold before it expires. Of course, be sure the agent understands if the listing expires with the home unsold but the agent is doing a good job, you will renew the listing.

Beware of Agents Who Seek Advance Fees

Q: I own some farmland which I inherited several years ago. It was rented to a tenant farmer, but he decided not to renew in 1989 and it is now vacant. A local real estate broker has written me several times about selling my land.

He claims to have contacts with corporate farm buyers but he wants me to sign a six-month listing and pay a $500 advance marketing fee. In addition, he wants a 10% sales commission. Is it customary to charge an advance fee?

A: No. Beware of any real estate agent who insists upon an advance fee. Most reputable agents do not charge up-front fees and you should be very wary of one who wants you to pay before the agent sells the property.