Unneeded Fees May Be Inflating Closing Estimate
Question: My husband and I are selling our half of a two-family duplex to my brother, who owns and lives in the other half. We will be buying a single-family house. The Realtor says our closing costs will be 3% to 6% of the purchase price. Why so high? We will be getting only a $100,000 first mortgage.
Answer: Your agent probably gave you a high estimate for your closing costs, unless there is something unusual about the sale.
Typical closing costs for buyers are around 3% of the purchase price. I suggest you ask your buyer’s agent to determine more specifically what closing costs you should expect. Ask for a copy of the closing settlement statement at least three days in advance so you can study it and protest any unnecessary fees.
If you’re getting a new $100,000 mortgage, your loan fee should be only about 1 point ($1,000 on a $100,000 loan). In addition, you’ll probably have to pay title insurance, unless you negotiated for the seller to buy the title insurance.
There will possibly be other closing costs, such as a recording fee, escrow or attorney fee, prorated property taxes and some other minor fees. Be sure the lender doesn’t try to stick you with such “garbage fees” as an underwriting fee, warehouse fee, documentation fee and others that are pure profit for lenders.
Seller Not Obligated to Accept Full-Price Bid
Q: Last weekend my wife and I visited an open house held by a real estate agent whose office is 30 miles away. We have been looking to buy a home in this area for several months and realized the house was a steal, priced at least $40,000 below market value.
We insisted on writing up a full-price, all-cash, no-contingency purchase offer on the spot. That was about 2 p.m. The agent said she would phone us about 5 p.m. when the sellers got home. At 5:30 p.m. she phoned to tell us the sellers accepted another offer that was $7,500 higher than our offer.
Since we made the first offer and we offered full price, isn’t the seller required by law to accept our offer? Shouldn’t the seller have at least allowed us to match or surpass the offer that was accepted?
A: The listing contract is between the home seller and the listing agent. You were not a party to that agreement, so you cannot enforce it.
The asking price is an invitation for purchase offers at that price. But the seller is not obligated to accept even your full-price, all-cash, no-contingency purchase offer.
There is no legal requirement for the seller to make a counteroffer to you, allowing you to match or surpass the higher purchase offer from another buyer.
Easements Can Be With Permission and Without
Q: You recently wrote about prescriptive easements. What is the difference between a prescriptive easement and a permissive easement?
A: A permissive easement is the right to use part of another’s property with the property owner’s permission. It is usually recorded.
However, to obtain a prescriptive easement, you must use another owner’s property without permission, and that use must be open, notorious and hostile for the required number of years in the state where the property is located. In other words, a prescriptive easement is obtained without the permission and against the wishes of the property owner.
For full details, please consult a local real estate attorney.
Offer Should Be Based on
Market Value of House
Q: I am receiving conflicting advice as to how much below the asking price we should offer when buying a home. Our company attorney says to always offer at least 10% below the asking price. But a trusted friend, who owns several rental houses, says to offer 5% under the asking price. Who is right?
A: Neither is correct. The asking price might be the home’s correct market value if the home is priced to sell quickly.
Forget the asking price. Before you make a purchase offer, ask your agent to prepare a written comparative market analysis, or CMA. This is the same form the listing agent probably prepared for the seller when the home was listed for sale. The CMA shows recent sales prices of comparable nearby homes, as well as asking prices of similar neighborhood homes now listed for sale.
Since the time of listing, however, the local home-sale market may have gone up or down. That’s why you need a new CMA. When you make your purchase offer based on the CMA, you can be sure your buyer’s agent will show the CMA to the seller to justify why the seller should accept your offer.
Buyers Must Create Their Own Seller Financing
Q: You recently mentioned seller financing. That’s how I’ve been trying to buy a house, but I can’t find any Realtors who are savvy enough to find me a house I can buy with seller financing. I own two investment properties and want to buy more. Where can I find a house I can buy with seller financing?
A: Very few houses and investment properties are advertised for sale with seller financing. Smart buyers must create seller financing.
I’ve bought many properties with seller financing, but I can’t recall any of them specifying that approach. I had to create seller financing by making a purchase offer that asked the seller to carry back a first or second mortgage.
I’ve found the best candidates for seller financing are vacant houses owned by elderly sellers who need retirement income. If you make a purchase offer with a 6% to 7% interest rate seller carry-back mortgage, it will give the seller more than the interest he or she would earn by depositing proceeds in a savings account. That’s how you create seller financing.
Loan Fees Rolled Into New Mortgage Are Costly
Q: You often advise against paying loan fees when refinancing because those fees are amortized over the 15-or 30-year life of the refinanced mortgage. However, what about rolling them into the new principal amount? My wife and I are thinking about rolling 2 points into our refinanced mortgage to get a lower interest rate with no out-of-pocket costs. What do you think of this idea?
A: Not much. Forget about loan fees, usually called points (1 point equals 1% of the amount borrowed). Instead, ask your lender for its interest rate on a no-cost mortgage.
It should be about one-eighth percent higher than if you paid a typical 1-point (1%) fee. A 2-point loan fee is very high in today’s mortgage market.
Suppose you are getting a $100,000 mortgage. If you add a 2-point loan fee of $2,000 to the principal amount, you will be paying interest on that $2,000 for 30 years. Such an arrangement benefits the lender, not you. Shop around. You can probably do much better with a true no-cost mortgage and still get the benefit of low monthly payments.
There’s No Need to Pay a Biweekly Mortgage Fee
Q: I recently received a special letter from my mortgage lender, one of the largest. The letter was a detailed explanation of why I should sign up for its new biweekly mortgage plan, by which half of my monthly mortgage payment would be electronically withdrawn from my checking or savings account every two weeks. The result is my home loan will be paid off in about 21 years and I would save thousands of interest dollars. However, the setup cost is $295, plus $6 per month. What do you think of this idea?
A: I recently received a similar letter from my mortgage lender. You can be sure this is a profitable scheme; otherwise, reputable mortgage lenders wouldn’t be sending such letters to their borrowers.
Why should you pay your lender a $295 setup fee, plus $72 per year, for something you can do yourself? A biweekly mortgage plan is simply the equivalent of 13 monthly payments every year.
If you want to pay off your loan in a little more than 20 years and save thousands of interest dollars, you can accomplish this yourself at no extra cost. Just divide your monthly principal and interest payment by 12. Then add that extra principal amount to your regular mortgage payment every month.
For example, suppose your monthly principal and interest payment is $1,200. Dividing $1,200 by 12 produces a $100 principal amount, which you should add to your regular mortgage payment each month. You will then accomplish the same result as a biweekly mortgage, but you’ll save the $295 rip-off fee, plus $72 each year.
Widow Needn’t Refinance for an Insignificant Gain
Q: In February 2000, my husband died. Three months later, I moved into the home we were having built. We signed for a $50,000 mortgage at 8% interest. The house is tax-assessed at $125,000. Should I refinance or pay off my mortgage? My husband always took care of the financial matters. I have about $300,000 that my financial planner is managing. With the stock market so low, I don’t know what to do. If I refinance, what is a good interest rate?
A: There is no right or wrong answer to your question. Your current mortgage of just below $50,000 at 8% costs you around $4,000 per year in interest. If you refinance, you can probably get a new $50,000 mortgage at about 6.75% interest. The annual interest cost will be approximately $3,375. That’s an annual interest savings of only $625.
What is your yield on that $300,000? If it is lower than 8% (it probably is) and if you feel comfortable with only $250,000 remaining, then go ahead and pay off your $50,000 mortgage to save $4,000 annually.
Personally, I wouldn’t go through the mortgage refinance hassle to save just $625 per year. The primary reason is your 8% mortgage is probably only costing you around 6% after you consider your mortgage interest tax deduction.
If I were in your situation, I wouldn’t do anything now. However, if mortgage interest rates plummet to 6%, it might be worthwhile to refinance to save interest.
Landlord Can’t Qualify for Tax Exemption
Q: I am selling a house I bought for $230,000 in 1990; the selling price is $331,000. I lived in it for the first year. Since then, I have rented it to students. Will I have to pay tax on my $101,000 sale profit? I heard there is a law that I don’t have to pay tax on profits from a house where I lived in the past.
A: Internal Revenue Code 121 allows up to a $250,000 principal residence sale tax exemption (up to $500,000 for a married couple filing jointly). To qualify, you must have owned and occupied the principal residence an aggregate of two years during the five years before sale.
You clearly don’t qualify. Uncle Sam will be eager to collect his $20,000 capital gains tax on your $101,000 sale profit, plus a depreciation recapture tax. If you move back into your house for at least two years before selling, you can then avoid that $20,000 federal capital gains tax.
For more details, please consult your tax advisor.
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Letters and comments to Robert J. Bruss may be sent to 251 Park Road, Burlingame, CA 94010 or visit https://www.bobbruss.com .
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