Smart Money: Appraisal necessary to prove equity, eliminate PMI

Bruce Williams is a national radio talk show host and syndicated columnist.

Dear Bruce: I just built a new home with a 30-year fixed mortgage at 6 percent. After I get a garage built, which I'm paying out of my pocket, my equity should exceed 20 percent. I'm going to apply to have the private mortgage insurance removed. My friends said that I should build the garage under the mortgage, but the way I see it PMI has nothing to do with the mortgage. B.J., Dunker Town, Iowa

Dear B.J.: Private mortgage insurance is merely a hired gun, someone hired to co-make your loan. Ordinarily, one can struggle and get the 20 percent equity, then put the money down and borrow the money on a second mortgage, if need be, to build the garage. Understand that there can be a difference of opinion as to the value of the house, which is determined by an appraisal that very likely will be conservative. Until such time as the bank agrees that the 20 percent equity is secured, you will continue to pay the private mortgage insurance premium, and you will also have paid an extra premium to put it into place. I would have hoped that if you used an attorney for this transaction that he would have advised you as I have. At this point you will have spent money that is unnecessary, and all you can do is to try and extricate yourself as quickly as you can by getting the insurance eliminated. That will require yet another appraisal that you will have to pay for, and hopefully the lender will agree that the equity is sufficient.

Dear Bruce: I signed a written contract to have landscaping work done and gave them a $500 deposit. I had to give them an additional $800 for them to order landscaping materials. They fell behind in their work. I sent them a letter reminding them that the work had to be completed as stipulated in the contract. I sent them a second letter requesting a refund. No refund was returned, so I took them to small claims court, where the judge ruled in my favor. The contractor failed to refund my money, so a writ of execution was filed. When he was finally served with the papers, he failed to respond. Is there anything else I can do to get my court-ordered money? Can I file criminal charges against him with the local police? I really don't want to let him get away with this. Can I claim this loss on my taxes? Can I report him to the IRS since I doubt he has claimed anything on his taxes? T.S., El Paso, Texas

Dear T.S.: First, you say work fell behind schedule, but the question is, how much work was delivered? You have $1,300 invested. You went to small claims court and won, very likely by default. You should know that something on the order of 70 percent of all small claims defaults are never collected on. You can place this collection with a commercial collection agency, which may be able to help you.

I know you don't want to chalk it up as a bad experience, but there's a lesson here concerning doing your homework before allowing money to change hands. As soon as somebody wants money for materials up front, you should take a hard look at them because they are generally on shaky ground. You cannot claim this on your taxes unless this is a business proposition, meaning the work was being done on a business property and you are expensing the payment. You can certainly report the matter to the IRS, but you'd have to have more than just a suspicion that he didn't report it. More importantly, you should know that, oftentimes, when people report others, the IRS takes a hard look at the reporter something very few of us want. With the money that's involved here, the reality is you're probably going to get stuck for the difference between $1,300 and the work that was completed.

Dear Bruce: I would like to remodel my small, 50-year-old home. Our budget is about $100,000. My husband says if we tried to sell it later we wouldn't get that much out of the home. He suggests building a new one for the same price. What are your thoughts? Reader, via e-mail

Dear Reader: You mentioned that you want to spend about $100,000 on an upgrade but you didn't tell me what you would be getting, what the starting price is, and what you are planning on doing. You also failed to tell me your age and how long you intend to hang onto the house. Finally, what would it cost to buy the replacement house?

The idea that you have to get out of a home what you invest is flawed. With this type of investment, you're buying a lifestyle, and that is an integral part of this transaction. Even if it winds up costing you a little more, you might want to stay there. How long you are going to stay is another part of the equation. If you are staying for a long period of time and amortize your investment over that period, what difference does it make if you don't recapture a few thousand dollars? Never be persuaded that you will always recapture what you invest.

Dear Bruce: I read with interest the article about the people who had a lien placed on their home after having some work done. We also had some work done on our home and provided the contractor with a substantial down payment. We were very unhappy with the work so the contractor sent his crew back to "fix" things. The end result was no better, and we refused to pay the balance. We received a letter from the contractor's attorney stating that we had 30 days to make payment and/or respond to the letter. If they did not hear from us, they would place a lien on the property. As I was preparing a response, along with photographs of the work and damage that had been done, we received a letter informing us that the lien had been placed. This was well before the 30-day period in which we were given to respond. Do you have any suggestions for what our next course of action should be? I did send our letter along with our complaints to the attorney but never received a reply. Reader, via e-mail

Dear Reader: The law in regard to liens varies dramatically from state to state. The general notion is that, even though the owner of a piece of property may pay a contractor, if the subcontractor or the provider of materials is not paid, then, since they cannot repossess the materials that are now part of the owner's building, the owner still has responsibility. This means the provider of the service or material can file a lien against the property to protect his interests. That's the unfortunate reality. And in a situation of this kind, where the balance owed is of a decent size, communications from the contractor's attorneys or from the courts should be answered by an attorney not by you, a layperson. I recognize that this is costly, but when you take matters into your own hands in this case not paying a bill this can be the unhappy result.

Dear Bruce: What should I know before I purchase land? What is a reasonable offering price? The lot is located in a housing development plan in a suburb of Pittsburgh, Pa. Most of these flat lots have a scenic view and one-third acre to an acre. Prices range from $27,000 to $45,000. I'm just looking for a smart purchase not a steal on the land. Reader, via e-mail

Dear Reader: There is no general answer that will apply to your question. Obviously, if you are unsure of the value of the piece of property, have it appraised (that will cost between $200 and $400) money well spent. The first thing that you should know is how the property is zoned, as some of the parcels are too small to conform to the current zoning, possibly requiring a variance. There is no fixed percentage as to what an offer might be. In many cases, if a sub-divider is offering it, the price is fixed and not negotiable. Otherwise, it is expected that a counter offer will be proposed and room for negotiations are built in to the asking price.

Dear Bruce: Our home is approximately 35 years old. Some of the windows need to be repaired or replaced. Before selling, is it to our advantage to replace these or let the new owners replace them? J.S., Saltsburg, Pa.

Dear J.S.: In general, the wisest thing to do would be to allow the new owner to replace them. The troublesome part of that may be that if the windows are in bad shape, the potential lender may not approve a mortgage because of the condition of the building. If things are that far along, then it's entirely likely that you'll be obliged to make the repairs and incorporate the cost into the sales price.