Splitting home purchase may lead to trouble

Dear Bruce: My family is going in on the purchase of a townhome for my mother-in-law who will act as nanny for my 2-year-old. The purchase price is $460,000. My wife, her sister and my mother-in-law are all going in 25 percent on the down payment and mortgage. My mother-in-law qualified independently, using stated income for the loan. To include all of the investors on the deed, I understand we have to file a quit-claim deed after the close of escrow. Assuming all the parties stay amicable for years to come, do you have any advice for me? – M.L., via e-mail

Dear M.L.: Let me take your last question first. My advice is: Don’t do it. You mentioned your wife, sister-in-law and mother-in-law are throwing in 25 percent. I assume you are picking up the final 25 percent. I have no idea why someone has told you to file a quit-claim after the closing. You’re gambling that everybody will be amicable for years to come. If you and your wife are able to purchase this, why is the sister getting into the act? The mother-in-law is going to baby-sit for you, and that’s fine, but why is it necessary for her to be involved in the purchase? You may have omitted some salient facts, but, in my opinion, this type of family purchase can lead to nothing but trouble.

Residency avoids tax

Dear Bruce: As an older woman, how can I preserve my profit if I sell my home without buying into another? I have a house – purchased for around $130,000 in 1996 – that would sell for three times that amount. What kind of taxes or penalty would be required and why? I would need to keep as much as possible in anticipation of future medical needs. – M.T., via e-mail

Dear M.T.: This home has been your primary residence for two or more years, which means you are eligible to keep the $250,000 net profit without any federal taxes. Taking your numbers, that would be about $260,000. (I’m sure you can find at least $10,000 in capital-gains investment in your home over the past 10 years.) The reality is, you will pay no tax or, worst-case scenario, a very small amount. This tax relief can be repeated every two years, and it is in no way a condition on buying another house.

Too good to be true?

Dear Bruce: I received an offer in the mail to refinance my home. It was an interest-only loan at 1.25 percent, fixed for five years. At the end of five years, they would refinance the loan again at no cost with the same rate for another five years. We owe approximately $144,000 and want to pull out $15,000. The company representative said the costs would be 1 percent plus escrow. With a loan amount of approximately $159,000, the monthly payment would be $533, saving us about $340 a month in payments. Can you tell me if this is a good way to go? And are there any pitfalls to doing an interest-only loan? We live in Las Vegas, and home prices are going sky-high. We purchased our townhouse a year ago for $145,000, and they are selling today for $200,000 to $215,000. – T.D., Las Vegas, Nev.

Dear T.D.: I would have to see this offer in writing. There is absolutely no way that money can be loaned at 1.25 percent without some type of exorbitant fees and locked in for five years and, on top of that, an offer to renew it for another five. First, if it were that simple, why not just offer a 10-year mortgage at 1.25 percent? I think you’re going to find it’s 1.25 percent over a certain base number, perhaps the Wall Street Journal prime rate. The other thing we haven’t addressed here is your income. Walk very softly. In today’s world, there is no way an offer of this kind could be made as you have stated.

Attorney in condo purchase a good idea

Dear Bruce: What is the benefit of an attorney when purchasing in a condominium-site development where the land is common ground and the units are individual homes owned by the purchaser? When all the homes/units are built, an association will consist of the owners to manage the common property. The condo-site concept is state-regulated in Michigan. The developer has an attorney who has written all the documents, which are considerable. What would one ask an attorney to evaluate?

We are new at this, even though we have luckily purchased homes – two under land contract – and had no problems with either. We did have an attorney when we purchased one with a mortgage and found he knew less than we did, an old-timer, poorly chosen, I guess. We understand you feel strongly that an attorney should be consulted. I did check with one real estate attorney, advertised in the phone book, whose fee was $150 an hour. I also wonder how many hours it would normally take for such a consultation? Should we ask if he is knowledgeable in condo law? The home will cost about $435,000, which is a considerable investment. We are 73 years old. Any advice would be appreciated. – J.J. in Oregon

Dear J.J.: I understand all of the points you have made, but at the very end, you claim to be spending 435,000 big ones. You will be required to sign numerous documents … and I’m willing to bet a very, very large dinner at a restaurant of your choice that you will not understand all of the documents you are signing. Further, at many closings, they kind of make you look foolish by saying, “Sign here, it’s routine.” Well, if it’s so routine, why do I have to sign? An attorney who is not on your team prepared every one of those documents! You can talk to me about regulations in Michigan or another state, but the reality is, there are things that can go wrong, problems that can develop, and an attorney should be able to ferret them out. You may have picked a lousy attorney. I’ve eaten in lousy restaurants, had bad accountants, bad attorneys – and, yes, would you believe bad talk-show hosts and column writers? However, that doesn’t mean any of these things are necessarily bad. For the few dollars (you mentioned $150 an hour) and time (perhaps as much as 10 hours) involved, it is money well spent. How often do you spend $435,000? Not regularly. In my view, you should be represented.

Start with attorney to remedy sewer woes

Dear Bruce: We recently purchased a 13-year-old house. At the closing, they gave us papers saying the septic and water systems were in satisfactory condition. Shortly after moving in, we had a heavy rain and water entered the basement. They told us there was a problem with water in only one area. Several months later, we had a water-softener service test the water. They said it should not be consumed unless their service was installed. We have been drinking bottled water ever since. The company came back and tested it on several occasions, and they continue to say the water should not be consumed. We have also had problems with the septic system. Digging down, we found some of the pipes had been crushed and some were not even connected to the system. Who is responsible for all of these problems? – P.T., via e-mail

Dear P.T.: Hopefully, you had an attorney represent you when this property was purchased. If representations were made in writing that were clearly in error, you may very well have the ability to be reimbursed by the seller (assuming they still have assets). Representations of lack of fault are very important in real transactions. Some states require the information be given gratuitously; in others, it is only required if a question is asked directly. It is wise to ask pertinent questions. Then, you have to demonstrate the persons providing these warranties knew of the flaw. For example, to prove they knew the septic tank was crushed might be very difficult to do. The water intrusion is another matter. It is pretty hard to ignore that. If, in fact, I am correct in that counsel represented you at the closing, he is the guy to start with. He can go back through his files, see what representations have been made and act appropriately against the seller.

Steer clear of time shares

Dear Bruce: What is your opinion on the financial wisdom of purchasing a time share? My husband and I are strongly considering it. We are only in our mid-40s. We would hopefully have many years to make use of the opportunities it would open up. – D.F., via e-mail

Dear D.F.: My opinion has been consistent for 25 years; in most cases (there are always exceptions), time shares are an incredibly poor idea for anyone other than developers. The merchandising costs are substantial, which undermines the underlying “value.” Further, the secondary market for time shares, unlike those for real-estate ownership, is extraordinarily weak. Fifteen percent to 20 percent on the dollar is a generous return.

If you are absolutely persuaded this is a good idea, you should investigate the secondary market, where I suspect the same things you’re looking at new can be purchased at 15 percent to 20 percent on the dollar from some disillusioned person who preceded you. As I said, there are a few exceptions, but on balance I believe time shares are to be avoided like a contagious disease. The glowing claims for unlimited vacation possibilities, exchanges, something to pass along, etc., may well sound attractive in a sales pitch, but when exposed to the unfiltered light of day, these claims seldom have any validity.

Brilliant mortgage idea?

Dear Bruce: Someone approached me with an interesting mortgage idea. The suggestion was a 30-year interest-free mortgage and, rather than making principal payments, taking the same amount that would normally be used for principal and investing it in a life-insurance policy tied to a stock index. I didn’t run the figures, but the claim was that, with the same payments as a conventional mortgage, the tax deductions would be maximized by paying interest only on the whole balance. There would be enough in cash value after 15 years to pay off the loan, and the equity would be more easily accessible as a loan from the policy rather than rely on current financial conditions to qualify for an equity line.

As a certified public accountant, the strategy sounds brilliant to me, but I’d rather be wary and investigate first. The company seems to be backed by a financial giant. — Y.W., via e-mail

Dear Y.W: You mention a 30-year interest-free mortgage and you further say “by paying interest only on the whole balance.” I think what you mean is an amortization-free mortgage. I don’t think anybody is going to loan money interest-free, but you may very well be able to get a mortgage where you only pay the interest, nothing on the principal. By and large, you are the tax expert, not I. The idea of somebody’s very, very esoteric plans makes me want to know a great deal. Frequently, the providers of these plans are legitimate but the adverse Internal Revenue Service ruling can be costly to folks like you. Investigate thoroughly. I would like to hear the results of your investigation, but I don’t know anyone who is loaning money on a 30-year interest-free basis.

Bruce Williams is a national radio talk show host and syndicated columnist. He can be reached at bruce@brucewilliams.com.