Weigh risks before investing in real estate

Dear Bruce: I’m looking into real estate investing and am reviewing a course from an infomercial. What’s your opinion on his training and ideas? You don’t need a real estate broker’s license to invest. I’m about halfway through the course and it seems too easy. It keeps stressing “creative financing techniques” to acquire properties with no money down. Are you familiar with this man or his philosophy? – P.C., Houston

Dear P.C.: It looks like you have already purchased this course. You say you’re “about halfway through the course and it seems too easy.” I have watched a number of pitches about how to get rich in real estate on television and have absolutely no confidence in any of them. Of course they try to make it sound easy. There is no question that money has been made doing what they’re talking about with real estate, but I don’t see it anywhere near as simple as they would like you to believe. Investing in real estate is, at the very best, at least a part-time job and can be a full-time enterprise. It requires finesse and money – and there are risks involved. If you’ve purchased the course, by all means grab as much information as you can from it, but don’t take it for gospel. Read the financial section of your local newspaper and financial magazines that will give you information on how this craft is followed. If it’s done properly, there’s money to be made. It must be observed that there also is money to be lost.

Dear Bruce: We have had our homeowners insurance policy for a number of years with replacement value on our home. My insurance is coming up for renewal, and my broker tells me that the only thing he could find for me was fair market value on my home, not replacement. I have read in your column over the years that the only type of homeowners insurance one should carry is replacement on the home. I would like to stay with our insurance broker, but I’m not sure what to do. – T.S., via e-mail

Dear T.S.: Your insurance broker sounds more like a captive agent. A broker represents many companies from which to choose. An agent uses only one. The difference between replacement and fair market value is enormous. How much can a used sofa, chair or credenza be worth? Very little. If you must replace it at current prices, it can be rather expensive, which is why the only type of insurance that is acceptable is replacement value. If this fellow can’t provide it, go elsewhere.

Dear Bruce: I am a 72-year-old widow. My home is paid for. It appraises at $228,000. My income is very limited. I have a hard time each year paying the taxes and insurance. Would it be wise to take out a reverse mortgage on the home? I would either live in the house until my death or sell the house later on and pay off the reverse mortgage. Would this be a practical move for me? I don’t know much about reverse mortgages, the interest they charge or how much of a loan you could get on $228,000. My bank offers these types of mortgages, but I don’t know of anyone else who does. – M.W., Las Vegas

Dear M.W.: Reverse mortgages certainly serve a useful purpose. You should be able to borrow over a period of time, something on the order of 60 percent, or approximately $125,000, on your home. Even if you exhaust the withdrawal, which is paid to you on a monthly basis, as long as the taxes and insurance are paid, you can stay there for the remainder of your life and cannot be evicted. You might wish to consider selling the house and moving into less expensive quarters. Perhaps there are senior-citizens complexes available to you. You could apply now. It might take a few months to be admitted. No matter how it’s sliced, it seems to me that your living in your home for an extended period of time is not in your future. I understand that you would like to, but your finances just don’t permit it. Your bank and many others do offer reverse mortgages. The older one is, the higher the payout. A woman of your age still has a relatively long life expectancy ahead of her. Therefore, the payments will be more modest. I know this can be a hard pill to swallow, but at least it’s a course of action to which you should give serious consideration.

Dear Bruce: I am an active Realtor at 78. My wife is a part-time secretary at the age of 74. We own our home free and clear, and it has a current market value between $200,000 and $225,000. The local real estate market has been appreciating 5 percent a year for quite a few years. In the past 12 months, the appreciation has been about 15 percent, and I would not be surprised if it continued at an annual rate of 10 percent to 15 percent. I have been investigating the idea of obtaining a reverse mortgage, as we would like to be a little more independent, since our total income depends completely on our working income and Social Security. We have no retirement or pension plans. Everything I have learned so far about reverse mortgages seems to be positive, but I am certain that there has to be a caveat or two to these programs. Would you elaborate for me? – W.B. Roseburg, Ore.

Dear W.B.: Reverse mortgages have a place in many people’s financial futures. The older one is, the better deal it is, and the reason for that is simply, the older you are the shorter your life expectancy. The lender is prepared to advance you more money knowing they will get theirs after your demise. The only advantage of the appreciation will likely come for your heirs, not for you, since you have mortgaged the house and it will not be sold until your death. You should know there is nothing to prevent a reverse mortgage from being paid off simply by selling the house. In other words, it’s not necessary to continue to draw it down. Even after it’s completely drawn down, it isn’t necessary to remain in the house forever. It can be sold, the mortgage company will be paid and you will receive the residual. On balance, as long as you understand these details, a reverse mortgage may very well be in your interest. You should understand that as long as you stay in the home and pay the taxes, even though you’ve exhausted whatever equity could be borrowed against, you cannot be required to leave the house. You are granted life rights.

Dear Bruce: My son and his wife have divorced, and now he wants his name off the house loan and deed without refinancing. Is this possible? They are seeing a lawyer who is getting the papers ready but wasn’t sure if this was legal. If they sign the papers, will his name come off of the deed and loan? He does not want to have bad credit if she misses a mortgage payment. Right now he has excellent credit and doesn’t want it ruined. – Reader, via e-mail

Dear Reader: The lender is not going to go for this. The money was loaned to both people jointly, and that’s the way it’s going to stay. Unless the house is refinanced, your son’s name is going to stay on the loan. If she doesn’t make the mortgage payments, he’ll be responsible. If there is credit damage, it will happen to both parties.

Dear Bruce: My husband and I (ages 82 and 72) are in the process of selling apartments for $1.5 million. We are debating between rolling over using a 1031 exchange or going with a personal annuity. We have been told that through a third party, we can reinvest in property and avoid capital gains taxes. The problem with this route, according to our financial adviser, is that at our death, the properties would be divided between our heirs and should one want to sell, all would have to agree. I am leery of this route because I don’t want our children to end up hating one another if there isn’t an agreement between them to sell. The personal annuity seems like a good route in that there would be multiple income-generating investments even though we would have to pay amortized capital gains. What are your thoughts? – W.D., from California

Dear W.D.: Congratulations on acquiring some valuable properties. Yes, you could go to a 1031 exchange, which means buying more property to postpone paying the capital gains tax, but it seems to me you want to get out of the real estate business. Why would you want to go back in? As to annuities, at your age, I cannot see any strong arguments in favor of them. I am most concerned with the business of leaving undivided property to your heirs. You’re quite perceptive that if one wants in and one wants out, there’s going to be a problem. It is almost never a good idea to leave undivided property. You could, of course, not leave this up to your heirs, but rather in a will direct your personal representative to dispose of the property and divide the proceeds. In other words, the heirs would have nothing to say about it. What concerns me is that you’re so worried about the possibility of paying taxes. I don’t like paying taxes any more than anyone else, but of course you live in a state that makes tax collecting a sport. You chose to live in that environment. Why not think about getting hold of this money and spending it on you? Take a vacation, take a cruise around the world, do something that you have put off. The least concern should be to minimize taxes at all costs. Your first thoughts should be about you. Let the heirs have what is left, if anything. That doesn’t mean that financial planning is a bad thing, but I hope you get things into perspective.

Dear Bruce: My wife and I bought our first home. At the time, we had just moved to the Twin Cities, Minnesota, area and thought that we were going to live there for quite a while. Well, things change, and we decided to move. We had our home listed through the multilist service direct in hopes that we could make a little money on our home sale. It has now been on the market for about 65 days and we haven’t gotten an offer. All of the feedback we get says that the prospective buyer thought the price was good, the condition was good or excellent, but location seems to be the issue, as there is a gas station across the street. We have since moved to start our new jobs and can only afford to make one more payment on the home. That payment gets us through to mid-December. We have lowered the price of the home to where we are barely breaking even. Everyone seems to have advice on what to do. Here are some of the suggestions I have heard: 1. Take out a personal loan, make a few more payments and hope it sells. 2. Stop paying on the loan and just let the bank foreclose. 3. Go get a Realtor to sell the home. What is the best course of action to take? – J.F., via e-mail

Dear J.F.: Forget foreclosure. Letting the bank foreclose is going to screw up your credit for a great many years for no good reason. You mentioned that you tried to sell the house yourself, and you haven’t been able to do so. However, 65 days is not a long period of time. With no offer, it would seem that it’s overpriced. You have tried it by yourself, and apparently you’re not even there. By all means, put it in the hands of a real estate broker. You are going to pay a commission, but they are professionals, and they may be able to move it. A house is only worth what a willing and able purchaser can provide and a willing seller will accept. Having a gas station across the street from the house is usually going to materially affect its value. You decided to move, so you moved and you had no money. You say you’ve lowered the home to where you would be barely breaking even.

You may have to take a hit, and you may have to borrow money to take that hit. So many people believe that real estate only goes one way – up. You are living proof that this is not the case. Were I you, I would immediately find a good real estate broker and engage their services. You didn’t mention the value of the house, but you may be able to negotiate the percentage of commission.

Dear Bruce: I own a condo in California and plan on moving to the Midwest. I’d like to rent out my condo until I’m sure that I will stay in the Midwest. The mortgage is $1,100. The homeowner’s fees are $250 and the property tax is $300 a month. I can rent the place for $1,500 a month. What will I be able to deduct from the rental income? I realize it’s a losing proposition, but I feel it’s at least temporarily necessary. – J.C. via e-mail

Dear J.C.: All of the expenses that you have outlined – the mortgage, homeowners fees and property taxes – are deductible against the income except for whatever amount of principal is being returned in the mortgage payment. You will have to depreciate the property since it’s a rental property. I understand buying “insurance” on your move. Bear in mind if there’s a substantial gain in your condo, which was your primary residence, you will have to sell it within the next three years in order to get the homeowner’s capital gains benefit, which is a substantial $250,000 per person, $500,000 per couple. Don’t lose track of time. It slips by rapidly.

Dear Bruce: Two years ago, we purchased a home on which we financed $150,000 at 5.75 percent. Our payment is right at $887 on the 30-year mortgage. For 20 years, it would have been $1,200-plus. I’ve heard paying extra on the principal reduces the length of the amount of a loan. Our first payment showed monthly interest of about $670. We were able to put an additional $40,000 down on the principal after selling our other home. That dropped the interest by about $230 a month. The balance is now $85,100. We have no other debt load, and I am able to pay $2,000 monthly, which reduces the principal about $1,575 a month. My hope is to have this loan paid off in the next four years. Paying at the same rate, would we have paid less interest in six years for a 20-year loan? Interest is dropping by approximately $7.50 a month as the principal decreases. The interest is now less than half of our payment. At this rate can it be paid off by January 2009? – K.H. Roseburg, Ore.

Dear K.H.: All of the numbers and interest rates and payments you quoted, I assume, are correct. There is a fundamental flaw in your argument. That is, it’s good to be debt-free and you have accomplished something worthwhile by paying off less interest. The only reason you’re paying less interest is that you have the use of the lender’s money for a shorter period of time. Money at 5.75 percent interest is cheap, and I can’t imagine why anybody would want to give that up. If your income is reasonably substantial, the interest that you’re paying is deducted to achieve your gross adjusted income on your federal income tax, and perhaps your state as well, thereby reducing the real cost of the money to something under 5 percent. The flaw in your argument is assuming that if you didn’t prepay the mortgage, you would just put the money in a mattress or spend it frivolously. If you are doing either of those things then the prepaying makes sense. On balance, prepayment is simply not a good idea. You are far better off to invest the money reasonably conservatively over a period of time. The odds will be overwhelming that you will be well ahead of the game. This canard of paying off the debt as quickly as possible has been around for a long time, but it simply will not stand reasonable scrutiny.

Dear Bruce: I read with interest your article regarding the man who wanted to put his wife’s name on his home deed but the bank would not allow it since the mortgage is solely in his name. My daughter recently bought a home and had the opposite thing happen. Since her husband has bad credit, the mortgage is solely in her name, but the credit union and their mortgage company insisted that since they were married his name be on the deed. Their marriage is kind of rocky, and she wasn’t sure she wanted him to have any say on the home, but she had no choice. What do you think of this situation? Are there different rules in every state or is it the rules of the mortgage company? – E.O., Saginaw, Mich.

Dear E.O.: I suspect that when your daughter wanted to buy the home, she wanted to get credit for her husband’s income as well as her own to qualify. If that’s the case, then both names would have to be on the deed. I know of no prohibition for one married partner or another applying for a mortgage in their own name, but their income, and their income alone, would have to support the application. Different companies have different underwriting rules, but I believe if you talk to your daughter that the observations I’ve made are accurate.

Dear Bruce: Some time ago I read an article from someone stating that an ex-girlfriend owned half the home and, even though she did not purchase the home, her name was on the deed and she was entitled to half of the house. I have a similar situation. My boyfriend and I own a home and a boat together. He paid for the home and pays the taxes. I pay the utilities, groceries, upkeep of the home, yard work, housecleaning, laundry and other various duties relating to the home. I want out of the relationship, so am I entitled to half the sale price or value of the home? If my ex-boyfriend is against giving me half of the house and boat, how can I get my share? Do I have to go to court? Will they force a division of this “partnership” as they do if you are married and getting a divorce? Please help! – C.V., via e-mail

Dear C.V.: If you own half of the home and your name is on the deed and your name is on the boat, whatever equity exists in those properties is half yours. The fact that you buy groceries, utilities, etc., has no relevancy here. The question is how do you force your boyfriend to divvy up the joint property? Most likely, you will have to go to court. I suggest at the outset, before you even broach this further with him, that you consult with an attorney.

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