QUESTION: My daughter lives in San Francisco and her cute little two-bedroom house (I call it a cottage) twisted and jumped off its foundation in the recent earthquake. The house can be jacked up, a new foundation constructed and the house lowered back and bolted for about $30,000.
As you know, this is far cheaper than building a new house. Her mortgage company will finance the work without increasing her 9.5% fixed-interest rate. I thought that was nice of the S&L. However, she earns about $75,000 net per year as a San Francisco lawyer and could only deduct about $22,500 of her loss on her income tax returns. That will save her only about $7,500 in taxes. Should she make the repairs or sell the property to a developer who wants to build apartments on her lot?
ANSWER: Let your daughter decide. You and she have correctly calculated that a casualty loss is deductible only to the extent that it exceeds 10% of adjusted gross income. Estimating that she is in about a 33% combined state and federal tax bracket, she would save in taxes only about a third of her $30,000 repair cost, which is $7,500.
If your daughter likes her small house, with a new, properly constructed foundation, the house should withstand severe earthquakes. The houses and apartment buildings that were badly damaged in the recent earthquake were older buildings with inadequate foundations. The newer, properly engineered buildings came through just fine.
Sales Contract Usually Can Be Reassigned
Q: I contracted to buy a new house but find I am not qualified for a new mortgage. But I got a really good price on the house and a friend wants to take over my purchase contract. She will pay me $1,000 to assign the contract to her. Is this legal?
A: Contracts are generally assignable. If yours was an all-cash sale and the seller was not carrying back financing for you, unless the contract bars assignment, it can be transferred to your friend. For further details, please consult a real estate attorney.
Get Home in Top Shape to Get Top Dollar
Q: We plan to sell our home next March. But we're debating whether we should do some repair work. The house needs a complete painting and the kitchen and bathrooms need renovation. The cost of this work would be about $10,000. We talked to a realty agent and she says we will have no trouble getting back our additional investment, and she feels the house will sell quicker if we do the work. What do you advise?
A: Listen to your smart real estate agent. If you want to get top dollar for your home, get it into tip-top condition before putting it on the market for sale.
Your realty agent correctly advised you that money spent renovating the kitchen and bathroom should not only produce a profit but it will make your home sell faster than it would without the remodeling.
Now is a good time to do the indoor work. When the weather turns warm next March, before listing the home for sale, perhaps you should also give the exterior of the home a coat of paint because paint is the cheapest and most profitable improvement you can make.
Be Cautious of Home Equity Sharing Deals
Q: I recently saw a newspaper ad of a realtor who is advertising for home buyers who don't have a down payment but who can afford to make monthly payments. It seems the realtor puts together investors who will make the down payment with residents who will pay the mortgage payments, property taxes, insurance and maintenance.
While I realize my husband and I can't be too fussy since we only have a few thousand dollars in savings, it seems to us this plan puts all the burdens on the resident and gives all the benefits to the investor. I don't like the idea of getting only 50% ownership in return for making all the payments. What do you think?
A: You discovered a major reason why equity-sharing residents often default. Of course, don't forget the non-resident investor is putting up the down payment of perhaps 20% of the home's purchase price in return for 50% of ownership. Without the investor's down payment you wouldn't be able to buy half of the home.
Frankly, I think equity sharing is riskier for the investor than for the resident. The reason is, if the resident stops making payments, the investor must get the resident out of the house and off the title. If the resident resists, costly litigation can develop. Further details are in my special report, "How Equity Sharing Works, Especially Between Parents and Their Adult Children," available for $3.50 from Newspaperbooks, 64 E. Concord St., Orlando, Fla. 32801.
Select Individual Agent, Not the Firm
Q: My husband and I are getting our home ready to sell. We are following your advice to get it into top condition. Although we have decided not to try selling our home alone, we're unsure which realty agent should get our listing.
Several agents "farm" our neighborhood for listings and they are constantly giving us note pads, pens, potholders and other gimmicks, but we're not impressed with any of them.