Ignore Seller’s Asking Price When Calculating Your Purchase Offer

QUESTION: Due to the low mortgage interest rates, several months ago my wife and I decided to buy a home. We spend virtually every weekend looking at houses. As a result, we have narrowed our search to a nice neighborhood that has good schools, is close to my job (my wife runs a bookkeeping service from home), and is free of crime.

The problem is the asking prices for homes in this area vary by about $20,000 for very similar homes. Some have extra features, such as patios and decks, but we don’t think they add much to the value. When we want to make an offer to buy a house, how can we be sure we are not offering too much?

ANSWER: It sounds as if you are doing an excellent job of carefully shopping for your first home. But forget about the asking prices, because, as you discovered, many of those “dream prices” bear no relationship to true value. Or, some of the houses may have over-improvements for the neighborhood.

When you find a home you want to buy, ask the real estate agent to prepare a written comparative market analysis for you. This is the same form the seller was given at the time of listing the home for sale. By adding and subtracting for the pros and cons of the house you can arrive at a fair offer price.

Remember, you can always raise your offer, but you can never lower it. Even if you are willing to pay more than your initial offer, don’t communicate that fact to the real estate agent. Although the agent is not supposed to tell the seller you might pay more, it will influence the way your offer is presented by the agent to the seller.

Assessed and Market Value Not Related

Q: We want to buy a vacation cabin that has a $56,000 assessed value. But the asking price is $75,000. What price should we offer?

A: The assessed value of a property has absolutely nothing to do with its market value. Neither does the asking price usually reflect a property’s market value.

Before making a purchase offer, ask the realty agent to show you recent sales prices of comparable nearby vacation properties. Then add or subtract value for the pros and cons of each property as compared to the one you want to buy, arriving at a fair offer price for the vacation cabin.

How to Avoid Buying ‘Lemon’ of a House

Q: About nine years ago we bought our current home. After we moved in we discovered many things wrong with it. Over the years we have corrected the problems and today it is a beautiful home. Unfortunately, we must sell it due to a job transfer. After we sell our present residence we will be buying another house. What is the best way to avoid buying a “lemon” like we bought last time?

A: Don’t be in a hurry to buy a home in your new city. If you rent an apartment or a house for a while, until you become familiar with the area, you can avoid selecting a house in the wrong location. Better yet, lease a house with an option to buy, so you can try it out before purchasing.

But once you narrow the decision to a specific house, then you have several safeguards available. Depending on where you are moving, be sure to obtain any customary local inspections such as for termites, radon, etc. The real estate agent will inform you about these inspections.

Unless you are buying a home in Maine or California, where seller disclosures of home defects are mandatory, ask the seller for a voluntary disclosure of all known defects in the home. Should the seller fail to tell you about a significant hidden defect, then you have legal recourse against the seller.

In addition to a customary mortgage finance contingency clause, your purchase offer also should contain a contingency clause making the home purchase subject to your approval of a professional inspection of the house. Be sure to accompany the inspector, who will be glad to explain any defects discovered and the probable cost of repair. After the inspector writes the inspection report, then you can decide if you want to proceed with the purchase.

An extra protection is to insist on the seller or realty agent providing a one-year home warranty. This policy pays for repairs to the plumbing, wiring, furnace, water heater and built-in appliances during the 12 months after your home purchase.

Late Mother Haunts Path to Clear Title

Q: We contracted to buy a house from a nice young man. But the title insurance company discovered the title is held by this man and his late mother. Apparently, her estate has never been probated. The lawyer says it will take several months. How can this happen and what should we do?

A: If title was held in joint tenancy, it would be a simple matter for the surviving son to clear title in his name by recording a certified copy of the death certificate and an affidavit of survivorship.

However, there is probably more involved in clearing the title to that home. Perhaps title was held as tenants in common, which requires probate. Unfortunately, probating an estate can take many months and there isn’t much you can do to speed things up. One alternative is to cancel the purchase and buy another house. Another alternative is to get the seller to allow you to move into the house and rent it until he can clear up the title problem. Your attorney can give you further details.

Beware Tax Fine Print in Repair Cost for Sale

Q: When we listed our home for sale we knew it needed some fix- up work. The real estate agent suggested we paint inside and out, plus sprucing up the kitchen with new appliances. We spent about $4,500 total. As a result, our home sold in less than 30 days and we were very pleased with the result. Now we are trying to figure out the tax consequences. The realty agent said we can deduct our fix-up costs. How does this work?

A: The real estate agent was not quite correct. The home sale fix-up rule allows you to SUBTRACT your home sale fix-up costs from your gross sales price, if you incurred those expenses within 90 days before the sale and paid for them within 30 days of the closing. Examples are painting, cleaning, and repair costs that are normally personal expenses without any tax consequences. However, the cost of the new appliances that you included in the sale do not qualify as fix-up costs. For full details consult your tax adviser.

No Need to Reinvest Cash in Rollover Buy

Q: You often tell home sellers they can avoid paying tax on their home sale by buying a replacement principal residence of equal or greater cost within 24 months before or after the sale. I’ve practically got that memorized, because you answer so many questions on this topic.

However, you never say how much of the cash received from the home sale must be reinvested in the replacement home. We sold our home and had to use about $20,000 of the cash to pay off pressing bills. For the last six months we have been living with my husband’s parents and it is not very much fun. We want to buy our own house, but can’t reinvest all the cash we received from our home sale. What should we do?

A: Don’t worry. Internal Revenue Code 1034, the rollover residence replacement rule, does not require you to reinvest any cash from your home sale into your replacement principal residence. All that matters, if you are to defer all your profit tax, is that you buy a replacement home costing at least as much as the net (adjusted) sales price of the home you sold. Uncle Sam doesn’t care if you reinvest zero cash and buy your replacement home for nothing down, such as with a VA home mortgage. For full details consult your tax adviser.

Hovering Sellers Can Ruin Prospective Sale

Q: I have been selling homes as an agent for almost 12 years, so I know what I am doing. I am always in the top 10 of our brokerage, which has more than 75 salespeople. But as you know, home buyers are especially cautious now, so it takes extra effort to sell homes.

In the last few months, it seems the sellers are overeager to help incompetent salespeople sell their homes. I refer to the women who hover around when I show their homes to prospective buyers. Twice last week talkative sellers ruined sales of their homes for me. I am at my wits’ end. What do you recommend I do to get these sellers to shut up and let me sell their homes?

A: When you make the appointment with the home seller, very politely ask if they can arrange to go shopping while you show their home. If necessary, explain that most prospective buyers prefer privacy to discuss the house and, possibly, to talk over the terms of a purchase offer.

There is nothing worse than a home seller hovering close to a prospective buyer. Sellers mean well, but buyers are reluctant to criticize a home if the seller is nearby. Until a buyer finds faults with a home, that buyer is not serious about purchasing that house.

Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to P.O. Box 280038, San Francisco 94128.