DEAR BENNY: My husband and I purchased a second home for $300,000 in November 2008. We were planning to move into that house and sell our current residence. We put $15,000 into repairs on the house. Our children do not want to move and we came to realize after the purchase that we are happier where we are. What should we do: sell and cut our losses since the market value has decreased, or rent? –Jackie
DEAR JACKIE: The first question is whether you can afford to carry two houses for a couple of years. Even if you decide to rent, you have to understand that being a landlord is not always lucrative — and clearly never fun. You may have two to three months when the property remains vacant, and you still have to pay the mortgage, insurance and real estate taxes. Additionally, there are always minor (and sometimes major) repairs that will be necessary. And when there are tenants, they often find problems with the house — real or imagined — that you will have to correct.
Is the house in a neighborhood that is conducive to rentals? What about shopping, schools and transportation? Are they accessible? This may not have been important to you when you were considering buying the house, but it may be critical for potential tenants.
Have you checked your local landlord-tenant laws? Are they favorable to landlords or — as we have here in the District of Columbia — extremely favorable to tenants?
Once you have answered all of these questions, you should be in a better position to make your decision. Sometimes, it is better to take the loss and move on. And your loss will probably not be tax deductible, as I would not consider it an investment unless it was actually rented. However, you should confirm this with your own tax advisors.
DEAR BENNY: I am in the process of refinancing my current mortgage, and happened upon your advice in today’s paper. You wrote: "Don’t sign any documents until you have fully reviewed and understand them."
I have heard this before, of course, and always wonder about the sincerity of the writer. I know you’re not joking or telling a lie, so what are you (and everybody else) saying?
How many years did you go to specialized school in order to be able to "review and understand" the half-inch stack of documents that I am soon to sign?
Or, what would be the cost of hiring a real estate lawyer to read each page for me?
I am guessing it’s an issue that no one cares to look at, until something goes wrong, and then they can lay responsibility on the dummy who signed something they shouldn’t have. –Bev
DEAR BEV: No, this is not a joke. The law is universal that you are legally obligated for what you sign. While one may have some valid defenses to this (such as your signature was forged, or new pages were included in the document after signature), it clearly is not a defense to say, "Sorry, judge, I did not understand what I was signing."
You are correct that the loan documents are lengthy and legalistic. I often represent lawyers on real estate transactions who may be great corporation or patent attorneys, but have absolutely no knowledge or understanding of the documents they are asked to sign.
A real estate attorney who has familiarity with mortgage loan documents does not have to read each page, word for word. We understand the impact of the documents, and usually can review them in less than one hour.
I appreciate that the cost of legal fees is always a concern to everyone. However, the documents you will sign relate to your house — an important investment for you and your family — and you can lose that investment based on the terms and conditions spelled out in those documents. Don’t take a chance; have an attorney review and explain exactly what you are signing.
DEAR BENNY: Our homeowners association pays a man cash to perform basic cleaning of the common areas in our building every month. Is he considered our employee and therefore do we have tax reporting or withholding requirements? –Scott
DEAR SCOTT: Your question is whether the man is an employee or an independent contractor. Oversimplified, if you supply the cleaning equipment and give specific directions to the man, he is an employee. Your accountant should be able to assist you with the answer to your specific situation. Additionally, if you go to the IRS Web site and search "independent contractors," you will find a lot of information. However, the line between independent contractor and employee is rather fuzzy; the facts determine which is which.
DEAR BENNY: My daughter purchased a duplex in July 2006. There is a small bathroom off the kitchen. It had new wallpaper when she bought the property. A few months ago she decided she wanted to take the wallpaper down and paint the bathroom. There was old water damage in one corner of the bathroom, and when she pulled the wallpaper off above the mirror some of the wallboard came off. There was a lot of mold.
She called her real estate company and they said there was nothing they would do. They suggested she call a "mold specialist." She had a company come out, and they said there was mold and in their opinion the water damage was old and the previous owner probably wallpapered to cover it up. Their estimated cost was $2,200. …CONTINUED
So of course the question is, after all this time has passed, do you think it would be worth a shot to contact the previous owners? If in fact there was water damage and they did cover it up, isn’t that something that should have been in the disclosure statement? Someone told her she should get a lawyer. I doubt that would be worth the time and money for a small half-bath. Please let me know what you think. –Patti
DEAR PATTI: Nothing ventured, nothing gained. Yes, it doesn’t hurt to contact the seller, but I seriously doubt they will admit anything.
I am not belittling $2,200; it’s money that your daughter may not have and clearly should not have to pay to correct the mold. But going to court can be expensive, and it is always uncertain and time consuming. She can file suit in the local small claims court, without an attorney, but she will need real proof that the prior owner knew about the water damage and covered it up. The testimony of the mold expert would be considered speculative.
In my opinion, your daughter should just fix the problem and move on.
DEAR BENNY: We purchased our current home in 2006 with 10 percent cash down, a $417,000 first mortgage and a $77,000 home equity line of credit (HELOC). We would like to refinance our first mortgage to take advantage of today’s record-low interest rates, but the current holder of our HELOC refuses to subordinate.
We feel that their refusal is unreasonable because they would be in a better position after the refinance than they are now. After refinancing, the payments on our first mortgage could be reduced by $400 or more; with the lower payments, we are less likely to default, thereby making the lender’s position more secure. In addition, because our home recently appraised a little more than we purchased it for (unlike many properties purchased within the past few years), we cannot understand the lender’s position. Is there anything that can be done when a lender unreasonably refuses to subordinate a line of credit? –Tony
DEAR TONY: In today’s difficult economy, lenders have tightened up their loan requirements.
First, let’s explain subordination. You have a first trust of $417,000 and a HELOC for $77,000. You put down 10 percent, so by my calculations you paid approximately $550,000 for your home.
The word HELOC is short for "home equity line of credit." Call it what you will, it is a second deed of trust (mortgage). That means that it was recorded in second place behind your first mortgage. If you pay off the first with your refinance money, the HELOC then falls into first-place position.
No lender will refinance your home only to be in second place. Accordingly, many HELOC lenders will agree to file a document among the land records where your house is located, that simply states: "We are now in second place behind the new lender." That document is called a "subordination agreement."
There is no legal reason why any HELOC lender must agree to subordinate. In fact, many such lenders have started to either restrict the amount of money that can be tapped from HELOC loans or actually have canceled them outright. Why? Because as the equity in your home decreases, their security becomes threatened.
In your case, your home has appreciated slightly. If, for example, it is now appraised at $560,000, and the new loan will also be $417,000, you are correct that the HELOC lender will have a little more security than it currently has now.
Have you or your refinance lender talked to the HELOC lender? Have they given you any valid reason why they do not want to subordinate?
My suggestion: Talk with your proposed new lender. Do they make HELOC loans? If so, you can refinance, get a new first mortgage as well as a new line of credit, and pay off the old HELOC lender.
I encourage everyone to have a line-of-credit loan. You do not pay any interest until you start using the line; if you ever need money immediately, the checkbook is in your drawer.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@sandbox.inman.com.
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