Keep Equity Low and Put Money to Work

QUESTION: As a member of the military, my husband can count on being moved every two or three years. We just sold our old home and will soon be transferring to a new military base. Although we used his VA eligibility, I still have mine available, so we can buy a house for virtually nothing down.

However, I recently inherited several hundred thousand dollars, so we are considering buying our new home for cash. But we are receiving conflicting advice from friends as to the wisdom of paying cash for our home. It would be nice not to have any mortgage payments, but I am wary of tying up so much cash in one place. What do you advise?

ANSWER: Don’t do it. Use your VA mortgage eligibility to buy your next home for little or no cash down payment. Keep your cash in safe, liquid investments. You will sleep much better knowing you have ample cash reserves for emergencies or other investments. The earnings from that money also can supplement your retirement income.

Since you can count on having to move in two or three years, that is a special reason to keep a small equity and a big mortgage on your home even though you can afford to pay cash. Selling a home with a big mortgage, especially if your buyer can qualify to assume your VA mortgage, is usually far easier than selling one with a big equity.

Exclusive and Multiple Listings Don’t Compete

Q: Last spring, in an article about listings, you said most realty agents prefer exclusive-right-to-sell listings. But then you went on to describe the multiple listing service and how agents use it to cooperate on home sales. Is an exclusive-right-to-sell-listing better than a multiple listing?

A: Sorry for any confusion. Most listings which are submitted by member real estate agents to the local multiple listing service (MLS) are exclusive-right-to-sell listings. After the MLS receives the listing, the details and a photo of each home are distributed to all member agents who may have buyers waiting.

The MLS is the most powerful sales tool real estate agents have. Although you may sign an exclusive-right-to-sell listing with ABC Realty, when your listing goes into the MLS system, an agent with XYZ Realty may see it and show your home to her buyer looking for a home just like yours. If that buyer purchases your home, the two agents split the sales commission. The MLS costs you nothing extra, but is your agent’s best marketing device.

Avoid Impound Fund If Lender Permits It

Q: We are in the process of refinancing our home mortgage. The lender asked us if we wanted an escrow impound account for our property taxes and insurance. We had one with our previous mortgage, but I was not aware we had a choice on this issue. What do you advise?

A: Avoid a mortgage escrow impound account. Too often, they lead to disputes if the loan servicer attempts to overcharge for the property tax and insurance payments. However, if you obtain a VA, FHA or PMI (private mortgage insurance) home loan you must have an escrow impound account.

As you probably know, when an escrow impound account is used, each month you pay 1/12th of the annual property tax and insurance costs, so the lender can pay these bills when they come due. But many lenders overcharge to build up these accounts because, in most states, the lender can invest this “free money” and earn interest income on it.

Agreements Must Be Put in Writing

Q: We made an offer to buy a home that is rented to a tenant. The offer was accepted and the seller orally agreed to get the tenant out before the sale closed. But when we were ready for the sale to close, the tenant was still occupying the house.

The seller and realty agent assured us she would move out by the end of the month. So we closed the sale and were credited for rent until the end of the month. But on the first of the next month the tenant showed no signs of moving. When we asked when she would be moving, she showed us her lease which runs until next March. We were planning on moving into this house and had already given notice to our landlord. What should we do?

A: Now you know why it is so important to get everything involving buying, selling or leasing real estate in writing. The Statute of Frauds requires written contracts if you try to enforce the agreement in court.

In your situation, you understood the seller and agent to say the tenant would move out at the end of the month. If you had that agreement in writing there would be no dispute and you could recover damages from the seller and agent for misrepresentation when the tenant produced the lease extending until next March. Without written proof, it is your word against the seller’s and agent’s in court.

If you sue the seller and realty agent, their defense will be the Statute of Frauds. Without written proof, you have an uphill battle. For further details consult a local real estate attorney.

Be Specific on Needs When Seeking Bids

Q: Rather than moving up to a bigger house, we have decided to upgrade our home, since we like our neighborhood and the kids love their school. Our first project will be remodeling the kitchen to bring it into the 20th Century.

Some time ago you advised another reader to get at least three bids for remodeling work and to check each contractor’s references of previous clients very carefully. So far, we have talked with four contractors and have become thoroughly confused. Each wants to do the job differently, using a different quality of cabinets because they use different suppliers. One excluded the flooring, but the others included it.

Another insisted on including the appliances, whereas the others want us to buy them ourselves. What we thought was a simple job has turned into a complicated nightmare because each contractor wants to do the work his way. How can we resolve this problem and get started?

A: Congratulations on getting bids from three or more remodeling contractors. There can be big differences in bid prices between contractors. For example, on a recent house remodeling job, my usual contractor bid over $20,000 more than a new contractor who came highly recommended by a friend. I took the new contractor’s bid and he did a much better job than my old contractor.

To resolve the problem with each contractor bidding on different work I suggest you compile a list of all the things you want included in the bid. Be very specific, such as the type and quality of cabinets you want. Also, list the items you don’t want included, such as appliances. Then ask each contractor to bid on the same work.

But listen to each contractor’s suggestions. For example, my contractor has me compare appliance prices I can get with his bid. Mine usually come out better. On a recent complete house remodeling job, it turned out I could get a better roof price than his sub-contractor offered, so we deleted the new roof from the contract and I dealt directly with the roofer.

Dealing with contractors is not easy, but consider it to be a learning experience. In addition to price, place heavy weight on each contractor’s references. When phoning each contractor’s previous customers be sure to ask if they were in any way unhappy with the job and if they would use the same contractor again. You will soon know which contractor should get your job.

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 , Calif. 94128.