DEAR BENNY: Before the “crash” I bought a second home to try to help my daughter.
I put 20 percent down on a $360,000 property.
The current mortgage is $292,000, with a 6.25 percent interest-only loan. The home is now worth $210,000.
I am renting it to my daughter for $1,300 a month, which is about $800 a month negative for me. I cannot refinance because of the worth of the home, and I do not qualify for any programs because of my income.
Do I have any other options but to keep renting and take the loss on my income tax?
Do you add to the loss by trying to pay down principal to build equity when you are already $90,000 behind on the property’s worth? This sounds like throwing good money after bad. — Steve
DEAR STEVE: First, make sure that you have a written lease arrangement with your daughter and that the rent she is paying is consistent with market rents in your area. You wouldn’t want the IRS to claim that this is really not a bona fide residential lease transaction.
I remain an optimist. Some time in the foreseeable future, property values will start creeping up. So I see no alternative but to keep renting and take the tax loss.
And I agree with you. It probably does not make sense, right now, to add money to your monthly mortgage payment just to build up equity. However, I know that some critics will say: “He is probably getting less than 1 percent on his money if he keeps it in a bank, so why not reduce that mortgage, which carries a 6.25 percent interest rate?” This is something you may want to discuss with your financial adviser, especially if you do have extra money.
You also say that you cannot refinance, and I understand that. But perhaps you can talk with a senior officer at the mortgage company and explain that if you have to keep losing money on a monthly basis, you may ultimately have to let the property go to foreclosure. Thus, would the bank be willing to give you a lower interest rate, say 5.25 percent? It never hurts to ask.
DEAR BENNY: I am considering purchasing a distressed property that was in the middle of owner/builder renovation until the owner ran out of money. What are my legal responsibilities for work done prior to the purchase?
How do I protect myself against nonlicensed work?
Since the project was never complete, am I obligated to finish the project as proposed? — Mark
DEAR MARK: Everything between you and the current owner is negotiable, so you may be able to buy the property in its unfinished state.
But first you have to discuss the situation with a lender, since you really will need what is known as an “acquisition-construction” mortgage. Once the construction is completed, the bank will convert the loan to a permanent mortgage. But make sure that lenders are willing to do this, especially based in today’s market conditions.
As to whether you have to finish the project as proposed, that answer will have to come from your local county zoning department. I suspect that they may be willing to allow you to change the plans, but that’s a local zoning issue.
DEAR BENNY: I recently read your article about the new law regarding residential loans.
The article helps, but can you give me a website that will tell me what is considered to be a reasonable amount for charges for different areas?
Knowing the charges helps, but I would not have any idea as to whether the figures stated are reasonable. — Nancy
DEAR NANCY: Thanks for writing. Unfortunately, I really don’t have an answer for your question. I don’t know of any websites that provide this global information.
The best I can suggest is to do some comparison-shopping in your area. Talk with lenders, lawyers and real estate brokers and ask them what you will be charged for such items as (1) title search, (2) appraisal fee, (3) credit report, (4) lender’s underwriting fee, (5) title insurance, (6) settlement (or attorney) fee and (7) recording and notary fees.
It’s always a good idea to shop around. You may find two lenders offering you the same interest rate, but their upfront charges may differ dramatically.
Benny 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 firstname.lastname@example.org.