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Not reading fine print on sale contract can be costly

Question: About six months ago we my husband and I started looking at new houses. This house has been for sale many months, so the builder is extremely anxious to sell and he made us a terrific deal.

No complaints about that. But we told him we had to sell our old home to get our equity out, so we can afford the new home. "No problem," he replied. But we didn't read the fine print in the contract. It says the sale is contingent upon sale of our old home within 90 days. We put up a $10,000 good-faith deposit on the new house. Then we listed our old home for sale, but it hasn't sold. Not even a nibble.

Meanwhile, we qualified for a mortgage on the new house, subject to sale of the old house. But we can't find a bank to make us a "bridge loan," so we can use our old home's equity to buy the new house. The builder's attorney has written us a letter giving us 30 days to close our purchase or lose our $10,000. We have learned this tough builder is known for taking advantage of stupid buyers like us. What should we do? _ Myra H.

Answer: Now you know why I constantly remind readers to sell the old home before buying a new one. Apparently you failed to carefully read your purchase contract and it was not contingent upon the sale of your old home. Instead, it gave you only 90 days to sell your old home.

An alternative is to offer to trade in your old home on the new home. The builder may not be excited about this offer, but if he sees a potential profit he might accept. You could discount the price as much as necessary to appeal to the builder's greed. That's better than losing your $10,000 earnest money deposit and not buying that new home you want.

Benefits of fix-ups

Question: For the last few years we have been following your advice to make profits in real estate by buying rundown houses and fixing them up. So far we have done four houses, earning net profits of about $15,000 to $45,000 on each. We had to sell each one to get money for the next one. But we are changing our modus operandi slightly and plan to hold the next one for several years.

We notice when we fix up our neighborhood eyesore house, within a month or two the neighbors start painting and fixing up their houses, too. It occurred to us we shouldn't sell our fixed up houses so quickly, but should hold on for a year or two until the neighbors also upgrade their houses. Do you think this is a good or bad idea? _ Jeff R.

Answer: It is a very smart idea. In every neighborhood where I fix up houses I have noticed the home fix-up disease becomes contagious, too. For example, I am now fixing up a house and the next-door neighbor also has begun fixing hers up.

You are wise to hold your fix-up houses for several years to fully benefit from the fix-up disease. That is why I recommend renting fixed-up houses on lease-options to obtain top quality tenants who will eventually buy your house.

Shop for an agent

Question: I am in the military and have received notice of a transfer. As a result, I must sell my house. Since I have owned it only about three years and the market in our town has been stagnant, I don't have much profit. I talked with three real estate agents, as you suggest, and they all want a 6 percent sales commission. Who sets the real estate sales commission rate and is there any way I can get a lower rate? _ Jessie P.

Answer: In theory, real estate sales commission rates are negotiable between the home seller and real estate agent. But in reality they are fixed by local custom and few agents deviate from the traditional 6 or 7 percent rate.

However, some real estate agents offer lower commission rates on high-priced homes, or if you are willing to accept less than full service. For example, just recently I heard about a real estate agent who charges 4 percent if he sells the listed home without another agent's assistance, but a full 6 percent if the home is sold by another agent through the Multiple Listing Service. But when shopping for a lower commission rate, be sure to ask each agent for references.Saving taxes on sale

Question: We expect a job transfer within the next six months. It will be to the corporate headquarters in a small Iowa town where home prices are much less than where we now live. We have lived in our current home almost 10 years and anticipate a net sale profit of at least $95,000. Since we will be buying a less expensive replacement home, is there any way we can avoid paying profit tax? _ Bonnie R.

Answer: Yes. Since you will be buying a less expensive replacement principal residence, Internal Revenue Code 1034 requires you to pay tax on your profit up to the difference in the two prices.

For example, if you sell your old home for $150,000 net and buy a replacement home in Iowa for $80,000, $70,000 of your sale profit will be taxable capital gain. However, tax on the remaining $25,000 of your $95,000 profit will be deferred.

But you can avoid tax on up to $125,000 of your sale profit if you wait to sell your principal residence until at least one co-owner spouse is 55 or older. This can be done by delaying the sale closing until after your husband becomes 55. One method would be to "sell" with a lease-option that cannot be exercised until after your husband's 55th birthday. For further details, please consult your tax adviser.

Robert J. Bruss is a nationally syndicated columnist on real estate. Write to him in care of At Home, the Times, P.O. Box 1121, St. Petersburg, FL 33731-1121. Questions of general interest will be answered in the column.

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