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Don’t let layoff derail condo conversion refi

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POSTED June 21, 2012 6:12 p.m.

DEAR BENNY: We are three owners of a property in a nice neighborhood. We own the property as tenants in common, and have shared an interest-only loan since 2005. We are in the process of converting the property into three condominium units. One of the owners lost her job last spring and is now self-employed. The other two owners’ employment status has not changed.

The loan broker we have been in contact with (for the eventual refinance into three individual mortgages) tells us that the owner who is now self-employed will have the hardest time getting a loan (it will be in the neighborhood of $1 million; the other two will be under $500,000) and will likely have to file her current tax return before she will even be considered by a lender.

The other two owners would like to refinance immediately.

Can the two owners go ahead and refinance and pay off their shares of the common loan (and have their names removed from the loan), or do all three owners have to refinance at the same time? --Steve

 

DEAR STEVE: I am sure you never contemplated converting to condo when you first bought the property. However, what should have been done at that time was to negotiate with your lender that when you converted, the lender would agree to partial releases upon an agreed-upon payment as each unit was sold (or financed).

In other words, your current lender has a loan on the entire property. When you convert to three units, the current loan remains on the books. However, the lender may be willing to release each unit from the existing loan, but you may have to pay the lender up to 100 percent of the sales price on each unit.

You should talk with your lender to see if you can arrange for partial releases. The two of you would own your individual units subject to your new loans; the third owner would still own her unit, which would be subject to the balance of the old loan, taking into consideration the amount that the two of you will already have paid down.

This may work, but the existing lender may still want the two of you to guarantee the loan; if that’s the case, you may have your own problems getting your refinance loans.

My suggestion: Can the two of you qualify to get a third loan to pay off the existing mortgage? Rent the third unit to your partner until she is able to buy it and get her own loan.

 

DEAR BENNY: I am a senior and have made my one (clear-thinking) son executor of my total estate, and as you advised I am keeping my second home, which another son lives in, until I die to avoid capital gains taxes. At my death can this second home’s deed be transferred from son to son or does this need an addendum to my will? Will I be exempt from capital gains taxes on both my homes? --J.W.

 

DEAR J.W.: I am confused. If you do not sell either of your houses, and they are distributed after your death pursuant to your last will and testament, you do not pay any capital gains tax. You made no profit and thus no tax to pay.

I am assuming that you currently own both houses. If that’s the case, I strongly suggest that you retain a local attorney who will assist you in preparing your will. That document will spell out which house goes to which son, assuming that you want each of your sons to have one of the houses.

Is your wife alive? If so, does she have any interest in the house? Under most state laws, even if your will provides that the houses go to X and Y, a spouse can claim an interest in those properties. I cannot provide specific legal advice, but since you do own two houses -- and you clearly want to help your two sons at minimum expense to them on your death -- you need to consult an attorney while you are still competent to make decisions.

 

DEAR BENNY: I own a house with a business partner as tenants in common (no survivorship). If my partner dies and his son inherits the property, does he get a stepped-up basis? Then when we sell, do I treat my 50 percent interest with the original basis and the former owner’s son uses his stepped-up basis? --Max

 

DEAR MAX: The answer to both questions is “yes.” Because you each own as tenants in common, that means that you each have a divisible interest in half of the property. If you could find a buyer for your half, you could sell it even without the permission of your partner, unless, of course, there is a partnership agreement.

And, by the way, when any two people (other than husband and wife) own property -- even if they are related -- they should have a written partnership agreement spelling out such things as “What if I want to sell?”

Because your interests are separate, on your partner’s death his heirs will get the stepped-up basis. That means that the value of the property on the date of death (or no later than six months thereafter) becomes the new basis. So even if you and your partner bought the property years ago for $100,000 (his basis would be $50,000), if on the date of his death the property was worth $1 million, the heir’s basis would be $500,000.

But your basis remains $50,000. Of course, basis can be increased with major improvements. You should discuss your specific situation with your tax advisers.

 

DEAR BENNY: My property is on the high end of an incline. All rainwater drains into my lower neighbor’s property. For more than 30 years all went well until the new owners of the lower property raised their backyard and caused flooding in my backyard. They allowed me to connect to their drain system, which alleviated the problem.

My question is: Can the connection (easement?) be recorded on both property titles? This would preclude any problem in case of a disconnect when property changes ownership. --Ed

 

DEAR ED: Absolutely. You called the connection an “easement.” To make sure that an easement is permanent, it must be recorded on both properties. Your neighbor grants the easement and you accept as “grantee.”

Easements require that there are at least two parties. Since you will benefit from the connection, you are called the “dominant estate.” Your neighbor who granted the connection/easement is referred to as the “servient estate.”

This is technical. Bottom line: You should discuss the matter with your neighbor. Try to agree that you will both retain one attorney who will draft up the easement agreement. The cost of that lawyer will be split equally, and the cost of recording the easement among land records will also be split 50-50.

The easement document should spell out, among other items, who will be responsible for maintenance and repair of the connection. And of course, if the two of you disagree on the terms and conditions of the easement, you will each need to retain separate counsel. Hopefully, that will not be necessary.

 

DEAR BENNY: In a prior column, you discussed a case where a homeowner wanted to back out of a sale a couple of days after closing. In your response, you never mentioned the fact that if there were a real estate agent involved I believe the agent would have earned her commission since she brought a qualified buyer and the deal closed. Isn’t that correct? --Ron

 

DEAR RON: I don’t recall that Q-and-A; I answer a large number of questions. But let’s take two situations: First, the buyer wants to back out after closing (called escrow in the Western part of the country). Since closing has taken place, the real estate agent would already have received her commission. And unless the buyer can argue fraud on the part of the seller or the title attorney (escrow company), I see no way that the buyer can back out after the fact.

Second, the buyer wants to back out before settlement takes place. Unfortunately, this is an all-too-common problem nowadays, especially since the economy is still unsettled. In this case, you have to first analyze whether the buyer has the legal right to cancel. For example, are there contingencies in the contract (such as having to sell your house, or getting an acceptable appraisal) that have not been satisfied? If that’s the case, the buyer has the right to walk away, and the seller owes no real estate commission.

On the other hand, if the buyer is not legally entitled to walk away, then the seller has the right to retain the earnest money deposit, or sue the buyer for specific performance and/or damages. Does the seller owe a real estate commission? That depends on the listing agreement with the agent. Many sellers specifically include language in that agreement that “commission is earned only if settlement takes place.”

So, the answer to your question is found in the listing agreement between seller and agent.

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