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Real Estate Blog for Palo Alto, Mountain View, California, and Surrounding Communities

• Aug. 15, 2007 - Reap the Benefits (or Pay the Piper) When you Sell Your Home

When congress revised the tax laws in 1997 and offered a $250,000 per owner tax exemption for profits realized on the sale of a principal residence, they clearly didn’t live in this area. What was intended as a bonus for home sellers in most parts of the country actually discourages some owners in this area from selling their homes, and that may be part of the reason for our chronic inventory shortage in this area. Here is an example.
 
Let’s say a hypothetical couple, the Browns, purchased their principal residence, a 2 story colonial, for $300,000 in the early 1990’s. That same home may be worth $1,500,000 (probably more) by now. If the couple wants to move from a 2 story home to a single story home of the same value, they may be in trouble. Even after they deduct the original cost of the home plus the purchase and selling expenses from their selling price, their profit would be at least 1,100,000. Each person (assuming they had lived in the home for at least 2 of the last 5 years) is entitled to a $250,000 tax exemption. So, they would deduct a total of $500,000 from their profit and owe tax on $600,000. At the long term capital gain tax rate of 15%, they would owe $90,000 in taxes. Their purchasing power has been substantially decreased. If their replacement home costs the same as the one they are selling, they would have to take out a larger mortgage, or did into their savings, to be able to complete the transaction.
 
There is another potential tax complication that sometimes makes their turnover even more difficult. Most of the time, their property taxes will be based on the purchase price of their new home. At a base rate of 1%, they will now owe $1,250 per month in property taxes as opposed to approximately $375, allowing for inflation, on their older home with the same market value. As a result, many empty nesters feel trapped in their older homes. They don’t want their property taxes to nearly triple each month, and they don’t want to carry a larger mortgage than what they had in their older home.
 
One thing they should keep in mind is a once in a lifetime allowance for sellers over 55 years of age to transfer the tax base of the house they are selling to the one they are buying if they purchase a home of less value (even $1 less!!) than the one they are selling. This applies if they buy their replacement home before closing on the one they are selling. If they close on the one they are selling first, they are entitled to this exemption as long as the cost of the replacement home does not exceed 105% of the one they sold if they purchase within one year, or 110% if they purchased within the second year after selling. After the second year their ability to carry over their tax base disappears completely. And it is only available in certain counties. Fortunately Santa Clara County is one of these! And a very few counties also allow qualifying buyers from another county to bring their old tax base with them. This can make a huge difference in the decision to downsize for qualifying couples or individuals. 
 
The $250,000 per person tax exemption on the profits from the sale of a principal residence is not always a bad thing. I have several clients who have moved into a rental property they owned, lived there 2 years to qualify for the exemption, and then sold the property. They can do this every 2 years, so if they own another rental property after selling the first, they can then move into that, live there for another 2 years, and then sell it. I know one couple who has done this 4 times already, each time pocketing $500,000 free and clear of taxes. It makes for a great retirement fund!!
 
And here is one more tactic used by savvy investors to purchase their dream retirement home. If they have a rental property they have owned for a long time, they would probably owe a substantial tax if they sold it outright. However, they can defer the taxes by exchanging it for the home they want to retire to, rent that out for at least a year or two (to establish it as a legitimate investment property) and then move into it themselves, thereby converting it into their principal residence.
 
If you are interested in utilizing any of these strategies to save on taxes and profit from property you presently own, please do contact me. This is not meant to be a comprehensive explanation of the current tax laws, which are quite complicated, and consultation with a tax professional is always advised.
For additional information, you may visit the following websites:
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• Jul. 29, 2007 - Deeds in Title Transfers

Prelude: Dear Readers and Fellow Bloggers. Due to circumstances beyond my control, there has been a long break in my writing. However, I am back and I encourage you to participate. Feel free to add your comments to articles posted, and please do let me know what topics you might like to see covered. I begin my return with a short article about using various deeds to transfer title.
 
Deeds in Title Transfers:
 
Every once in a while I see articles in the newspaper where a real estate “guru” advises somebody to use a “Quit Claim” deed to transfer title. What is often left unsaid is that there are times when this is appropriate, but often it is not. In fact, there are several different types of deeds that can be used to transfer title, the two most common (in this area at least) are the Quit Claim and the Grant deeds.
 
Quit Claim Deeds:
 
Basically this type of deed transfers any claim the grantor (the person who signs the deed) may have in a property to the grantee (the person receiving the deed). The trick here is that there is no guarantee that the grantor has any claim in the property in the first place. As an example, I could easily sign a Quit Claim deed transferring any interest I may have in the Empire State Building to you, but the reality is that I don’t have any claim in that building, so you have received a worthless piece of paper. There is a great deal of risk in using this particular type of deed in the transfer of title except in very limited cases. One example might be in a divorce settlement where, as part of the settlement, one spouse transfers his or her claim to part of the title on commonly owned property to the other spouse. In this example the person receiving the deed would be pretty sure that the grantor really does have partial ownership of the property so they are receiving something of value (although there have been cases where a bitter spouse has actually sold his or her share to a third party and given them a grant deed to the property so that, by the time the Quit Claim deed was signed, there was nothing left to transfer.) It is also sometimes used if one partner in a marriage who wishes to transfer title to a new owner holds title in his or her own name, but the couple lives in a community property state. A quitclaim deed signed by the spouse whose name is not on title removes that person’s claim under community property laws. Please note that a quitclaim deed does not relieve the individual transferring ownership from any mortgage liability that may exist.
 
Grand Deed:
 
In Californa, Grant deeds are the most commonly used property deeds to transfer title to a property. The advantage of using a Grant deed as opposed to a Quit Claim deed is that the grantor warrants that:
a)     the property has not been sold to anybody else and
b)     the property is not burdened by any encumberances (loans, liens, etc) that have not been disclosed to the person receiving title.
 
Grant deeds do not need to be recorded in order to be valid, although it is always advisable to do so. It also does not need to be notarized although a prudent buyer will insist that the deed be notarized as it provides a witness to the transaction and the notary must be confident that the person signing the deed is, in fact, who they say they are. (Some sources used in this research state that a Grant deed must be notarized in order to be valid. This may or may not be true. Readers are adviser to consult with legal counsel to verify the accuracy of the information contained herein or to have additional questions answered.) Also, a deed must be notarized before it will be accepted for recording.
In order to be valid the Grant deed must be in writing, clearly state that title is being transferred, include the names of both the grantor and the grantee plus a description of the property being transferred. The grantor must sign the document and the deed must be properly executed. This means that it must be delivered to the grantee during the grantor’s lifetime (not placed in a safe deposit box for delivery after the grantor dies!!) and the grantee must accept it.
Warranty Deeds
Warranty deeds are used instead of Grant deeds in some states. They are very similar except that the Warrantee deed must include a legal description of the property (usually also provided with a Grant deed) and it must be notarized. And it must be recorder with the County Recorder or Recorder of Deeds.
In addition,the grantor will warrant and defend title against the claims of all persons. This means the grantor is guaranteeing the grantee that title is free of any defects that may affect the title, even if the defect was caused by a prior owner.
Other Types of Property Transfer Deeds:
Tax Deed: When property is sold for non payment of property taxes, a tax deed is used to convey title to the buyer. 
Gift Deed: These deeds are used when property is transferred without payment of money, usually between people who are closely related, such as parents to children, etc.
Deed-in-Lieu of Foreclosure. Sellers who are in danger of losing their home to a lender through foreclosure may opt to use a Deed-in-Lieu of Foreclosure to transfer title to the lender to avoid foreclosure (although the deed may still show up on the person’s credit report.)
For more information concerning property deeds and their legal ramifications, please contact a local real estate lawyer, because this Web site cannot give legal advice.
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• May. 3, 2007 - Investor News: Ways to Invest or Improve Your Investments

Now that tax time is over, this is a good time to review your investment strategy or get into the investment market. Even though the real estate market continues to boom in our immediate area, this is no longer true in many parts of the country and there are some very good opportunities out there for the savvy investor. If you already own investment property but you would like to trade up, or maybe invest in a different type of property or one that is closer to your own home so it will be easier to manage, you can take advantage of a 1031 exchange to defer the taxes that might otherwise be due. This is a great strategy, but you must follow the rules to the letter. For example, if you close one day late the IRS will disallow the exchange and taxes will be due. For a detailed discussion of 1031 tax deferred exchanges, go to: http://www.themoneyalert.com/1031ExchangeArticle.html

If you don't already own investment property and you are wondering how to get your foot in the door you should check into buying into a Real Estate Investment Trust.  These investments are similar to stocks but what you are buying is a share in some real estate investments. For a detailed discourse, go to http://www.themoneyalert.com/REITArticle.html

Another possibility is to use a self directed IRA to purchase investment property. It really is unfortunate that so few people are aware of this possibility as it open up enormous possibilities. However, unlike  other real estate investments where, ideally, one leverages the property by putting as little as possible down and financing the rest, investments must be purchased outright in a self directed IRA. Still, if you are looking for income and potential appreciation, there is tremendous opportunity here. For more details go to: http://www.realtor.org/rmomag.nsf/pages/managemoneyfeb02

 

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• Apr. 28, 2007 - What to Buy and When to Buy It

I have a client who is analyzing himself out of a home. We have spent a lot of time looking at and discussing homes, trying to find just the right one in the right location and for the right price. But the questions always remain the same: “Should we buy a new house or an older home?” and “Should we buy this house or wait until later in the year when there may be more to choose from?”
 
The answer to the first question is harder than the second. Older homes have their charms. They usually have a lived in, homey atmosphere that comes when families grow up and then move on. The landscaping is mature so you see more than just a house when you drive up. That feeling continues inside. The hardwood floors have probably developed a patina that no modern stain can match. There may be custom details such as crown molding and chair rails, built-ins, a telephone niche in the hallway, a laundry chute to the basement, even a milk box where (yes, this really used to happen) the milk man would deliver milk every morning. Many of these homes are custom homes, but even in tracts the owners have had time to make them all different.
 
Newer homes, on the other hand are just that…. New!! They have a fresh look and feel, and usually the spaces are more open and more compatible with our modern way of life. One good thing about newer homes is that they are built to the most modern building codes, making them safer in an earthquake, for example, and more energy efficient than most older homes. And there is not the specter of imminent repairs. Hopefully you could live in a brand new home for at least 10 years, maybe 20, without facing any major expenses such as having to install a new roof or heating system, replumbing or rewiring. But all of this comes with a price as newer homes usually sell for more than a similar sized older home in the same location and on a similar lot. It makes sense.
 
The bottom line here is that it is all a matter of taste. Everybody wants something different, and part of my job as a real estate agent is to try to find out exactly what you like and what you don’t like, narrow down the choices for you, and help you to make the final decision.
 
The second question is much easier to answer. Buying a house is a major decision, and a scary one. In this area even a small starter home costs at least $1 million and a move-up home will cost at least twice that amount. And we are not talking castles here!! So taking the giant step from looking to making an offer can be difficult. There is always the chance that a better house may come up just as you sign on the dotted line. Conversely, if you pass up one house on the premise that a better one may come along, you may end up regretting it. It may never happen.
 
Every home is unique and if I had a crystal ball I could tell you if something else was coming up. But I don’t. So here is what I have to say. If you see a house that you like, and if it is in a location you like, and if it fits your lifestyle and is in your price range, don’t overanalyze it, buy it!!! If you don’t, it will always be the one that got away.
Recently I was listing agent for a house that got multiple offers. One “buyer” decided she wanted to see the house one more time before submitting her offer but she was out of town at the time. So she sent her agent over to tell the seller how much she loved the house and how well qualified she was and what a strong offer she would bring after she had another chance to see the house. In the meantime there were 3 agents sitting outside who had very strong offers from very well qualified buyers who loved the house and did not hold back. Of course the seller did not want to risk losing those three buyers to the one who held back, so she lost the house. Every time I see her agent, she tells me how sorry her client is and how every house she has seen since does not compare to the one she lost.
 
Buyers, if you are investors it is a totally different story. Then emotion flies out the window and you crunch the numbers. If it works in your favor, you buy the property, if not you walk away. It’s easy. Buying a home is different. It becomes a part of who you are and emotion should play a role in what you are doing. Not to the point where you ignore gross defects and buy it anyways, but you should feel good about the house and that is what really matters. So the decision should be easy. If you like it buy it!! End of story!
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• Apr. 15, 2007 - Market Update

We heard it every day. The housing market is depressed; prices are dropping; houses are languishing on the market for weeks or even months on end. And that is true, somewhere. But not here!! Our local market is thriving! After the usual slowdown over November and December and part way into January, the buyers have come back with a vengeance. Our problem is that there are not enough listings to satisfy the demand. Multiple offers continue to be the norm rather than the exception, and prices continue to rise, albeit more slowly than during the past two years. Here are 2 case examples:
  1. 1. Recently I listed a home in a very good area of Palo Alto. It was a beautiful home, about 15 years old, but not perfect. It was on a busy street and one of the 3 bedrooms had been converted to an office. A family with children who might want to buy the home because it was close to a very good school might balk at the busy street or the price tag to reconvert the office back into a bedroom. The list price was set to conform to the most recent comps in that neighborhood and here is what happened: Open houses were swamped. The phone rang off the hook and agents were calling to ask if they could submit pre emptive offers (prior to the set offer date.) The sellers decided that pre emptive offers would be fine…. but set the minimum bid price at $200,000 over the list price. This was done on very short notice, but the sellers still received 3 pre emptive offers and the house sold even higher than the pre emptive entry price.
  2. 2. I also recently listed a total fixer upper in an area in Mountain View that is popular with first time buyers. The homes tend to be modest and range from 1150 to about 1650 sq. ft. max. Most are in the 1150-1250 sq. ft. range. This particular home had been a rental and the tenants were very hard on the home. The floors and doors were damaged. The roof was leaking, as was the bathroom shower. Everything was original… the kitchen, the bathrooms, the windows. And there was an apartment building immediately behind the home. We listed about $100,000 less than a fully renovated home might sell for (with new kitchen and granite counters, new bathrooms, new windows and doors, new fences, and new roof). The property was entered into the MLS about 8 PM on a Friday night and by 3PM the next afternoon we already had 3 very good offers! Contract is signed even before most buyers are aware of the listing!!
This is not to say that the market is great everywhere, even on the peninsula. There are micro markets, with some “hot” areas and others that are languishing. There are some good opportunities out there for investors, but you have to be very patient and be willing to move fast when the right opportunity comes along. But for home buyers it is a different story. If you want to buy the house you love, you must be right on top of the market. It is very demanding and very time consuming. And a bit confusing. There are a lot of decisions to make in a very short amount of time. You need to start early to look at homes early in the process and then follow through to see what they sold for. My advice: pick up a flyer at every home you visit and make notes. At the end of the day, file the flyers and your notes in a 3 ring notebook. You can use dividers to separate the “dream homes” from the “dogs” or the “Ho-Hums.” Do it any way you like but be sure to follow through to find out what each one sells for. Your agent should help you with this.
Hopefully you will select a local agent who knows the particular area or areas you are familiar with. OR if you are researching a couple of areas (maybe mid peninsula and San Francisco) give your agent the option to partner up with another agent in the second area you are looking in. I do this all the time. We will make some sort of arrangement where we will both get compensated regardless of where you decide to purchase. That way both agents will stay motivated and work towards your best interests, knowing that their time will not be wasted. There is nothing worse than working like crazy for a client only to find out, too late, that they have also been looking in another area with another agent behind your back.
But enough of that. Let’s get back to the first paragraph. The bottom line is that you can’t believe everything you read in the newspapers. What is true in another area may or may not be true here. If county wide statistics are being used, they may not reflect the reality in your micro market. If in doubt, go to a professional, and experienced agent who sells enough homes to really know what is going on, one that has an impeccable reputation (ask for references) and ask them. In my books, a good agent is an honest agent and they will know more about what is going on than anybody. I honestly believe that part of the reason for our shortage of listings is because homeowners have been led to believe that the market is slow and they won’t be able to sell their home for the price they want. The truth is they can probably do better!!
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Selling real estate in the mid San Francisco peninsula is unlike selling real estate in any other area. Just as the geographical area is famous for its microclimates, the real estate landscape has its own microclimates, each with its own idiosyncracies. An experienced agent will be in tune with the subtle variations from one subarea to another. But it is always changing. In this blog I will attempt to capture some items of interest to buyers and sellers alike, and to have some fun as well (see ""Fun Stuff"). If you have information you would like to have posted on this website, please email your suggestios to Lmercer@Lmercer.com.

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