Higher SAT Scores Equal Higher Home Values

The quality of a neighborhood's school district has always had an impact on real estate, causing property values and interest in a community to rise if local students are known to perform well.

As government scrutiny on school performance has risen and standardized test scores have been made available on the Internet, however, homebuyers have found it easier than ever to access statistics on local school districts.

Homestore.com, which averaged 8.65 million unique user visits each month last year, reports that school information is the second most sought-after feature on its site after actual property listings. Buyers' growing interest in student-performance information has helped increase the price gap between homes in top-scoring districts and those in mediocre or poor-scoring districts, with the difference eclipsing $70,000 or more in some areas.

Eric Belsky of the Joint Center for Housing Studies at Harvard University notes that buyers are attracted to the high level of "social capital"—or valuable social contacts and connections—associated with quality school districts.

Please click here to view Local School Information.

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Californians fueling Kauai real estate boom

Record home-price appreciation lures investors, retirees
Inman News
An unprecedented boom in the Kauai real estate market is being led by California buyers, according to a study by Data@Work, a Hawaiian resort residential market research firm.

The study shows California residents as the largest buyer market for all resort properties (condos, single-family homes and vacant home sites) in Kauai, accounting for about 40 percent of all sales on the island.

Home prices appreciated 28.3 percent in the Hawaiian Islands in 2004, the second-highest rate in the country behind Nevada. The island of Kauai experienced the greatest gains of all the outer islands, with the average price of resort properties soaring 45 percent over the past two years.

According to Ricky Cassiday, president of Data@Work, real estate investments over the past five years in resort property on Kauai have appreciated by 21.5 percent annually, with the average residential price increasing from $300,229 in 1999 to $622,869 at the end of 2004.

The already striking appreciation rate is expected to go even higher this year as developers struggle to keep up with demand, according to a press statement, which also noted that inventory is tight, resales are brisk and new developments are selling out in record time.

Despite rising prices, Kauai is still a value in relation to the other islands, according to the press statement. A new beachfront condo priced at $800,000 on Kauai would easily sell for over $1.5 million on Maui, and Cassiday expects Kauai's values to continue to rise faster than the other islands.

"Californians come to Kauai to experience a less hectic way of life," said Danielle Fletcher, owner of the Windermere Carmel office, which is a California sales representative for the new Waipouli Beach Resort under construction on Kauai. "Post 9-11, people are looking for security and simplicity. Buyers who may have considered a home in Mexico or Costa Rica are finding Kauai more appealing for a number of reasons – personal safety, quality of health care and a lower 'hassle factor' that comes from sharing the same language and currency."
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Multifamily real estate market tightens

Apartment industry in recovery, according to survey
Inman News
Senior apartment executives report significant improvements in several apartment market indicators, including occupancy rates, sales volume and debt and equity availability, according to the National Multi Housing Council’s April 2005 Quarterly Survey of Apartment Market Conditions.

The survey’s four indexes measure changes in market conditions between January and April. For the third quarter in a row, and only the fourth time in the survey's six-year history, all four indexes showed improving conditions compared with three months earlier.

“All signs point to continued apartment market recovery,” said NMHC Chief Economist Mark Obrinsky. “After several years of flat rent growth and widespread use of concessions to fill apartments, a record 60 percent of respondents reported higher occupancy rates, rising rents, or both, in the markets with which they are familiar. The apartment recovery that began in a few markets is clearly spreading and gaining strength.”

Despite some anecdotal reports that the number of potential buyers may be edging down, actual sales transactions have not slowed down. The number of respondents noting higher sales volume than three months earlier outnumbered those observing lower sales volume by a 3-to-1 ratio (39 percent versus 13 percent).

The Market Tightness Index climbed to an all-time high of 78 in April. This was the seventh consecutive quarter in which the index has been above 50 (that is, the seventh consecutive quarter of improving demand, measured by lower vacancy rates, higher rents, or both). (A score above 50 means more respondents saw improving conditions than saw worsening conditions over the past three months.) According to the survey respondents, there are virtually no markets where conditions are worsening, and an increasingly large number of markets where demand is improving.

The Sales Volume Index was unchanged at 63, and represented the eighth consecutive quarter of increasing sales volume.

The Equity Financing Index was essentially unchanged at 63, the seventh straight quarter (and eleventh time in the past 12 quarters) that the index has surpassed 50. While 60 percent of respondents indicated conditions were unchanged, 27 percent indicated that conditions had improved, and a record low of only one percent reported that conditions had worsened.

The Debt Financing Index slipped a little from 56 in January to 54 in April. This is somewhat surprising since interest rates are a little lower than three months ago, but with the index above 50, which means more respondents saw improved borrowing conditions than saw worse conditions. Clearly, debt financing remains widely available.

The April 2005 quarterly survey was conducted from April 20-27. Eighty-three CEOs and other senior executives of apartment-related firms nationwide who serve on NMHC’s Board of Directors or Advisory Committee responded. The January 2005 quarterly survey was conducted Jan. 24-31, 2005; 113 responded. The April 2004 quarterly survey was conducted April 12-20, 2004; 72 responded.

Based in Washington, D.C., NMHC is a national association representing the interests
of the larger apartment firms in the country. NMHC's members are the principal officers of firms engaged in all aspects of the apartment industry, including owners, developers, managers and financiers. Nearly one-third of Americans rent their housing, and almost one in five Americans lives in an apartment.
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Overnight real estate rates trend lower

30-year fixed rate at 5.31%; 10-year Treasury down at 4.15%
Inman News
Long-term mortgage interest rates slipped further Thursday, and the benchmark 10-year Treasury bond yield sank to 4.15 percent.

The 30-year fixed-rate average dropped to 5.31 percent, and the 15-year fixed-rate slipped to 4.91 percent. The 1-year adjustable was down at 3.72 percent.

The 30-year Treasury bond yield dropped to 4.48 percent.

Rates are current as of 7:15 p.m. Eastern Standard Time.

Mortgage rate figures are according to Bankrate.com, which publishes nightly averages based on its survey of 4,000 banks in 50 states. Points on these mortgages range from zero to 3.5.

In other economic news, the Dow Jones Industrial Average fell 128.43 points, or 1.26 percent, finishing at 10,070.37. The Nasdaq fell 26.25 points, or 1.36 percent, closing at 1,904.18.
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Builders Remain Largely Upbeat In April

Strong demand for new single-family homes is helping buoy builder confidence as the market heads into the late spring selling season, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today.

The April HMI edged down by three points to 67 but remained within the strong 67-71 confidence range that builders have held throughout the past 14 months.

“Builders continue to express confidence in the overall housing market and expect sales to remain strong during then next six months,” said NAHB President Dave Wilson, a custom home builder from Ketchum, Idaho.

“Favorable market conditions and the appeal of homeownership continue to fuel demand,” said NAHB Chief Economist David Seiders. “Many builders are reporting higher lot prices and some difficulty in finding available land, both symptoms of strong demand for new homes. NAHB expects both home sales and house values to remain healthy in coming months,” he added.

The NAHB/Wells Fargo Housing Market Index (HMI) is derived from a monthly survey of builders that NAHB has been conducting for nearly 20 years. Each month, builders report current sales of single-family homes and prospects for sales in the next six months as either “good,” “fair” or “poor.” They also rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view sales conditions as good than poor.

The component index gauging current single-family sales remained at a solid 73 while the component index gauging sales expectations for the next six months and the component gauging traffic of prospective buyers were 76 and 50, respectively.

EDITOR’S NOTE: The NAHB/Wells Fargo Housing Market Index is solely the product of NAHB and is not influenced by any other party. HMI historical information and tables are available online at: www.nahb.org/hmi.
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Obesity not a valid reason for eviction

Downstairs tenant afraid of ceiling collapse
By: Robert Griswold: Inman News
Question: This is a classic problem. I took a downstairs apartment out of desperation. The people upstairs are of the heavy type. This is a cheap apartment. There is no soundproofing. They are so heavy that when they stomp (excuse me – walk) across the floor, they make it sound like I am living near Baghdad. I have tried to talk to them but they say it is not their fault. My only answer is to move if the landlord won't kick them out. Now they have moved another entire family into the apartment, which is clearly a violation of the lease. So now there are four large adults and two babies up there. I have notified the management, they claim to have given them a warning. These people are so heavy that you can actually see floor joists are bowing down. I am afraid the ceiling is going to collapse. Can't the landlord just tell them to leave?

Landlords' attorney Smith replies:

Fair housing laws require the landlord to have an open rental policy to qualified tenants. It would be illegal to evict them based solely on their physical characteristics. However, there is a distinct violation by having extra people occupy the rental. For this reason alone, the landlord could take legal steps to evict them and probably should do so under the circumstances given the over-occupancy and the disturbance issues. You could vacate the premises, but it's my view that the landlord could still hold you to the lease. Also, if you can literally see the floor above you move, then you may want to have the landlord send someone in to check that out.

Question: I have a rental property where one of the tenants just moved in last month and signed a six-month lease. These are standard, boilerplate lease forms that we got from Professional Publishing. At the time this tenant signed the lease we asked him for first month, last month and a security deposit. He told us he couldn't pay the entire security deposit or anything towards the last month's rent before moving in. But he indicated that he was getting paid his commission soon and would pay the rest of the security deposit and the last month's rent in two weeks. This turned out to be a lie, but we did eventually get the last month's rent from him over two months after move-in. Once again he promised to pay the balance of the security deposit but he never comes through. He has now become surly when we ask him for the deposit. The rental agreement he signed with us clearly stated that he would pay first, last and security. Since we now have a last month's rent from him, at what point can we consider him to be in breach of the lease and give him a 30-day notice?

Landlords' attorney Smith replies:

Your tenant is in violation of the lease agreement under which he holds possession of the premises. The lease violations you refer to subject the tenant to possible eviction. However, you may not use a 30-day notice. The 30-day is used to terminate month-to-month tenancies only, not leases. In this case you have a 6-month lease. You will need to legally serve a notice to perform or quit, which requests payment of the balance of the deposit or possession of the premises within a limited number of days after service. If he fails to comply with the legal notice, you will have the right to evict despite the six-month lease. Your retention of the last month's rent should not defeat your right to evict based on the lease violation. In residential cases, I encourage my landlord clients to get away from collecting "last month's rent," and, instead, call the entire amount held "security deposit." This gives you your maximum use of the money for rent, cleaning and damages. By calling the entire sum "security deposit," you are not required to give credit against rent before the tenant vacates.

This column on issues confronting tenants and landlords is written by property manager Robert Griswold, author of "Property Management for Dummies" and co-author of "Real Estate Investing for Dummies," and San Diego attorneys Steven R. Kellman, director of the Tenant's Legal Center, and Ted Smith, principal in a firm representing landlords.

E-mail your questions to Rental Q&A at rgriswold.inman@retodayradio.com.

Questions should be brief and cannot be answered individually.
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First-time buyers flood condo market

Part 3: Condo craze: Flippers, converters, first-time buyers grab a slice
Inman News
Editor's note: The condo market is on fire across the country, with prices appreciating faster than single-family homes in some cases. Buyers are scrambling to be the first in line, and amateur real estate investing is akin to sports and hobbies in the hottest markets. In this three-part series, we examine the trend from the trenches, catching up with part-time investors and first-time buyers, along with an example of the type of unique conversion projects taking place. (See Part 1: Property flipping is sport in some markets and Part 2: New England town converts hospital to condos.)

Ryan Sankey dropped the first moving box on the floor of his first-floor condo about a month and a half ago. At 27, he's feeling good about his decision to buy a condo in a Seattle suburb.

Sankey viewed the purchase as a way he could own real estate without having to worry about the exterior headaches that come with owning a single-family home. And the price was still within reach at $121,000. Houses in his area of Everett, Wash., sell for about $200,000 to $250,000 on average, he said.

The condo market has sizzled in many markets across the country, with condo-price appreciation in some cases exceeding home-price increases. Murmurs of bubbles and busts haven't scared away condo developers from low-rise, high-rise and condo-conversion projects, though. And buyers in some markets are still scrambling to be first in line for a condo unit.

"The primary motivation was being able to find something decent for less money since houses are still expensive in my market," Sankey said.

Also, he's still within reasonable distance of his technical support job at Microsoft in nearby Redmond. If he'd bought a house, he'd most likely be further from his job.

Sankey figures that by keeping the interior nice, he'll build some attractive equity by the time he's ready to move again. "I figured if I do this, I will live here maybe two years, three. I may turn this into an investment," he said.

Sankey's two-bedroom condo is part of a former apartment complex that's been converted. He said a conversion group is now finishing converting the second to last complex.

"They basically took all the carpet out, all the detailing out, repainted everything – all the fixtures – and basically updated it so it looked like a brand-new interior," he said.

The Everett area is in high demand because of its proximity to Seattle – about 30 miles, Sankey said. Many of Sankey's friends have bought condos or are looking to buy condos. "Everyone is recognizing the fact that it’s just easier to purchase…it's not that much harder than renting, and it’s yours," he said.

Sankey said he's been hearing chatter that the housing market in his region is set to cool down. "The condo market, however, seems to be more on the rise than on the fall," he said.

Condo markets are booming nationwide, with sales and prices in this market segment rising steadily for eight consecutive years. The median price of condos and co-ops has increased roughly twice as fast as that of existing single-family homes, according to Harvard's Joint Center for Housing report for 2004.

"The market in general favors single-family, detached homes, and when they become unaffordable, condos are the preferred alternative," said Leslie Appleton-Young, chief economist for the California Association of Realtors.

The median price for condos in California rose by 24.2 percent year-over-year from $303,060 in January 2004, to $376,300 in January 2005, according to a recent report from the state Realtors association.

And annual price appreciation of condos surpassed that of detached homes in all but one of the last five years in California.

Nationwide, sales of condos and co-ops went from 657,000 units sold in 2002, to 731,000 in 2003, to 820,000 units sold in 2004, according to the National Association of Realtors. And the average U.S. condo price increased 16.4 percent from 2003 to 2004, while single-family home prices increased 9.3 percent during that same period.

Appleton-Young said condos are a welcomed addition to the California housing stock, particularly in the coastal areas where the supply of homes for sale is low.

"We really do see condominiums come to life when the single-family, detached alternative is too expensive," she said. The median price of a single-family home in California reached $485,700 in January.

Indeed, price and location were among the top reasons recent condo buyers gave Inman News for buying this type of housing rather than a single-family home.

Simon Horwith, chief information officer for AboutWeb, recently purchased a condo in the Logan Circle area of Washington, D.C. Horwith and his wife are first-time buyers.

"The deciding factor in purchasing a condo versus a house was the fact that my wife and I wanted to live in the city as opposed to the suburbs," Horwith said. "We like to go out to bars and clubs, little shops and coffee shops, and we like to walk."

Horwith said the condo market was competitive. The seller of the condo he eventually purchased received many bids – including Horwith's – in the first weekend of the sale. "Without an escalation clause and willingness to pay above the asking price, we wouldn't have got the condo," he said.

The Horwiths also had to compromise a little on location to get in on the condo market. The couple started looking for condos in the Dupont Circle area of D.C., but opted for a larger unit for about the same price at the nearby Logan Circle neighborhood. Horwith said they were able to purchase a two-bedroom, two-bathroom condo for the same price they would've paid for a small one-bedroom just a few blocks away.

Iris Garica, a Bronx, N.Y., resident, turned to the condo market because she is priced out of the single-family market. Garcia said condo prices in the area have been a wake-up call for her, and she has expanded her search to a four-state area that includes Connecticut, New Jersey, New York and Pennsylvania.

"You can't find a two-bedroom condo for $92,000. They all start at $120,000 and up. Some of them are about $300, 000," she said. "The prices are ridiculous. I figured I would be able to buy something and I really haven't been able to."

Jessica Swesey and Glenn Roberts Jr. contributed to this article.
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The Weekend Guide! April 28 - May 1, 2005

The Weekend Guide for April 28 - May 1,2005.
Full Article:
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New England town converts hospital to condos

Part 2: Condo craze: Flippers, converters, first-time buyers grab a slice
By: Janis Mara: Inman News
Editor's note: The condo market is on fire across the country, with prices appreciating faster than single-family homes in some cases. Buyers are scrambling to be the first in line, and amateur real estate investing is akin to sports and hobbies in the hottest markets. In this three-part series, we examine the trend from the trenches, catching up with part-time investors and first-time buyers, along with an example of the type of unique conversion projects taking place. (See Part 1: Property flipping is sport in some markets.)

In tiny Adams, Mass., developers are converting a former hospital into condominiums, in a sign that the national condo conversion craze is hitting New England.

Halfway through construction, 11 of the 16 units already have sold, according to Dave Carver, managing partner of Scarafoni Associates of North Adams. Scarafoni is the real estate management and development company converting the hospital.

"This is the first condo project in the town," said Carver. Adams, which has 8,000 residents, is a sleepy community, a former mill town in the Berkshire Hills. But apparently even Adams – and the Plunkett Hospital, erected in 1918 – can't escape the inexorable condo conversion trend.

"The condo craze is penetrating into Massachusetts," Carver acknowledged.

The news should come as no surprise. Condo converters accounted for 22 percent of apartment sales in 2004, and 45 percent of total volume in January 2005, according to Prudential Real Estate Investors' U.S. Market Outlook for the first quarter of 2005.

The condo market has sizzled in many markets across the country, with condo-price appreciation in some cases exceeding home-price increases. Murmurs of bubbles and busts haven't scared away condo developers from low-rise, high-rise and condo-conversion projects, though. And buyers in some markets are still scrambling to be the first in line for a condo unit.

The former hospital in Adams has two classic red brick New England buildings, one of which boasts a cupola and a 6-foot gold leaf weathervane. It stands on "the best parcel of land in Adams," according to Ronald King, Scarafoni's project manager. Perched high on the hill, the buildings, which total around 40,000 feet, have a striking view of downtown and the surrounding area.

Though the exterior has been preserved, the insides have been gutted, King said. "No remnants of the hospital remain inside," he said. "Hospitals and houses don't have much in common." He acknowledged, "It's somewhat difficult to fit these things into what was a hospital and make it work properly." Overall, the "medium-difficult" job is going well, he said.

Deemed a historic resource by Historic Massachusetts, a state advocate for historical preservation, the hospital sat empty for nearly 20 years. Proposals for the town-owned property went nowhere.

During that period, thieves plundered the boarded-up hospital's copper piping and downspouts. Some even considered the neglected property to be haunted, according to Carver and ghost spotting Web sites that reported, "Screams can be heard along with sightings of ghosts that usually resemble patients that may have died there." Carver, however, said, "If there are ghosts there, they are friendly ghosts."

In 2003, Scarafoni proposed to bring the "haunted" hospital back from the dead, with a plan to create condominiums selling for $150,000 to $250,000, targeting the "empty-nest" market of local retirees.

City officials were ecstatic. "We are quite pleased this is a positive proposal and believe it is a realistic proposal," Faith Yando of the Massachusetts Development Finance Agency, which handled the proposal process, told the local paper, the Berkshire Eagle. "I'm glad it's a local developer and one with a good reputation," Edward Driscoll, vice chairman of the Selectmen, told the Eagle.

Work began in late 2003. Scarafoni expects to complete the job in 2006. The hospital's 200-odd windows have been replaced with windows that, while modern, are mullioned and resemble the old windows. The old gutters and ironwork have been replaced, and now the interior is being rebuilt.

"We are trying to direct this to the older market," said Carver. "A lot of the houses in town are occupied with people who raised their families and now want to downsize.

"This keeps those people in the community and also frees up the larger houses for young couples who plan to have families," Carver said.

The unit mix ranges from a 1,222-square-foot, one-bedroom, one-bath unit with a deck, to a 2,823-square-foot, two-bedroom-plus-den with two baths. All the units have garages. Unlike many condo complexes, the 16-unit property doesn't have a common area.

The condos are priced from $150,000 to $250,000. According to King, new houses in Adams, "which is what these essentially are," sell for around $200,000. The smallest unit is 1,129 square feet, with one bedroom and one bath. The largest is 2,823 square feet, with two bedrooms, a den and a deck.

It appears that Adams residents aren't scared of the hospital's "haunted" reputation, with 11 of the 16 units selling before construction was completed. Indeed, King anticipates that the brick buildings crowning the hill in the center of town will radiate a sense of community.

"Some of the people who are moving in already know each other," King said. "I'm sure it will become a close-knit group."

Tomorrow: First-time buyers get into real estate with condo purchases.
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California: Home Prices Continue Upward

The CALIFORNIA ASSOCIATION OF REALTORS® reports a 7.5 percent increase in statewide home sales during the year-over-year period ended in March.

Meanwhile, the median single-family price surged 15.7 percent to $495,400 in March from $428,060 during the same month of last year. CAR chief economist Leslie Appleton-Young attributes the ongoing housing frenzy to rapid population growth, with the state welcoming 3 million newcomers over the past five years.

Also in March, inventory of for-sale properties climbed to a supply of 2.7 months from 1.3 months. Foreclosures.com is concerned about a dramatic jump in mortgage defaults, pointing to research by PMI Mortgage Insurance Co. that puts six California markets among the top 10 regions with the highest risk of price declines over the next two years.

"We have a combination of very low affordability and rising interest rates as dual triggers for a price correction in overheated California markets," explains Alexis McGee, president of Foreclosures.com.
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Property flipping is sport in some markets

Part 1: Condo craze: Flippers, converters and first-time buyers grab a slice
By: Glenn Roberts Jr.: Inman News
Editor's note: The condo market is on fire across the country, with prices appreciating faster than single-family homes in some cases. Buyers are scrambling to be the first in line, and amateur real estate investing is akin to sports and hobbies in the hottest markets. In this three-part series, we examine the trend from the trenches, catching up with part-time investors and first-time buyers, along with an example of the type of unique conversion projects taking place.

Rajpal "R.J." Singh is selling a "super luxury Trump condo" in Manhattan's Upper West Side for $1.7 million. He's also selling a West Side condo for $699,000 and renting out another condo in the Hudson Heights neighborhood.

That's not his day job. Singh works in the software industry. Real estate investment is something he does on the side – he is not a licensed real estate agent.

"I happen to like new construction lately," he said. He focuses on Manhattan and Queens, and believes those markets are generally still a safe bet.

The condo market has sizzled in many markets across the country, with condo-price appreciation in some cases exceeding home-price increases. Murmurs of bubbles and busts haven't scared away condo developers from low-rise, high-rise and condo-conversion projects, though. And buyers in some markets are still scrambling to be the first in line for a condo unit in a pending project – even when that project is little more than a hole in the ground.

Singh said he has seen a lot of amateur investors getting into the real estate market, a trend that seemed to catch fire in 2003. He said the percentage of condo owners who live in their condos appears to be shrinking while the number of owners who rent out the condos is growing, which may be an indicator of this growing push by investors in the real estate market.

"I think it used to be roughly 90 percent owners, 10 percent renters – today I've seen 70 percent owners and 30 percent renters. If it goes to 60-40 or – God forbid – 50-50" he said.

"Because of the stock market and mutual funds not producing much return, people are shifting that money to real estate. A lot of people need an investment vehicle and they are finding real estate as the investment vehicle for right now," he added.

And then there is the demand from those people who are simply looking for housing – "There seems to be a steady flow of people that are in need of housing, hence they are willing to pay top dollar," Singh said. Some New York markets may already be overpriced, such as the Brooklyn waterfront, he also said.

Robert Holtz, of Hoboken, N.J., is selling a condo that he bought two years ago for about $419,000. He has already purchased another condo, a unit in a new development that is under construction. He's still fixing up the condo he's living in, he said, though he said he's willing to move out now if someone will give him the right price.

Then again, he said, he might consider selling the new condo instead – if he can get the right price for that one. "If I can get $559,000 without having to move into it – I don't have to sell where I'm living at now. I can put the other one on the market."

Decisions, decisions.

Condo sales, as a percentage of total real estate sales, have grown from 8.8 percent in 1994 to 12.1 percent in 2004, the National Association of Realtors reported.

And the rate of condo and co-op price increases has eclipsed that of single-family homes for the past several years. The average U.S. condo price increased 16.5 percent from 2001 to 2002, 13.7 percent from 2002 to 2003 and 16.4 percent from 2003 to 2004, the association reported, while single-family home prices increased 8.8 percent from 2001 to 2002, 7.2 percent from 2002 to 2003 and 9.3 percent from 2003 to 2004.

Also, the total number of existing condo sales grew 9.7 percent in 2002, 11.3 percent in 2003 and 12.2 percent in 2004; while homes sales rose 5.1 percent in 2002, 9.6 percent, and 9.4 percent in 2004.

Holtz said he knows that the real estate market can be cyclical, and there is always some cause for alarm when prices inflate very rapidly. He cited the example of a $609,000 "pile of dirt" in Florida that ended up selling as a $740,000 real estate deal just 90 days later. That was a deal he worked on with his family.

"It's always a worry when you start talking about one-half million dollars like it's nothing," he said. "But we're not talking about a (dot-com) or an Enron or something like that." Real estate is a tangible thing, he said. "People need to live some place. They need four walls and a roof."

So far, the local real estate market continues to thrive, he said. "If you price it right it sells in one day."

A first-quarter 2005 report released by Prudential Real Estate Investors, a part of Prudential Financial, though, expresses some serious caution about the condo boom. "The potential fallout from a meltdown in the condo market is unquestionably one of the biggest risks facing the real estate industry," the report states. "While we believe the excesses are fairly concentrated within a few markets, the effects of a shock would reverberate throughout the industry."

The report also states, "As housing prices soar, comparisons between the housing market today and the dot-com bubble during the late '90s tech bull market grow more frequent by the week. Although condo fever is more of a coastal phenomenon than a national epidemic and is more bubble-like in some markets than others, the warning signs are getting harder to ignore." The report mentions media reports of properties that are sold and resold in a short period of time – in some cases in the same day.

"If a condo bubble develops (or already exists) and bursts as interest rates rise, loan delinquencies could increase sharply and liquidity in the debt markets could dry up very quickly, at least until lenders can assess the impact of falling property values." On the other hand, the report notes that a downturn in the condo market could benefit the apartment rental industry, as condo rentals are typically more expensive than apartment rentals.

Philip Conner, vice president in the Investment Research department of Prudential Real Estate Investors, said, "There are a lot of factors driving the condo market that aren't necessarily symptomatic of a bubble," such as the higher cost of single-family homes and the "urban renaissance" phenomenon of residents moving into denser housing developments in downtown areas.

But some markets, particularly in Florida, have been named as exhibiting some bubble-like characteristics, Conner said. Some warning signs of a condo slowdown are an oversupply in condo inventory and a growing gap between the ownership costs of a condo unit versus the cost of rental housing in a given market area, he added.

Michael Gasior, president and founder of American Financial Services, an investment training company, titled his March newsletter "Real Estate is Over." Gasior said that last month he saw an e-mail notice about an East Florida condo that was selling for about $850,000. "I went back through my e-mail box and saw that same condo about 90 days prior and it was $779,000. Now it's $940,000." The listing price kept escalating even though the property hadn't sold, he said.

"When you see speculators enter the residential real estate market that's often a sign of the top. There's no way borrowing money is going to be easier or cheaper than it's been," he added, and condos may feel the brunt of a market slide. Gasior noted in his newsletter that if the 30-year fixed interest rate rises about 8 percent, "the market will need to give back nearly all the gains enjoyed between 1999 and 2005 in order to stabilize the marketplace.

"The decline that would result would be more severe than the one experienced in the Northeast and Southern California between 1989 and 1994 when homes depreciated between 20 percent to 25 percent in those markets and condo prices dropped between 40 percent and 60 percent. No region of the U.S. would be immune although each area could look to 1999 market values for an idea where their respective bottom might be."

To capitalize on the frenzy for pre-construction condos in Florida, Realtor Steve Dalia of Exit Team Realty in Coral Springs, Fla., launched a Web site this year, PreConstructionProfits.com. Dalia said some condo markets in Florida "seem to be absolutely on fire" in terms of buyer demand, and most of the visitors to his Web site are from outside the area.

On the other side of the country, Mike Machado, a Realtor for Pacific Union GMAC Real Estate in San Francisco, is selling a one-bedroom, one-bathroom condo unit in a high-rise development for $689,000.

"Since it's getting really pricey I don't see a lot of first-time buyers," said Machado. He does see Baby Boomers, retirees and a growing number of investors shopping for condos these days. He said San Francisco real estate has been a good long-term investment, but "if you're thinking about flipping this thing in a month and making $100,000 on it then forget about it." He has seen some sellers in the San Francisco market are taking the money and running for other parts of the state or country.

Machado, like many other real estate professionals, has played the real estate market himself, buying and flipping properties for a profit. Richard Shrake, who left California to sell luxury condos and other property in Las Vegas, said, "A lot of purchases are made by brokers. I've bought myself in this market."

He said that the real estate frenzy in Las Vegas, which has sent property values soaring and seeded several high-rise condo projects, could be headed for a glut within the next few years. Investors can protect themselves, he said, by doing their homework. But he is new to this real estate business. "I haven't been in there that long. I don't know where this is going."

Machado said that as with other cycles, it may be too late when real estate investors and speculators realize the market is turning – people may not realize what's happening "until we all get burned."

He added, "It's just like the stock market in the late 1990s. Now, we're all in real estate. Real estate's the new stock market. Which we all know can't last forever."

Tomorrow: A New England town converts a hospital into condos.
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Illegal bedroom comes back to haunt home buyer

Permit dilemma could cost thousands to rectify
By: Barry Stone: Inman News
Dear Barry,

The home we just bought has a bedroom that used to be a garage. It was converted without a permit, and no one disclosed this during the transaction. We learned about it when the building department cited us, and now they expect us to restore the garage or build a new one. This means we overpaid for a two-bedroom home. The sellers and agents said nothing in their disclosure statements, so we assumed everything was OK, and the home inspector claims that he has no duty to check for permits. How can it be that no one was responsible for disclosing this issue? – Tony

Dear Tony,

Regardless of who may or may not be responsible, lack of disclosure never justifies the assumption that everything is OK, especially where construction permits and building alterations are concerned. In some cases, alterations such as garage conversions date back to previous owners; so your seller could have been genuinely unaware of the situation. Perhaps your new neighbors can shed some light on that question.

Most home buyers are unaware that disclosure statements from sellers and agents are generally incomplete – not necessarily because known problems are being concealed, but because sellers either don't know or don't remember the defects that warrant disclosure, and because agents are not sufficiently familiar with the histories and shortcomings of subject properties.

Although home inspectors and real estate agents are not required to conduct permit searches, prudent members of those professions typically recommend that buyers review the building department records, prior to completing a purchase. That recommendation could have averted your current predicament, but the agents and inspector appear not to have covered that base.

Experienced home inspectors can usually determine, by way of visible evidence, that a garage conversion has taken place. In such cases, disclosure of an apparent conversion would be cited in the inspection report, with recommendations for further evaluation and a verification of permits.

To determine potential liability for lack of disclosure, it is recommended that you: (1) ascertain when the garage conversion took place; (2) determine whether the conversion is visibly apparent; (3) learn whether the building department notified the previous owners for the non-permitted work. This should help to clarify who, if anyone, is responsible for your uninformed purchase.

Dear Barry,

If I install a raised flowerbed against the foundation of my house, should I install some kind of vapor barrier against the building before the dirt is put into the new planter? – Jerry

Dear Jerry,

When raising the grade level against the wall of a building, the main concern is whether the elevated soil will be above the line where the wall construction adjoins the top of the foundation. When the grade exceeds this level, there is the potential for water intrusion and resultant moisture damage, dryrot, and possible mold infection. Vapor barriers provide a temporary solution, at best, as they eventually deteriorate and allow water seepage. The preferable method of prevention is to construct the planter separate from the building, with an air space between the wall and the rear boundary of the planter itself.

To write to Barry Stone, please visit him on the Web at http://www.housedetective.com/.
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Avoid remodeling pitfalls

California Contractors State License Board has free information for homeowners
SACRAMENTO – The California Contractors State License Board wants to make sure new homeowners know how to make informed decisions when hiring and managing contractors for their home improvement projects. Unfortunately, many homeowners fall victim to unlicensed and unscrupulous contractors, resulting in thousands of dollars in damages. Even homeowners working with reputable, licensed contractors can get into trouble as a result of simple misunderstandings about costs, schedules and materials.
Full Article:
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Top 10 Tips for Identity Theft Prevention

from the Office of Privacy Protection.
California Department of Consumer Affairs
An identity thief takes some piece of your personal information and uses it without your knowledge. The thief may run up debts or even commit crimes in your name. The following tips can help you lower your risk of becoming a victim.
Full Article:
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Existing-home sales, prices rise in March

Condo prices jump nearly 16% in past year
Inman News
The rate of existing-home sales, including single-family, townhomes, condominiums and co-ops, rose 4.9 percent in March compared with the March 2004 rate, the National Association of Realtors announced today.

The seasonally adjusted annual rate of existing home sales was 6.89 million, compared with 6.82 million in February 2005 and 6.57 million in March 2004. The seasonally adjusted annual rate projects a monthly sales total over a 12-month period. The record was a sales rate of 7.02 million in June 2004, followed by 6.98 million in November 2004, the association announced.

The national median existing-home price for all housing types was $195,000 in March, up 11.4 percent from March 2004 and up 2.1 percent from February 2005. The median is a typical market price where half of the homes sold for more and half sold for less. The median condo price was $206,800, up 15.9 percent from the same month a year ago. Condo sales last month accounted for 12.3 percent of market activity.

David Lereah, the association's chief economist, said, "With mortgage interest rates remaining historically low, gains in the labor market and economic growth appear to have lifted the confidence of home buyers. There's no question there is a strong demand for housing from a growing population."

Al Mansell, association president and CEO of Coldwell Banker Residential Brokerage in Salt Lake City, said this is the third consecutive month in which home prices have experienced double-digit annual gains. "Although there are solid fundamentals underlying the strength of the housing market, we'd really like to see a bigger supply of homes so people don't feel pressured when making purchase decisions or contract offers," he said.

Total housing inventory levels fell 0.2 percent at the end of March to 2.33 million existing homes available for sale, which represents a four-month supply at the current sales pace.

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 5.93 percent in March, up from 5.63 percent in February; the rate was 5.45 percent in March 2004.

Existing condominium and cooperative housing sales slipped 0.1 percent to a seasonally adjusted annual rate of 845,000 units in March from a level of 846,000 units in February. Last month's sales activity was 7 percent above the 790,000-unit pace in March 2004, the association announced.

Single-family home sales rose 1.2 percent in March to a seasonally adjusted annual rate of 6.04 million from a level of 5.97 million in February. Last month's sales activity was 4.5 percent above the 5.78 million-unit pace in March 2004. The median single-family home price was $193,600 in March, up 11.3 percent from a year earlier.

Regionally, total existing-home sales in the Midwest rose 2 percent to an annual rate of 1.55 million units in March, and were 3.3 percent above March 2004. The median price in the Midwest was $159,000, up 11.2 percent from a year earlier.

Existing-home sales in the West increased 1.9 percent to an annual rate of 1.63 million units in March, and were 5.8 percent higher than the same month a year ago. The median existing-home price in the West was $289,000, up 18.9 percent from March 2004.

The home resale pace in the South rose 0.4 percent from February to an annual rate of 2.57 million units in March, and was 4.9 percent higher than March 2004. The median price of an existing home in the South was $169,000, which was 7 percent higher than a year ago.

Existing-home sales in the Northeast held even at an annual pace of 1.14 million units in March, and were 5.6 percent above the level of a year ago. The median existing-home price in the Northeast was $242,000, up 14.7 percent from March 2004.
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Should home seller fix a defect, credit money or lower the price?

Each resolution has its pros and cons
By: Dian Hymer: Inman News
Inspections invariably reveal defects. Often, buyers and sellers find themselves back at the negotiation table trying to work out an agreeable solution. Determining who is going to pay for what is one part of the resolution process. The other is figuring out how and when the defects will be repaired.

There are three options. The seller can do the work before closing. The seller can credit money to the buyer at closing and the buyer can take care of fixing the defect later. Or, the seller can reduce the purchase price by the amount of the negotiated resolution.

There are advantages and disadvantages to each approach. For example, if the sellers agree to repair a defect before closing, the work is done. The buyers don't have to worry about fixing a problem after they take possession.

A disadvantage is that there may not be sufficient time to complete the work without delaying the closing. Also, the sellers, who are moving on, may not take the same interest in overseeing the work as the new home owner might.

A related issue is that the sellers may agree to complete only the bare minimum to get the job done. If the buyers prefer to upgrade the work project, they should consider taking a credit at closing.

In cases where the seller is completing work before closing, the buyers should ideally have the right to reasonably approve the work order before the job is done. The seller should provide a copy of a paid invoice when the work is completed.

The buyer should also make sure that the contractor who is performing the work will guarantee his work for the buyers as well as the sellers. This is so that the buyers can turn to the contractor, and not the seller, if there is a problem with the job after closing.

HOUSE HUNTING TIP: Sellers often prefer to credit money to the buyers at closing to satisfy inspection-related issues. This relieves them of the responsibility for having work done while they're in the midst of moving. If you're having trouble convincing a seller to repair defects, you might make headway by agreeing to accept a credit in lieu of an actual repair.

A credit for defects can be a cost-effective way to solve a problem if the buyers are planning a larger renovation. For example, it would be a waste of money for the seller to repair a shower if the buyers plan to completely remodel the bathroom. In this case, a credit would benefit both parties.

Also keep in mind that there are often several ways to fix a property problem. Who better to decide how to fix a defect than the new owners? Just make sure if you do take a credit that you follow through and have the work done.

Also, be sure to check with your lender before finalizing your negotiations with the seller. Lenders have limits on how much money they'll allow a seller to credit to a buyer at closing.

Credits generate cash to repair defects, which works well for buyers who are cash-strapped. Buyers for whom cash isn't an issue might prefer a reduction of the purchase price. A lower price can help both buyers and sellers if there are closing costs that are based on the purchase price, such as transfer taxes and title insurance.

THE CLOSING: In areas where property taxes are based on the purchase price, a lower price could result in a sizable savings over time.

Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.
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Interest-only real estate loans give borrowers extra savings

Additional principal payment reduces following month's payment
By: Jack Guttentag: Inman News
"I am looking for a loan on which, whenever I make an extra principal payment, my monthly payment immediately declines. Is there such a thing?"

The only mortgage that works that way is one on which the payment is interest-only. Not all interest-only mortgages work that way, however.

With a fixed-rate mortgage of the standard type, extra payments shorten the payoff period but do not affect the monthly payment. For example, if you borrow $100,000 for 30 years at 6 percent, your fully amortizing payment is $599.56. Pay this amount every month, and you are out of debt after making 360 payments. If you make an extra payment of $90,000 in month 2, your payment in month 3 and all subsequent months remains $599.56 until month 20, when the loan balance hits zero. Until then, you receive no payment relief.

With an adjustable-rate mortgage (ARM) on which the borrower is making the fully amortizing payment, extra payments do change the monthly payment, but not until the next rate adjustment. At that point, the payment is recalculated and the new payment will reflect all prior reductions in the balance.

Assume the $100,000 6 percent loan is a one-year ARM, and that an extra payment of $90,000 is made in month 2. The payment would remain at $599.56 through month 12, but (assuming the rate stayed at 6 percent) the payment would drop to $13.81 in month 13.

On ARMs with longer initial rate periods, the drop in payment following an extra payment would be further delayed. On the popular 5-year ARM, for example, the payment wouldn't drop until month 61.

If a loan is interest-only, the payment should decline in the month following an extra payment, whether the loan is fixed-rate or adjustable-rate. The interest only payment on the $100,000 loan at 6 percent is $500. Following the payment of $90,000 in month 2, the interest-only payment should drop to $50 in month 3.

From the mail I have received on this topic, however, I get the distinct impression that not all lenders have their servicing systems geared to do this properly. This is not surprising, given the haste with which many lenders have incorporated interest-only into their program offerings. Even if the system calculated the new interest-only payment correctly, they need to communicate the new interest-only payment to the borrower. I have not done a comprehensive survey, but I do know that some lenders are not doing this.

In most cases, lenders who do not change the payment immediately will change it on the anniversary month, as specified in the note. Until that date, the payment will remain unchanged, but since the interest due is lower, a part of the payment will be credited to principal.

If the loan in my example is of this type, the interest due in month 3 will drop to $50, but the borrower will continue to pay $500 until month 13, which is the anniversary month. $450 will be applied to principal in month 3. In each subsequent month 4-12, the interest portion will drop a little and the principal portion will rise, until month 13, when the borrower will once again be able to pay interest only.

There are some interest-only loans on which the interest-only payment in month 1 continues until the end of the interest-only period – five or 10 years.

If it is an ARM, the payment will adjust when the rate adjusts, but if it is fixed-rate, the payment won't change for five or 10 years.

If you are contemplating an interest-only loan and find immediate payment adjustments in response to extra payments a highly desirable feature, ask about it. Don't expect the subject to be volunteered by the loan officer or mortgage broker. They are not involved in loan servicing and the chances are that they don't know the answer and will have to ask. Make sure they do.

The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

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Home makeover craze hits the garage

By: Katherine Salant: Inman News
Over the last 20 years every room in a typical suburban house has been transformed to some degree.

The only one to escape home builders' attention has been the garage, but the enterprising folks at Whirlpool and Sears now offer you the opportunity to organize it, accessorize it, or go the whole nine yards and undertake a complete maker-over. After a recent fact-finding trip to my local Sears store, I concluded that there is now a solution to nearly every garage gripe you could imagine. Moreover, these solutions are projects that any homeowner can undertake and, carried to their most extreme, won't cost more than about $3,400.

The easiest project offers the most immediate gratification because it will bring order out of chaos. You can gather up the jumble of unpacked boxes, sports equipment, and gardening tools that make every arrival and departure from your otherwise perfect new house so unsettling and put them on easy-to-assemble shelving units.

Durashelf 's $45, 36-inch-long plastic shelving system holds 150 pounds per shelf. Should you have a lot of really heavy items, say an engine block or many boxes crammed with books, Do+Able's $65, 36-inch-long shelving system holds an astounding 1,000 pounds per shelf. Both units are 18-inches deep. In most garages, they will easily fit on the side wall of a parking bay and still leave enough room to get in and out of your car.

Moving from stuff to food stuffs and bulk-purchase grocery shopping, the next garage gripe on your list may be the old refrigerator you have in there that runs all the time, costs a fortune to operate and doesn't work well. In this case the problem is not your refrigerator, it's where you put it ? an unconditioned space. Whirlpool has a solution ? a refrigerator and freezer that is designed to function in a garage.

Unbeknownst to most consumers, Whirlpool refrigeration engineer Travis Perkins explained, a standard refrigerator is designed to operate in the 55 to 100 degree range of your interior conditioned space, not the extreme temperatures of your unheated, un-air conditioned garage where the mercury can go as low as 0 degrees or as high as 110 degrees.

While most people might suspect that a refrigerator wouldn't work well at 0 degrees, its performance begins to decline when room temperature falls below 50 degrees, Perkins said. At 40 degrees a refrigerator's thermostat stops signaling the unit to turn on, and the freezer also shuts off because it only runs when the refrigerator does. After a few days of 40-degree weather, the frozen food will begin to thaw and spoil. In many parts of the country, this situation will prevail all winter if your garage is attached because the space will capture some of the heat from your house and the temperature will never fall below freezing.

Should the temperature of your garage eventually fall below 25 degrees, food in the freezer will remain frozen, but items in the refrigerator will also freeze. At the other extreme, when the temperature soars over 100, the refrigerator goes into "overdrive," constantly running to keep food chilled and frozen, but not adequately. A typical symptom of this condition is softened ice cream, Perkins said.

A refrigerator that works well in a typical garage situation is no small feat of engineering, and its manufacture is expensive, said Perkins. Whirlpool's 19-cubic-foot Chillerator (a refrigerator with a small freezer on top) is $1,000, and its Freezerator (a 21-cubic-foot unit with a freezer below and a smaller unit on top that can be either a refrigerator or a freezer) is $1,100. Whirlpool also makes a small $450 Beer Box that holds 35 12-ounce cans of soda or beer. All three are on casters, and the small one fits under a workbench.

Segueing from the practical to serious makeover, both Sears and Whirlpool offer a workstation ensemble that will make a garage work area look coordinated and finished instead of like a handy man's hodge-podge. Sears' Craftsman Professional and Whirlpool's Gladiator include a workbench, and steel cabinetry ? a 5-drawer base and a base cabinet on casters that you can move right next to your car when you're working on it (otherwise both base units fit neatly under the workbench), a tall, standing cabinet, and wall cabinets. Another plus with both systems ? the wall cabinets can be easily attached and detached, making the entire ensemble portable and easy to stow on a moving van, should you relocate at some point in the future. The crowning touch: plastic floor tiles or plastic roll flooring that make the space look and feel like a room and not a garage.

Not being one to spend any time at a workbench myself, I invited three Ann Arbor, Mich., friends with expertise in this area to evaluate the Sears Professional and Whirlpool Gladiator products: Greg George, a carpenter/remodeler; Dick Vail, a professional handyman/mechanical engineer/remodeler; and Ernie Weaver, an auto mechanic/wood working hobbyist.

My team's conclusion: for the weekend auto mechanic or the person who likes to build or repair small things (for example, fix a lamp or help with a child's science project), the system will work well. For the serious woodworker, the workbench and storage units are not big enough. Woodworking tools are bigger than auto repair tools and would not fit easily into either 5-drawer base unit. If you routinely use large pieces of wood (to make furniture or repair a door, for example), you need a much bigger, freestanding workbench. Another downside of woodworking that can make it an unacceptable garage activity regardless of any particulars is the sawdust that gets all over everything. The floor tiles looks nice, but practically speaking, the only spot where they are sensible is right in front of the workbench, if you anticipate standing for long periods.

The main differences between the Sears Craftsman Professional and the Whirlpool Gladiator ensembles are aesthetics and price. Both are tastefully designed in a monochromatic combination of metallic grey, black and silver. Sears' cabinetry features rounded edges and catchy rubber drawer pulls that look like car door handles. The rounded "zero-edge" corners on all the cabinetry make it easy to open the doors, even when the unit is next to a wall, and the cabinet doors have shallow shelves for storing small items. The workbench surface is sealed MDF board, which is easily cleaned if auto grease gets on it.

Gladiator's silver cabinet doors and drawer fronts feature a raised tread plate pattern that adds a masculine touch. The doors are inset and also easy to open if the unit is next to a wall. The workbench surface is maple butcher block, which may seem inappropriate for a garage workstation, but Weaver, a professional auto mechanic, said, "If it gets dirty, it looks like you're doing something."

Couching the aesthetic choices in terms of cars, Weaver and I agreed that the rounded look of the Sears Professional workstation would likely appeal to the owner of a Chrysler PT Cruiser or Pacifica, while the squared off Gladiator look would be more appealing to the owner of a more traditional-looking car like a BMW sedan or a Volvo station wagon.

The cost of the two workstation ensemble systems with an 8-foot workbench differs by $313; the total for the Gladiator is $2,273, for the Craftsman Professional $1,860. This price includes a 3-foot-wide tile floor in front of the workstation. A Whirlpool Chillerator and 2 Do+Able shelf storage units would add another $1,130. These prices are all "manufacturers suggested retail prices," but the garage storage systems market is very competitive and markdowns are common.

A final tip: before you get very far with your garage makeover in your new house, make sure that the system will fit. Mark Marymee of Pulte Homes said their average size two-car garage is 21 feet by 21 feet. Leaving 1 foot between the rear of your car and the garage door, you would have about 3 feet between the front of your car and the workbench if your car is the size of a Ford Focus station wagon, 2 feet if it's the size of a Ford Explorer or a Ford Taurus, 15 inches if it's the size of a Ford minivan, but only 3 or 4 inches if its as big as a Ford Crown Victoria.

For more information:
Whirlpool's Gladiator Garage Works: www.GladiatorGW.com
Sears' Craftsman Professional garage work station: www.Sears.com; on the home-page search feature, first click on tools, then write in "garage storage"
Questions or queries? Katherine Salant can be contacted at www.katherinesalant.com.
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New rule protects consumer info from Dumpster diving

Real estate finance companies must safely dispose of personal data
By: Janis Mara: Inman News
Three years ago, an identity thief jumped into a filthy Dumpster behind a Washington, D.C., pizza place and stole Ray Everett-Church's credit card number from the pizza joint's discarded receipts.

In every consumer's worst nightmare, the thief used the card to buy $800 worth of watches from a Web site.

Though Everett-Church was able to set the matter straight before further damage was done, the process consumed hours of his time. His experience demonstrates the reasons behind a new federal rule mandating that businesses destroy customers' personal information before tossing it out.

The disposal rule of the Fair and Accurate Credit Transactions Act of 2003, or FACTA, goes into effect June 1. It mandates that anyone who has personal information from consumer credit reports must properly dispose of such material to protect against unauthorized access to the material.

Consumer concern over identity theft has skyrocketed in the wake of scandals over information theft from ChoicePoint and LexisNexis, among others. The new rule, which is just one part of FACTA, is specifically directed at businesses and individuals who obtain information from consumer credit reports, according to Dennis Kiker, an attorney at Moran Kiker Brown, PC.

"If the information comes from a credit report, it is covered by the rule. In the real estate and mortgage industries, particularly the mortgage side, that information often will be entered into another system," Kiker pointed out. Any information taken from a credit report, such as Social Security numbers, is covered, the attorney said.

In most instances, properly disposing of consumer information means shredding paper records containing information from credit reports or the credit reports themselves, and wiping computers clean of such data, Kiker said.

"The paper part is easy. If it's paper, you shred it," said Kiker, who specializes in litigation management, including document management programs.

The best way for a large-scale operation to shred paper is by hiring an outside company to do it, Kiker said. That way, as long as the information is identified as being affected by the FACTA rule, "if it gets out after leaving your hands, it's their (the outside company's) responsibility."

A sole proprietor or small company can just use a shredder from Home Depot or another store, he added.

With electronic data, sole proprietors and small companies can buy a software utility to clean the computer's hard drive, Kiker said. "Put consumer-identifying information in specific places, as simple as folders in Windows, and use software to eliminate that data."

In larger companies, the Information Technology department will dispose of the information, Kiker said. "For the big companies, it's understanding what the FACTA obligation is and taking care of it. This needs to be a part of an overall document retention policy. There needs to be someone responsible for implementing the policy and someone responsible for auditing it."

Generally, this is a good practice anyway, Kiker said.

"If a situation arises, the company needs to be able to demonstrate what they did to destroy the information. As long as they have made a good faith effort to eliminate it, they are very unlikely to result in any liability," Kiker said.

Generally, willful violation of the requirements can result in actual damages, or damages of not less than $100 nor more than $1,000, plus costs of the action, including attorneys' fees, the attorney said. Liability for negligent violation is limited to actual damages and the costs of the action, including attorneys' fees.

"It's not just the money," said Tena Friery, research director for the Privacy Rights Clearinghouse. "There is a tremendous amount of bad publicity associated with a breach. There was a case last week of medical records falling off a truck and scattering over the highway. The hospital will probably recover, but a mortgage broker who loses the faith of clients is another matter altogether."

Eventual financial losses to a company because of a damaged reputation can be enormous, Friery said. "ChoicePoint's reputation is really tanked," she said, referring to the scandals over data theft from the company.

With regard to the new rule, Everett-Church said, "In this day of rampant identity theft, what mortgage broker and real estate agent isn't already securely disposing of records containing deeply personal data?"

Everett-Church, who is himself a privacy expert, said, "I've witnessed people climbing into a Dumpster ankle-deep in half-drunk coffee behind my local Starbucks looking for credit card receipts. Anyone who doubts that data thieves haven't identified the offices of mortgage brokers, loan processors, settlement agents and anybody else with a goldmine of financial information in its Dumpster really has no concept of what's going on out there."

Friery and Kiker agreed that adhering to a set of security procedures shouldn't be anything new for mortgage brokerages. Kiker said most big companies are already sophisticated about safeguarding consumer-identifying information.

"The key is knowing if your document-retaining policies do address the FACTA rule and are being followed," Kiker said. "My experience is most big companies have good policies with regard to paper records, but often don't have policies for electronic data. The FACTA rule should be a component of every company's paper and electronic disposal policies."
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Simple home remodeling tricks

Molding provides simple options
By: Paul Bianchina: Inman News
If spring is the time for you to be thinking about selling your home, or even if you just think it's in need of a few simple new touches, you might be looking around for some inexpensive fix-up ideas.

One quick and easy approach is to remodel with moldings.

There are dozens upon dozens of stock molding patterns on the market, in a variety of paint-and stain-grade materials to match any décor and any budget. Use them alone, or combine two or more of them to give you a virtually endless selection. Here are a few ideas:

Doors
You can do a lot to dress up plain doors, including cabinet doors, with the application of some moldings. For full-size doors, you can utilize larger moldings such as casings and base, while narrower-profile moldings such as screen bead, half-round, and scribe-moldings are more suited for smaller doors such as cabinets.

Begin by laying the door flat on a table or a pair of sawhorses. Experiment with different designs by simply laying the moldings on the door in a variety of patterns until you find the right look, then measure the layout and sketch it on a piece of paper to make it easier to duplicate on other doors.

Measure the layout carefully on the door, and mark the locations using a straightedge and sharp pencil. Take your time - this is finish carpentry, and getting things crooked or unequally spaced will really show up. Cut the moldings as necessary using a power miter saw equipped with a fine-tooth molding blade, then attach them using wood glue and fine brads.

Walls
Almost any plain wall can benefit from a simple chair rail. This can be any type of trim material, from solid 1-by-4 stock to intricately carved chair rail moldings. The molding is placed horizontally on the wall, typically about 36 inches from the floor. Attach the molding to the wall using finish nails driven into the studs. Chair rails can be painted the same color as the walls, or painted or stained a contrasting color for greater definition - experiment with a few pieces of scrap before doing the entire room. Also, you'll find it much easier to lay all the moldings out on sawhorses and pre-paint or stain them before installation.

Another wall trick is to use moldings assembled into squares and placed at regular intervals along the wall, creating a paneled look. One method is to use 1-by-4 stock vertically every three to four feet, to a height of 36 inches off the floor. A horizontal 1-by-4, similar to the chair rail idea, runs across the tops of the vertical members, creating a regular series of square recesses. Smaller moldings can be used inside the larger squares to enhance the paneled look.

Here again, you'll want to experiment with a few different materials and layouts before deciding on exactly what you want to do. After deciding on the pattern, layout the design one the wall very carefully, adjusting the size of the squares as necessary to achieve a regular pattern of spacing - you don't want to end up with one square at the end of the wall that's larger or smaller than all the rest!

Ceilings
Ceilings are an often overlooked area where a few molding tricks can make a dramatic difference. For example, you can install a decorative molding such as a base or chair rail around the perimeter of the room, attached flat against the ceiling and spaced about four to six inches in from the walls. Paint or stain the moldings to either match or contrast with the ceiling, and you'll really dress up an otherwise bland area.

Finding the materials
Every lumber yard and home center carries a selection of standard molding patterns, usually in stain-grade materials such as oak and clear fir, and paint-grades materials of finger-jointed hemlock and medium-density fiberboard (MDF). Most yards have either a sample board or a chart that shows all of the different patterns and sizes available - even if they don't stock it, they can order it for you.

When you find something you like, just buy one or two pieces to experiment with. You may even find a couple of short ends or broken pieces that you can buy at a discounted price.

Remodeling and repair questions? E-mail Paul at paul2887@direcway.com.
Copyright 2005 Inman News
Distributed by Inman News
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Paying Off Mortgage May Not Be Best Move

Homeowners with extra cash should think twice before repaying their mortgages early. If they eliminate their loan, they can't take advantage of tax-deductible interest, which typically surpasses the standard deduction. They also will lose the equity benefits associated with rising property prices. However, other investments are more liquid than real estate, enabling them to cash in quickly when they need money.
Consumers must compare their mortgage returns, which are equivalent to the interest rate, with other investments in order to determine the course that best fits their needs. Many homeowners who repay their mortgages use the freed-up cash to purchase other properties, but experts urge them to proceed with caution. Higher interest rates and a slowdown in price appreciation may indicate an unfavorable climate for real estate investments. For those nearing retirement and the end of their mortgage terms, however, as well as those whose investments of choice are bank CDs and low-yielding bonds, repaying a mortgage ahead of time may be a viable option.
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The Weekend Guide! April 21-24, 2005

The Weekend Guide for April 21-24,2005.
Full Article:
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Homeownership Tax Credit Bill Introduced

The NATIONAL ASSOCIATION OF REALTORS® praised U.S. Sens. Rick Santorum (R-Penn.), John Kerry (D-Mass.), and four other senators of both parties for introducing in the U.S. Senate this week the Community Development Homeownership Tax Credit Act (S. 859), which can help as many as 50,000 families a year achieve the American dream of homeownership. Companion legislation known as the Renewing the Dream Tax Credit Act (H.R. 1549) was introduced in the U.S. House of Representatives last week by U.S. Reps. Tom Reynolds (R-N.Y.) and Ben Cardin (D-Md.). Modeled after the Low-Income Housing Tax Credit, the latest legislation is expected to generate nearly $2 billion in private investment annually for the construction and/or rehabilitation of approximately 50,000 homes for sale to lower-income families. The credit also is expected to produce 122,000 construction and related jobs, $4 billion in wages, and $2 billion in federal, state, and local tax revenue. The program would provide investors with a tax credit of up to 50 percent of the cost of developing each home. The bill is similar to legislation that was introduced in both the House and Senate last session and gained the support of a bipartisan majority of Congress. The homeownership tax credit also enjoys the strong support of President Bush. NAR is part of a coalition of more than 40 housing and community organizations that back the measure. “The homeownership tax credit will help thousands of families a year purchase a home by bridging the gap between the development cost and the price at which these homes can be sold in many lower-income communities,” says NAR President Al Mansell, CEO of Coldwell Banker Residential Brokerage in Salt Lake City. “As REALTORS®, we’re committed to helping every family achieve the American dream of homeownership," Mansell says. "We look forward to working with Congress and the administration to enact homeownership tax credit legislation this year.”
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Older Homes Have More Wiring Worries

Homes that are more than two decades old could have electrical problems, leading to power failures, fires, or electrical shocks. Worn wiring, overused extension cords, and inadequate circuits are the most common problems, according to the Copper Development Association.

However, there are several other defects that could be uncovered by licensed electricians. Wiring that is too small for electricity to flow freely, for example, can get too hot and start fires. The problem is exacerbated in attic areas, so homeowners would be wise to ensure that wiring in that space is large in diameter.

Owners of homes with aluminum wires, which are more brittle and corrosive than copper wires, can either completely rewire the residence or, as a much more affordable alternative, attach copper wire near outlets and switches.

Additionally, they should make sure fuses are of the appropriate rating and consider installing ground fault circuit interrupters (GFCI) and arc fault circuit interrupters (AFCI). GFCIs minimize the risk of electric shock in kitchens, bathrooms, and other moist spaces; while AFCIs safeguard against fires caused by arcs in worn cords.
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Spice up your home with a few paint tricks

Whether it's sponging or ragging, new techniques give a fresh look
By: Paul Bianchina: Inman News
You've seen them do it on shows like "Trading Spaces" and "Extreme Makeover." You may have even seen it at a friend's house. And now you've decided it's time to move away from those plain white walls and try something different. With some basic tools, a couple of cans of paint, and a little experimental spirit, you can dress up one wall or your entire house with some simple special painting effects.

The materials listed here should all be available at home centers, paint stores and larger department stores. With any of these techniques, you might want to practice in a closet or on a large sheet of cardboard or plywood first, to get a feel for the process and to see if you're happy with the color and texture. Also, your hands will be getting up close and personal with the paint, so a couple of pairs of disposable gloves are also a worthwhile investment.

Sponging

Sponging is probably one of the most popular and most enjoyable of the special effects painting techniques. To get started, you need two or more colors of paint, a paint tray, a natural sea sponge and some paper towels or old newspapers.

To begin, paint the wall with the base color. This will actually not be the predominate color when you're done, but rather more of an accent color that shows through gaps in the sponged-on color. Let this coat dry before proceeding.

Next, dip your sponge in water and ring it out so that it's just damp, which helps keep the sponge from picking up too much paint. Dip the sponge into the second paint color, blot it slightly against the paper towel to remove excess paint, and then gently press the sponge against the wall. Keep your touch light to create a subtle pattern of paint, as opposed to pressing hard or with too much paint on the sponge, with blurs the pattern too much.

Don't overdo it by trying to cover too much of the base coat at once. Instead, try and achieve a light pattern of paint texture that has a look you like. Do the entire wall, and then if you feel that too much of the base coat is still visible, you can go back over it a second time. Allow this second color to dry completely before going back over it with a third color if desired. If the sponge will not reach into the corners, use a small paint brush to dab paint into these areas in a pattern that matches the sponge.

Ragging

Ragging is similar to sponging in technique, but the finished look is different, with a slightly heavier look that resembles some types of fabric. Once again, begin by applying a base coat color to the wall and allowing it to dry completely. You'll want to use a clean, absorbent, lint-free rag or towel that has some nap to it, like a washcloth. The type of cloth you use and how you hold it will determine the finished texture effects.

Dip the rag in water, wring it out, then ball the rag up loosely in your hand and gently dip it into the second paint color. Blot off the excess on a paper towel, then touch the rag against the wall. Repeat this, re-gripping the rag as you go, to create different textures. Re-dip the rag in the paint as soon as it begins to lose the pattern you like. Ragging is usually done with only two colors, but you can add a third if you like - just make sure each color is completely dry before moving on to the next one.

Washing

As the name implies, this technique will leave thin wash of top-coat color over the base color, almost at though the wall has aged or been worn from use. Washing is best done with just one color over the base coat.

Paint on the base color and allow it to dry. Using the same type of rag or towel used for ragging, dip the rag in water and wring it out, then dip it into the paint. You can actually allow the rag to pick up a little more paint with this technique, but you do want to be sure that you do not have an excess amount on your gloves that could smear onto the wall.

Use the rag to apply the top color coat to the wall by actually wiping on the paint with a swirling motion - almost like you're washing the wall with soap and water - rather than dabbing it on as was done with the earlier techniques. Continue "washing" the wall with paint until the rag begins to dry and starts taking some of the paint back off. When you have removed a sufficient amount of paint to achieve the look you want, re-dip the rag in paint and move on to another section of the wall. The important thing here is to try and achieve some level of consistency with the finished look, rather than leaving large areas with a lot of paint on them and other areas with much less.

Remodeling and repair questions? E-mail Paul at paul2887@direcway.com.

Copyright 2005 Inman News

Distributed by Inman News

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Overnight real estate rates slide

30-year fixed rate at 5.34%; 10-year Treasury up at 4.3%
Long-term mortgage interest rates were lower on Thursday, and the benchmark 10-year Treasury bond yield jumped to 4.3 percent.
The 30-year fixed-rate average dipped to 5.34 percent, and the 15-year fixed-rate edged down to 4.95 percent. The 1-year adjustable was down at 3.71 percent.
The 30-year Treasury bond yield climbed to 4.64 percent.
Rates are current as of 7:15 p.m. Eastern Standard Time.
Mortgage rate figures are according to Bankrate.com, which publishes nightly averages based on its survey of 4,000 banks in 50 states. Points on these mortgages range from zero to 3.5.
In other economic news, the Dow Jones Industrial Average gained 206.24 points, or 2.06 percent, finishing at 10,218.6. The Nasdaq rose 48.65 points, or 2.54 percent, closing at 1,962.41.
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California: Agency Boosts Ceiling for Financing

The ever-soaring cost of residential housing in California has forced the state's affordable housing agency to make yet another round of increases to the maximum price of homes it will finance for first-time buyers. Over the last year, the California Housing Finance Agency has boosted the price ceiling an average of more than 20 percent for homes eligible for below-market interest rate loans and other assistance programs. The latest upward revision leaves Southern California with some of the most dramatic increases over the last 12 months. Qualified buyers now can purchase a home up to $582,000, a 31 percent spike, in Ventura County; $453,000, or 28 percent more, in Riverside County; and $559,000, or 22 percent more, in Los Angeles County. Increases totaling 11 percent established maximum prices of $643,000 in San Francisco, $588,000 in San Diego County, and $453,000 in Sacramento County. Theresa Parker, the agency’s executive director, says the new price limits, which are raised periodically during the year, are the highest possible allowed by federal guidelines. “It’s very exciting to be able to increase these sales limits and provide more opportunities for first-time buyers in our state,” Parker says. “Owning a home is the dream of many Californians, and these revised limits add strength to CalHFA’s programs and will help bring that dream closer for many families."
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Disappointing economy pushes real estate rates lower

30-year fixed drops to 5.8% in Freddie Mac survey
Mortgage rates fell for the third consecutive week as fears of an economic slowdown increased, according to surveys conducted by Freddie Mac and Bankrate.

In Freddie Mac's survey, the 30-year fixed-rate mortgage averaged 5.8 percent for the week ended today, down from last week when it averaged 5.91 percent. The average for the 15-year fixed-rate mortgage this week is 5.36 percent, down from last week when it averaged 5.46 percent. Points on both the 30- and 15-year averaged 0.5.

The five-year, Treasury-indexed, hybrid adjustable-rate mortgage averaged 5.22 percent this week, with an average 0.6 points, down from 5.31 last week. The one-year Treasury-indexed adjustable-rate mortgage averaged 4.26 percent this week, with an average 0.6 point, down from last week when it averaged 4.3 percent.

Interest rates in general have been oscillating with every piece of economic news released lately, said Frank Nothaft, vice president and chief economist. The market is switching its focus between the strength of the economy and the fear of inflation. Thus, although mortgage rates have dropped the last two weeks, that doesn’t necessarily indicate a trend.

That said, April’s mortgage rates are currently lower than those of the previous month. And lower mortgage rates will undoubtedly have a positive influence on housing activity.

In Bankrate.com's weekly survey, mortgage rates fell to the lowest point in two months, and have now dropped four weeks in a row. The average 30-year fixed-rate mortgage dropped from 5.95 percent to 5.86 percent, Bank rate.com reported. The 30-year fixed-rate mortgages in this week's survey had an average of 0.3 discount and origination points.

The 15-year fixed-rate mortgage, popular for refinancing, declined by an even larger margin, falling from 5.55 percent to 5.42 percent. Meanwhile, the average rate for the jumbo 30-year fixed-rate mortgage retreated from 6.13 percent to 6.03 percent. Adjustable-rate mortgages dropped also, with the average 5/1 adjustable-rate mortgage falling from 5.41 percent to 5.31 percent, while the one-year ARM retreated from 4.69 percent to 4.61 percent.

Disappointing economic data spurred another decline in mortgage rates, according to Bankrate.com. Lackluster retail sales and a nearly 18 percent drop in housing starts fueled fears of a broader economic slowdown. Investors responded by moving cash into long-term government and mortgage-backed bonds, pushing yields lower. Mortgage rates are closely related to yields on long-term bonds, which fluctuate with changing outlooks for inflation and the economy.

The following is a sampling of Bankrate's average 30-year-mortgage interest rates this week in some U.S. metropolitan areas.

New York: 5.88 percent with 0.15 point
Los Angeles: 5.88 percent with 0.43 point
Chicago: 5.92 percent with 0.03 point
San Francisco: 5.89 percent with 0.24 point
Philadelphia: 5.84 percent with 0.22 point
Detroit: 5.82 percent with 0.25 point
Boston: 5.94 percent with 0.1 point
Houston: 5.81 percent with 0.6 point
Dallas: 5.87 percent with 0.43 point
Washington, D.C.: 5.76 percent with 0.59 point
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No easy way to avoid tax on profitable vacation-home sale

Principal-residence restrictions get in the way
By: Robert J. Bruss: Inman News
DEAR BOB: After about 14 years of very enjoyable vacation-home ownership, my wife and I have concluded it is time to sell. Market values have greatly appreciated in the vicinity. We can earn at least a $300,000 net profit if we sell now. Realty agents are constantly hounding us to sell. But we only paid about $46,000 so we will have a tremendous tax to pay. Because this is not our principal residence, nor do we rent it to tenants when we aren't using it, how can we avoid tax when we sell? – Wayne T.

DEAR WAYNE: There are several possibilities. One is for you and your wife to move into the vacation home full-time as your principal residence for at least 24 of the 60 months before its sale. Then you can qualify for up to $500,000 principal-residence-sale tax-free profits.

If that doesn't interest you, another alternative is to rent your vacation home before its sale, perhaps on a lease with option to purchase. Then you can sell your rental property and qualify for an Internal Revenue Code 1031 tax-deferred exchange for another qualifying rental property of equal or greater cost and equity.

That's it. If you don't like either of those alternatives, you'll just have to resign yourselves to paying the current 15 percent federal capital gains tax rate, plus any applicable state tax where your vacation home is located. For full details, please consult your tax adviser.

$500,000 PRINCIPAL-RESIDENCE-SALE TAX BREAK CAN BE USED AGAIN

DEAR BOB: We plan to sell our home and use the $500,000 tax exemption that you often discuss. When we purchase our next home, can we take that exemption again after five years? – Leslie R.

DEAR LESLIE: Yes. But you don't have to wait five years to use the Internal Revenue Code 121 principal residence sale tax exemption again.
This wonderful tax break can be used over and over again without limit. However, it cannot be used more frequently than every 24 months.

After you buy your next home, if you have owned and occupied it at least 24 months before its sale, you can use your principal residence sale exemption again to shelter up to $250,000 (up to $500,000 for a qualified married couple filing a joint tax return) tax-free profits. For full details, please consult your tax adviser.

CARRY OVER UNDEDUCTED "SUSPENDED" REALTY TAX LOSS

DEAR BOB: On my recently filed 2004 income tax returns, I had about $34,000 tax loss from my rental property. But the tax law allows me to only deduct up to $25,000 of that loss against my ordinary taxable income from my job. Do I lose the undeducted $9,000 of my tax loss? – Martha W.

DEAR MARTHA: No. You have a "suspended" tax loss. That means your excess $9,000 tax loss from your rental property, probably due to the wonderful non-cash tax deduction for depreciation wear, tear, and obsolescence, must be saved for use in future tax years.

Keep careful track of your suspended, unused tax losses from your rental property. You can deduct such suspended losses in future tax years. Or, as happened to me when I sold some of my rental properties, I used my suspended tax losses to avoid tax on my capital gains. For full details, please consult your tax adviser.

The new Robert Bruss special report "How to Get Started Investing to Earn Big Real Estate Profits" is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at http://www.bobbruss.com/. Questions for this column are welcome at either address.

For more information on Bob Bruss publications, visit his Real Estate Center.
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Savvy real estate buyers crowd path to tax-free profits

Using home-sale exemption to its full potential
By Robert J. Bruss: Inman News
Internal Revenue Code 121, the principal-residence-sale tax exemption, can be used over and over again, without limit, but not more frequently than once every 24 months. Some savvy home buyers have even created a tax-free business by buying a fixer-upper house, living in it at least 24 months, meanwhile renovating it to increase its market value.

If you do this over and over, you will soon become known as a tax-free "serial home seller!" A single person can qualify for up to $250,000 tax-free profits, but a married couple (or two qualified, unmarried co-owner residents) can qualify for up to $500,000 tax-exempt profits every 24 months. The big drawback, however, is living in the home while it is being renovated!

TESTS FOR DETERMINING YOUR PRINCIPAL RESIDENCE. Your IRC 121 primary or principal residence (the IRS calls it your "main home") is not always clear-cut, especially if you own two (or more) homes where you divided your occupancy time.

IRS regulations say your principal residence is "the property that the taxpayer uses a majority of the time during the year will ordinarily be considered the taxpayer's principal residence." Short absences, such as for a vacation, count as occupancy time, such as spending two months in Europe. But a one-year absence from your home won't count as occupancy time (unless you meet the medical care exception explained earlier).

The latest IRS regulations also say: "In addition to the taxpayer's use of the property, relevant facts in determining a taxpayer's principal residence include, but are not limited to the: (1) taxpayer's place of employment; (2) principal place of abode of the taxpayer's family members; (3) address listed on the taxpayer's federal and state income tax returns and driver's license, automobile registration, and voter registration card; (4) location of the taxpayer's banks; and (5) location of religious organizations and recreational clubs with which the taxpayer is affiliated."

A major drawback of these IRS regulations is they might indicate a taxpayer's principal residence is at one home, but the taxpayer spends the majority of time at the other home.

EXAMPLE: Suppose a retired couple spends seven months of each year in their Minnesota condo and five months at their Florida home. The Minnesota home looks like their principal residence based on the majority of time test. However, if the couple files their income tax returns from Florida (which has no state income tax), vote in Florida, have a Florida homestead exemption, have their auto and driver's licenses in Florida, and have their bank accounts with a Florida bank, now it looks like the Florida residence is their principal residence. Based on the minimum 24-month occupancy test within the last five years before sale, either home meets that test.

PRINCIPAL RESIDENCE SALE EXEMPTION CAN INCLUDE PROFIT FROM THE SALE OF AN ADJOINING VACANT LOT. If you separately sell a vacant lot next to your principal residence, and if you sell it within two years before or after selling your principal residence, the lot sale capital gain can be included with the home-sale tax exemption. Of course, if you sell the lot to the buyer of your principal residence, the lot sale profit also clearly qualifies for the exemption.

However, this lot sale exemption only includes a "reasonable amount" of land adjoining your primary residence. This tax exemption cannot be used, for example, to make a tax-free farm sale just because the farm adjoins your home. Only the market value of the residence plus a reasonable amount of adjoining land can qualify.

NO ALLOCATION OF BASIS IS REQUIRED FOR HOME BUSINESS USE UNLESS THAT BUSINESS OPERATES FROM A SEPARATE BUILDING. If you operate a home business from your residence, when selling that property it used to be necessary to, in essence, make two sales – one of your principal residence and the other of your "business area." Fortunately, that is no longer necessary.

Tax advisers used to even suggest that you not claim any home business tax deductions for at least two years before selling your home – again, that is no longer necessary unless your home business is operated from a separate building on your residence property. Then an allocation to the value of the business building is required.

However, home sellers who claimed depreciation deductions for the business area of their residence after May 6, 1997, (the effective date of IRC 121) will have that depreciation "recaptured" (that means taxed!) upon home sale at a special 25 percent federal depreciation recapture tax rate. Home business depreciation deducted before that date is not recaptured and is taxed as long-term capital gain, subject to the $250,000 or $500,000 exemption.

IF YOU OWNED AND/OR OCCUPIED YOUR PRINCIPAL RESIDENCE LESS THAN 24 MONTHS WITHIN THE FIVE YEARS BEFORE ITS SALE, YOU MAY BE ENTITLED TO A PARTIAL $250,000 OR $500,000 EXEMPTION. Internal Revenue Code 121 pas passed by Congress in 1997 included three provisions for partial use of the $250,000/$500,000 exemptions: (1) change of employment location qualifying for the moving expense deduction, (2) health reasons, and (3) unforeseen circumstances. Those first two exceptions didn't cause much confusion. But the third exception, even after clarifying the new IRS regulations, still causes confusion. Let's take a look at each exception:

Change of employment location. If the home seller qualifies for the moving expense tax deduction, then that seller can also qualify for a partial IRC 121 exemption if the principal residence was owned and/or occupied less than the required 24 months during the five years before the home sale. Briefly, the moving expense deduction requires the taxpayer's new work location to be at least 50 miles further from the old principal residence than was the old work site.

EXAMPLE: Suppose your old principal residence was four miles from your old job location. You then changed job locations (whether with the same employer, a new employer, or you became self-employed doesn't matter). To qualify for the residential moving cost tax deduction, you new job location must be at least 50 miles further from your old home than was your old job site. In this example, that means your new work location would have to be at least 54 miles (4 + 50) to qualify. If you meet this test, you then also can claim the partial home-sale tax exemption.


The moving cost tax deduction also has work time tests, such as remaining employed at least 39 weeks during the year after the move in the vicinity of the new job location. For self-employed individuals, the minimum qualifying work time test is 78 weeks during the 104 weeks after the job location change. Either spouse can qualify, but "tacking" work time of one spouse unto another spouse's work time is not allowed.

Health reasons. Just because you think you will feel better living in Arizona rather than Alaska is not a sufficient health reason for selling your Alaska home and claiming a partial IRC 121 tax exemption! Qualified health reasons must usually be based on a physician's recommendation to the homeowner or a family member.

Health purposes can include (1) to obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury of a qualified individual, and (2) need to move to care for a family member. But a home sale that is merely beneficial to the general health or well being of the individual does not qualify for the partial exemption.

Unforeseen circumstances. IRS regulations now include several "safe harbor" principal residence sale reasons, which the IRS will not challenge. The first five reasons must involve the taxpayer, spouse, co-owner, or member of the taxpayer's household. In addition, the IRS Commissioner has authority to approve a partial exemption for other unforeseen circumstances. The "safe harbor" unforeseen circumstances are:

(1) Death in the immediate family; (2) divorce or legal separation; (3) becoming eligible for unemployment compensation; (4) change in employment leaving the taxpayer unable to pay the mortgage or reasonable basic living expenses; (5) multiple births resulting from the same pregnancy; (6) damage to the residence from a natural or man-made disaster, or an act of war or terrorism; and (7) condemnation, seizure or other involuntary conversion of the property.

If you qualify, calculate the partial IRC 121 $250,000 or $500,000 percentage exemption based on your number of months of occupancy. If you qualify for a partial exemption, as explained above, it's easy to calculate your percentage exemption. The denominator of the fraction will always be 24 (months). The numerator will be the number of months you occupied your principal residence before moving out for one of the above reasons.

EXAMPLE: Suppose you owned and lived in your principal residence for 16 months before receiving a job location transfer notice from your employer, which qualifies for the moving-expense tax deduction. Your fraction will be 16/24 or two-thirds, which is 66.7 percent of the $250,000 or $500,000 exemption for which you are otherwise qualified. In this example, you therefore can claim up to $166,750 or $333,500 tax-free, home-sale profit, depending on whether you are single or married, meeting the partial-occupancy time test.
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