Bounced check raises red flag

Robert J. Bruss
Inman News

DEAR BOB: I had a contract to sell my home. I gave the buyer seven days to bring me an acceptable mortgage letter from a bank, but he presented a letter from a mortgage broker indicating final approval of his loan was subject to “underwriting.” His bank returned his $1,000 deposit check for insufficient funds. Can I legally terminate his contract? –Jorge S.

DEAR JORGE: From your description, it sounds like your buyer is in breach of the sales contract. That letter from a mortgage broker indicating his mortgage approval is subject to “underwriting” is worthless.

Purchase Bob Bruss reports online.

Today’s smart home buyers get pre-approved in writing by an actual lender before shopping for a home. If your buyer had done that, and shown you the lender’s approval letter or certificate, you could feel confident he will obtain a mortgage.

Although mortgage brokers can obtain such pre-approvals for their borrowers, because they are not the actual lenders, mortgage brokers can only issue pre-qualification letters, which are non-binding on actual lenders.

Especially because your buyer’s $1,000 deposit check bounced, if I were in your shoes, I would feel confident canceling that sale for breach of contract. For full details, please consult a local real estate attorney.

ANOTHER DISADVANTAGE OF GIFTING A PROPERTY BEFORE DEATH

DEAR BOB: In a recent article, you answered a widow’s question about gifting her property to her daughter and son-in-law. But one tax consequence you failed to mention, which snares many people, is the fact that by gifting real estate before death to a child, the child loses the opportunity to receive a stepped-up basis to market value upon the donor’s death –Tim F.

DEAR TIM: Shame on me. How could I have forgotten that major benefit of inheriting real estate instead of receiving it as a gift before death?

A big disadvantage of a property gift is the donee takes over the donor’s adjusted cost basis. In the situation you describe, the mother presumably had a very low cost basis if she owned the property for many years. The gift donee takes over that low basis.

However, when real estate or other assets are inherited, the heir receives title by inheritance with a new stepped-up basis of market value on the date of the decedent’s death. For more details, please consult your tax adviser.

MUST HOMEOWNER FORM A CORPORATION TO RENT A HOUSE?

DEAR BOB: Do I need to form a corporation to rent my single-family house as an investment property? My son says “yes.” –Christina K.

DEAR CHRISTINA: I’m sure your son is a fine young man, but he is mistaken on this issue. Landlords do not need to form a corporation before they can rent their property to tenants.

Millions of property owners rent real estate to which they hold title in their own names without forming a corporation. Perhaps your son was thinking that forming a corporation to hold title to the rental house would limit your liability.

But forming a corporation is not necessary. Nor is it a good idea, especially because holding title in a corporate name forfeits your rental property income tax benefits.

However, before renting that house to tenants, please consult your insurance agent to be certain you have adequate liability insurance. You need a rental property owner’s insurance policy, not a homeowner’s insurance policy. With adequate liability insurance, you can rest easy and forget about all the drawbacks of owning corporate real estate. For more details, please consult a local real estate or tax attorney.

The new Robert Bruss special report, “How to Sell Your House or Condo for Top Dollar With or Without a Real Estate Agent,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet delivery at 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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Copyright 2006 Inman News