The Ticking Tax Bomb That Might Be Coming For You

by Diane Kennedy

There is a ticking tax bomb that will hit 16 million Americans this year. The problem with this tax is that typical tax planning doesn't work. It has its own rules.

This sneaky tax is called Alternative Minimum Tax (AMT). The problem is that it's a complicated tax to calculate and even harder to try to explain, so most tax advisors aren't talking about it. But, here's a statistic that everyone should be talking about: This year over 16 million taxpayers will be subject to it. And, in just a few more years, 30 million taxpayers will be, unless Congress does something to combat it.

The tax is calculated based on an "alternative" calculation of your income. A lot of the deductions that you're used to taking on your tax return, aren't allowed when you're subject to AMT.

You might be subject to AMT if:

• You have income over $50,000 per year.
• You have a lot of depreciation deduction on your return.
• You have a lot of capital gains in relationship to regular income.
• You are a real estate professional.

What exactly is AMT? There are two main differences between regular income tax and AMT.

First, the way the income is calculated is different. Deductions that are allowed against regular income might not be allowed against income when AMT is used. Some examples of the disallowed deductions are:

• Accelerated depreciation
• Home equity interest
• Medical expenses
• Property tax
• State income tax

Secondly, there is a flat rate of 26 percent or 28 percent applied to the AMT calculated income. Forget the special benefits of long-term capital gains (which is generally taxed at a maximum of 15 percent instead of the 35 percent highest rate) that come under regular income tax. You lose the special rate for long-term capital gains.

There is one more issue that is especially applicable to real estate agents. As a full-time real estate professional, you get special privileges when it comes to paper losses that you're able to generate from your real estate. Normally, you are limited to $25,000 of those losses against your income if you make less than $100,000. And, if you make over $150,000 per year, you can't take any of those losses.

One of the huge benefits of owning real estate investment property is the paper loss you can legitimately generate as you can continue to put money in your pocket from the investments. In other words, you've got cash flow and yet still have a legal tax loss. Stay tuned to this column for more information on how that is possible or visit my website at taxloopholes.com for free tax strategies you can use right now.

The tax breaks are there for real estate investors, but are limited as your income goes higher. But, that's where being a real estate professional comes into play. As a real estate agent, you qualify as a real estate professional in the IRS's eyes and that means you can take an unlimited amount of loss against your income, no matter how much the income is.

It's a great loophole. But, it doesn't work for alternative minimum tax. In other words, if you're counting on real estate losses to offset your real estate commissions when it comes to tax time, you might just be out of luck if you're subject to AMT.

Here are three things that you should do if you're concerned about AMT. (And, in my opinion, everyone should be concerned about AMT. It won't be long before most taxpayers will be having a real issue with it — if not this year, soon, the ticking tax bomb is going to explode.)

• First, determine if you're going to be subject to AMT this year. Contact your tax professional and ask them to prepare an AMT worksheet to look at whether AMT is likely to be an issue for you this year.
• Second, every single time someone explains a tax strategy or tells you can get a tax deduction for an expense, ask, "How does this affect AMT?" That may be the single most important question you ask in 2006.
• Third, plan your income, deductions and capital gains if AMT is an issue this year. Keep up to date on AMT tax planning techniques and make sure your advisor is doing the same.

We all hope that Congress addresses the mounting problem of AMT, but until they do, it's up to us to proactive plan against this sneaky little tax.

7-Ways to Make Money On Investment Properties

by M. Anthony Carr

The market has cooled in various cities across the country and fair weather investors are starting to worry about how they'll be able to make money now that their houses aren't escalating at astronomical rates.

I just have to say to these folks — breathe. If all you want to do in real estate is make money on the basis of appreciation (asset growth), then you need a primer on how to make really good money in real estate.

The authors of Investing In Real Estate, Andrew McLean and Gary Eldred (2006, John Wiley & Sons Inc.), have provided that primer, listing eight ways to grow your wealth in investment real estate.

The key to building true wealth in real estate is through buying and holding. A good tenant can create wealth for you by paying for the mortgage, insurance, taxes and monthly fees through their rental payment to you. In addition, consider this: you have just taken over an asset leveraged by a fraction of the value. In other words, let's say you purchased a condo at $150,000 for $15,000 down payment. If it grows at 5 percent per year ($7,500 first year, etc.) you're making more than 50 percent on your money that you actually invested — can't get that kind of power behind mutual funds.

Real estate investing allows investors several ways to make and/or save money that other investment tools will never allow or have the ability to provide. As Mr. McLean and Mr. Eldred point out, no one can predict short-term price increases — but that's why the savvy investor doesn't look to just appreciation to make money. Here's how you can build wealth through your real estate investing:

1. Positive cash flow. This is simply what it sounds like — the rent covers the mortgage, taxes, insurance, fees, etc., and once all that's paid, you have money left over at the end of the month. A wise investor will also have enough money in reserves to cover all these expenses for a few months in case the property goes vacant.
2. Equity growth via amortization. As the mortgage shrinks from the mortgage payments, your equity grows (and so does your net worth). This is one of the most powerful means of wealth growth — using OPM (other people's money) to build your net worth. The tenant is providing the investor with hundreds or thousands of dollars per month to pay off debt, which turns into equity for the landlord.
3. Capital improvement. This is the fixer-upper that most people think about when investing in real estate. Purchase a property for $50,000, put in another $25,000, and voila, the house is now worth $125,000 ($50,000 more than the initial investment).
4. Wholesale purchases. The most effective way to build net worth and equity is to buy a house for a bargain price. These properties would be the pre-foreclosure, foreclosure, tax sales, etc., where the investor buys the property well below market price. In essence, you make your money when you buy the house at such a low rate.
5. Lowering tax bills. One of the greatest benefits about real estate investing is all the tax breaks allowed for these type investments. Uncle Sam allows many tax deductions, tax credits and other government-sponsored programs connected with real estate investing that cut the investor's tax bill, thus, increasing the bottom line and equity growth.
6. Smart asset management. Many novice or ignorant real estate investors lose money simply by not managing the asset wisely. For instance, painting properties before the wood is actually peeking through will keep the asset in good shape, seal the wood, and protect it from more expensive damage. Managing the asset is just as important as buying smart and cash flow. The real estate investment is a commodity, not a money machine, and must be managed and protected to maintain future wealth growing potential.
7. Asset value growth. As your property increases in value, so does your wealth. This is the old fashioned principle of buy and wait. Buy at today's prices and with time, your asset will grow in value because of local appreciation. In addition, your equity will grow along with the amortization principle mentioned above.
8. Rent appreciation. As the cost of living increases, so, too, should your rent cash flow. Increasing your rental income per month by 5 percent could result in hundreds of dollars of cash flow per year — year after year.

Modernization of the New Home For the Aging-In-Place Buyer

by Peter Mosca

According to a recent survey of remodelers by the National Association of Home Builders (NAHB), the aging population will significantly influence the remodeling industry over the next five years. However, most older Americans have not prepared their homes for life's inevitable changes.

"With America's 50+ population hitting 100 million by the year 2010, the building industry has developed a strong awareness of the importance of this segment of the market," said Norman Cohen, chairperson of the National Association of Home Builders' 50+ Housing Council. "The baby boomer generation has changed the ways builders do business."

Though the vast majority of older Americans want to "age-in-place," many of these homeowners will require special modifications in order to live safely and independently. "Most who remodel for accessibility only do so after their home becomes too difficult to navigate," said Remodelors Council Chairman Vince Butler, CGR, CAPS, GMB, a remodeler from Clifton (VA). "With a little foresight, homeowners can enjoy an independent lifestyle without undergoing a difficult and unexpected transition."

When evaluating a home, Certified Aging-in-Place Specialists (CAPS) recommend that a newly-built home contain the following:

• A master bedroom and bath on the first floor.
• A low or no-threshold entrance to the home with an overhang.
• Lever-style door handles.
• No change in levels on the main floor.
• Bright lighting in all areas.
• A low-maintenance exterior.
• Non-slip flooring at the main entryway.
• An open floor plan, especially in the kitchen/dining area.
• Handrails at all steps.

"People often believe that aging-in-place modifications make your home look like an institution, but it's the exact opposite," said Butler. "CAPS trained professionals seamlessly implement these changes into the existing look of the house so that most visitors will not even know their ultimate purpose. Plus, it is simply good design."

Technology is also important to boomer home buyers. They want to be online and high-tech, with media-rich capabilities. In many active adult rental communities, "tech centers" are now called business centers, reflecting the extended employment years of today's active adults.

"An influx of builders into the market has pushed active adult developments to step up their amenities as competition is keen for the active adult dollar," said Symposium speaker, Jim Daniel, vice president of sales for Robson Communities' PebbleCreek Resort Community in Buckeye (AZ). "Amenities like golf and tennis used to be enough, but now amenities have to be about technology and learning."

"Homeowners are no longer looking for the traditional retirement communities," added Cohen, a principal at Camelot/Signature Development of Marietta (GA). "They want to live somewhere where they can remain active."

Author and generations expert Neil Howe adds that because boomers, who make up 37 percent of all homeowners, are retiring at such varied ages, they're in no hurry to move. When marketing to boomers, he recommended that builders do away with language about "retirement," and instead stress that their products allow buyers to be engaged and employed. In order to draw these buyers in, he says, builders should stress informality and spontaneity.

"Boomers want to discover communities on their own, rather than buy into a planned development. This trend is resulting in NORCs, or "Naturally Occurring Retirement Communities," said Howe, "where influxes of older residents create unplanned 50+ communities."

"Unlike the generations before them, boomers don't want to "get away from it all," said Howe. "They want to be near cultural and spiritual hubs that keep them connected with community and culture and involved in lifelong learning at local universities."

The CAPS designation is the only national program that trains remodelers how to design and implement aging-in-place modifications.

May Roundup

by Realty Times Staff

Loan rates continued their gradual upward trend as May drew to a close, according to mortgage giant Freddie Mac. The average cost of a long-term, 30-year fixed-rate mortgage ended the month at 6.62 percent. Last year at this time, the rate on long-term loans averaged 5.65 percent, almost a full percentage point less. The 30-year rate hasn't been this high in almost four years, Freddie Mac reported. To be exact, the rate last averaged 6.63 in the week ending June 20, 2002. The cost of intermediate-term money also continued to move higher, but rates on adjustable loans dipped, albeit just a tad. The average rate on a 15-year intermediate-term loan rose to 6.23 percent, up from 5.21 percent a year ago. But five-year Treasury-index "hybrid" ARMs – loans with a fixed-rate for the first five years and an annual adjustment feature thereafter – slipped 2/100ths of a point (two basis points), as did the average for regular one-year adjustables. At the end of the month, the rate on those loans stood at 6.2 percent and 5.6 percent, respectively. "Currently, mortgage rates are roughly a half a percentage point higher than they were at the start of the year," Frank Nothaft, a Freddie Mac vice president and its chief economist, pointed out. The good news, perhaps, is that in all cases, the amount of points being charged by lenders to make loans is less than one on average. A point is 1 percent of the loan amount. Makeover Obsession It is said that change is often good. But if the results on a nationwide survey of 750 adult male and female home owners is any indication, we may be obsessed with it, perhaps to the point of neglecting ourselves. How else to explain that when asked to choose between a $10,000 home makeover and a personal makeover, a staggering 75 percent picked the house? Our addiction to our homes was found by a national pollster working on behalf of Minwax. Surveyors also found that almost half would do the work themselves, so maybe there's also a recreational and/or physical aspect to fixing up our manses. Or, when you consider that nearly nine out of ten responsdents said they worked together with their spouses on a previous project, maybe it's a form of slow, excruciating suicide. Or just a form of torture. Just kidding on that last part. Truth be told, most husband-and-wife teams seemed to work together fairly well, at least according to the survey. One out of four of those claimed they made a great team and almost that many said the work went "surprisingly." Nearly 15 percent said "it wasn't perfect but I wouldn't switch," partners that is. But a previous do-it-together do-it-yourself project was not a bed of roses for the 6 percent who said "they fought like cats and dogs." And smart 13 percent said, "next time I'll do it myself." Not One But Two Maybe it does take two to tango. An unexpectedly high number of vacation-home owners, 21 percent, own two or more vacation homes, according to the latest study from the National Association of Realtors. Nearly a third of those who own vacation properties also report they hold title to two or more investment properties. On the flip side, NAR that more than half of all investment property owners, 53 percent, own two or more investment homes and 12 percent own two or more vacation homes. Overall, the analysis of Census Bureau data shows there are 6.8 million vacation homes in the United States and 37.4 million investment units. That's in addition to the country's 74.6 million owner-occupied units. NAR President Thomas M. Stevens, a Vienna, Va., broker, commented that the fact that so many owners of vacation homes and investment property have more than one is "a bit of a revelation." "We've always known that a certain segment has invested heavily in the rental market, and some people earn their living simply by holding and managing investment property," Stevens said. "What we see now is a crossover between largely vacation or investment-home owners, with people recognizing the value of those investments and pouring more assets into real estate." For what it's worth, the typical vacation-home owner has a property that is 220 miles from his primary residence. Half are located within the same state's as the owner's primary residence. Also, three-fourths were purchased solely for personal use, while18 percent were intended to become a primary residence in retirement. Only 13 percent of vacation owners listed rental income as a reason to buy. And finally, the typical owner spends 39 nights per year at their property, three-quarters of which are not rent out to anyone else. Remodeling: Money in the Bank With so many home owners looking to remodel as a way to increase the value of their homes, the National Association of Home Builders Remodelors' Council offers these tips to get the most bang for your buck:

• Keep Up With the Joneses. When searching for project ideas, look at amenities of other homes in the neighborhood. Building an addition may not be a sound investment if yours is the first on the block, yet it would be very wise to add should all the neighbors have one.
• Kitchens and Bathrooms Count. These rooms are consistently rated the best places to spend your remodeling dollars. But don't neglect the rest of the house. Money spent on a beautiful kitchen is wasted when other rooms have cracked drywall and 1970s shag carpeting. Make sure the entire home is updated to an acceptable level.
• A Topical Solution. One of the cheapest and easiest ways to add value is through a fresh coat of paint, breathing new life into a room for just a little money and some elbow grease.
• Nice, But Not Too Nice. While you may want to have the best house on the block, the return diminishes if your home becomes the most expensive in the neighborhood.
• Square Peg, Round Hole. When renovating or adding on, avoid too much customization of space so potential buyers can envision the home suiting their needs. A well-designed fourth bedroom to you could be an office, workout room or home theater for someone else.

There is no single project that guarantees a 100 percent return on investment. However, careful planning and professional work will ensure your remodeling dollars go farthest. To learn more about home remodeling, visit http://www.nahb.org/remodel.

Practical Things to Remember When Home Shopping

by M. Anthony Carr

Most folks are always looking for the ever-elusive "dream home." Not too long after settling into a new dwelling, many residents begin to pick apart the house they just rented or bought.

Someone who really likes the idea of a laundry chute (great, no more walking the dirty clothes to the laundry room), rethink that idea when they now have to climb up two flights of steps to put away the clothes.

Here are some practical things to think about when you're looking through your pool of homes that you're hoping to buy.

Measure your furniture
I mentioned this recently about a couch that wouldn't fit into my basement once I finished the space. You might say the excitement about the two sleeper sofas dimmed to the degree that I was realizing I couldn't use them the way I had planned. Fortunate for me, I had hired the perfect decorator who pointed me back to the furniture manufacturer who directed me to a couple of fellas that dismantle, move and reassemble furniture. Thus — when shopping for a home, don't forget the measurements of your large furniture: couches, big screen TVs, mattresses, pianos, etc. More than likely, they will convey with the house.

Why is that conveying?
Okay, so it sounds great that the pool table (or 2 sleeper sofas) conveys. Be sure to ask yourself — Why? Why would the owner part with this piece of furniture, extra refrigerator, etc.? Play a quick game of pool, see if the refrigerator really freezes and cools, and why would they let go of these two perfectly good sleepers? Sometimes, it may be they just won't have room in the next house for them or no longer need them. Meanwhile, they may be handing over a white elephant to the next owners.

Sounds great. What if it breaks?
So the hot tub stays? Great. What if it breaks down? Again, is this really a benefit to the house or is it something that has cost the owners hundreds or thousands of dollars a year to maintain? Find out if a large piece of equipment, appliance, etc., has had any repair problems.

What about conveniences?
Sure, the house is located deep into the community on a cul-de-sac, but what does that mean when you need a bag of sugar or flower? Is the shopping just a few minutes down the road or does it mean a 15-minute jaunt down Hwy. 1? If it's a newer development, how long before they will be constructing the business section of the development?

What kind of wiring?
This analysis has become more important as homeowners look more toward broadband, high-speed Internet access for work and pleasure. When walking through an older home, be sure to really understand what all the coaxial connections really attach to: antenna, cable, digital cable, satellite. In addition, if you're accustom to other type connections, such as DSL or Fiber Optics, at least find out if these services are available if the house doesn't have them connected already.

Planes, trains and automobiles
If you're looking for a quiet neighborhood, don't forget to come by and check out the community during rush hour. It may be convenient to the main thoroughfares, but are those roadways so close that you can hear the traffic (or see it) before tuning to Traffic on the Nines? How about the sounds from above? I've talked with many owners who, aware that the community was near the airport, had no idea they would have to straighten up their pictures on the walls after each airplane flew over.

HOA Documents
Don't just thumb through the homeowners association documents. Be sure to really understand your limits under these binding documents. In a community near Washington, D.C., for instance, no residents can park a pickup truck on their property. Imagine the surprise to a new homeowner who just didn't happen to read about that limitation in the docs. When I've bought properties, this is one of the sections of the HOA docs I turn to immediately.

More detail is better than the big picture when it comes to selecting your next property. Research, drive by and really get to know your target property before making a final decision. Happy home shopping.

Cutting Carbons to Reduce Greenhouse Gases

by Al Heavens

Do you get the feeling that the world is getting more serious about alternative energy sources?

The Irish government, for example, embarked on a program a couple of weeks ago to increase the country's dependence on wind and solar to 13.5 percent from 5 percent — even though Ireland's environmentalists don't think 13.5 percent over 10 years is enough.

Brazil has taken the lead among developing and developed countries in using hybrid cars and alternative means of propelling them to reduce its dependence on fossil fuels.

Even I'm seriously considering solar power for my workshop and solar hot water for the house. My home state, New Jersey, provides a 70 percent rebate of the cost of such "clean-energy" projects, and the Energy Act of 2005 will provide a tax credit for some of the rest of the cost.

Not all solar is the same, at least not yet. At the National Hardware Show a couple of weeks ago, I visited a booth in which the manufacturer had on display a growing line of solar powered outdoor lights.

When I suggested that solar lighting tended to be a lot dimmer than conventional outdoor lighting, the booth tour guide agreed, saying that low-voltage electrical systems (those that step down power to 12 volts from 110 volts) reduce power consumption while providing plenty of light for sidewalks and driveways at night.

Yet, solar lighting, too, is improving, with more powerful LEDs and technology — even though they still are considered more decorative than useful, my guide said.

By reducing fossil-fuel consumption, we can reduce the amount of gases being emitted into the atmosphere, especially by power plants and cars. Many scientists have linked these so-called greenhouse gases to global warming — although there is still considerable debate about the issue.

Environmental Defense, a nonprofit organization that believes the threat of global warming is real, has come up with a number of ways the average homeowner can reduce his or her contribution to greenhouse gases.

The group calls it "The Low Carbon Diet," contending, among other things, "that if everyone in Memphis, Tenn., replaced just two regular 60-watt bulbs with compact fluorescents, the savings would power Hartford, Conn., for three weeks."

Those lights do cost more but last 13 times longer than the older models.

You can increase energy efficiency by 30 percent by just plugging up air leaking out of your house. You should increase insulation in attics, ductwork and under flooring on the ground floor if you have an unheated basement.

If your hot water heater is older than five years, wrap it in an insulating jacket, and keep the temperature at 120 degrees. Microwave ovens reduce energy use by two-thirds compared with conventional ones, and crockpots and pressure cookers also are more efficient.

Our ancestors had a better idea of how to use the natural environment to keep houses cooler in the summer and warmer in the winter, since they didn't have air conditioning and cutting wood for the fireplace could become a full-time occupation in frigid weather.

Since we have at least five months to correct landscaping problems, here's what the group recommends.

In temperate climates, don't plant deciduous (leaf-shedding) trees south of the house, since even bare branches can block sun in the winter. Plant shrubs, bushes and vines about a foot from the wall of the house to create a "dead-air" insulating space.

In the desert Southwest (including Southern California), plant shade trees to cool your roof, walls and windows. Shading your air conditioning unit also can increase its efficiency by 10 percent. Keep vegetation away from the house; it can trap heat and make the house feel hotter.

In the northern Plains and Upper Midwest, as well as Northern New England and Alaska, you should plant dense evergreen trees and shrubs north and northwest of your house to protect it from winds. You can combine evergreens with a wall, fence or berm to lift winds over the house.

Don't block the winter sun from south-facing windows. If you get a lot of snowdrifts, plant low shrubs on the side of your house where winds originate. In hot and humid climates, plant deciduous trees on the northeast-to-southeast and northwest-to-southwest sides of the house. Plant low ground cover, including grasses, around your driveway or patio to cool these areas and to prevent glare.

Real Estate Often Calls for Legal Advice

by Lew Sichelman

When asked for what reasons people might consider hiring legal representation, most people's answers involved situations concerning their real estate dealings.

There are many real estate related issues that lead to the need for legal advice, everything from selling and buying to financing the transaction or refinancing a mortgage, from resolving issues with a tenant or perhaps locking horns with a landlord. And according to LegalMatch.com, three of the top reasons are related to real estate.

LegalMatch is a free, on-line matching service that helps anyone with a computer connect with attorneys and access their legal rights. LegalMatch was founded in 1999, and then survived the dot-com melt-down to become one of the top such services in the country. Thousands of people submit legal help requests each month through LegalMatch.

Sited most frequently by LegalMatch users as the time when they "at least consider hiring legal representation" is when they are buying or selling a property. And why not? Real estate deals certainly can be tricky.

Of course, not every sale requires a lawyer. But the more complicated the transaction, the more you might want a qualified attorney to at least look over any paper work that you are required (or asked) to sign. With so many do-it-yourself books on the topic, it's tempting to go it alone. But if something goes haywire, having an attorney in your corner can bring genuine peace of mind to what otherwise could be an anxious, if not costly, moment.

The second most frequent time that people consider hiring an attorney is when they refinance their homes. This one's somewhat surprising. After all, trading in one mortgage for another simply can't be as hair-raising an experience as obtaining that first mortgage, if only because you've done it at least once already. And most people do it the first time without a lawyer in tow.

But when you think about it, mortgages are long-term commitments, just like real estate transactions. So perhaps some people feel more comfortable with someone representing their interests sitting next to them at the closing table. After all, many of the world's most successful people suggest never signing anything unless a lawyer reads it first.

The fifth most frequent time folks consider hiring legal help is when they are involved in a dispute involving real estate. Situations with a landlord, tenant, neighbor, homeowners association or condo board usually involve interpretation of an existing contract, written or oral. And who among us laymen is able to do that?

In case you are wondering, the other reasons people consider asking for legal advice are, in descending order:

Creating or revising a will, estate plan or trust (which also often involves real estate); were given inadequate medical care; were cited for a moving traffic violation; having difficult with creditors, including, perhaps, their mortgage lender; had to deal with administering an estate or an inheritance; difficulty obtaining medical insurance; believed they were a victim of consumer fraud; thinking of filing bankruptcy; having difficulty collecting public benefits; having problems with a public utility, and were involved in a dispute over child custody or support.

Housing Counsel: Mold Was Remediated, Do I Still Disclose?

by Benny L. Kass

Question: We recently learned there was mold in our house. We spent a lot of money correcting it, using a licensed mold remediator. Now, we plan to put the house on the market and our real estate agent is not sure whether we have to disclose this problem. What do you suggest?

Answer: Many states throughout this country — including Maryland, Virginia and the District of Columbia — have laws requiring sellers of residential properties to disclose known conditions within the house.

However, the laws differ widely from state to state. For example, in the District of Columbia, a seller must disclose everything about the property that he knows is — or even may be — defective. In Maryland, on the other hand, sellers can take the position that they will refuse — i.e. disclaim — making any disclosure, and leave the buyer to inspect the house and make up his/how own mind as to the property condition.

It should be noted, however, that the Maryland legislature recently amended the seller disclosure law. Effective last October, even if a seller decides to disclaim disclosure, any latent defects of which the seller has actual knowledge must nevertheless be disclosed.

The law defines "latent" as: a material defect in real property or an improvement to real property that: "(1) a purchaser would not reasonably be expected to ascertain or observe by a careful visual inspection of the real property, and (2) would pose a direct threat to the health or safety of … the purchaser or … an occupant of the real property, including a tenant or invitee of the purchaser."

Thus, before you decide to sell your house, you must obtain the appropriate form for the jurisdiction where your house is located. Ask your real estate broker or attorney for a copy. Some states have decent websites where these forms are also available.

Read the form carefully. If you have questions, do not complete it until you get answers — and make sure those answers are from knowledgeable professionals.

You have completely remediated your house of mold. But were the conditions which caused the mold corrected? It is my understanding that many mold remediators only treat the symptoms, but not the cause. They may not do any of the structural changes which are necessary to insure that no further mold can develop..

Let's pose this question: You fill out the seller disclosure form and state that there is no mold present in the house. However, less than one year after closing, your buyers discover that mold is again growing in your old house. The buyers then learn that you have attempted to remediate the house. I suspect that if the cost to totally cure the problem is high enough, the buyers will consider filing a suit against you for damages and misrepresentation.

The buyers will argue that you merely did a "band-aid" job, in order to sell the house. If the house is located in the state of Maryland, they will also take the position that this was a latent defect, which should have been disclosed under the new law.

You, of course, will claim that your disclosure statement was, in fact, accurate, because at the time of the disclosure, there was no mold.

This is not an easy question to answer. Ultimately, a jury may have to determine who is right.

Clearly, you do not want to subject yourself to prolonged, expensive litigation.

What should you do? I recommend that you disclose on the form that you did have a mold problem, but that it has been remediated. You should also provide potential buyers with pictures before and after the problem has been corrected, and a copy of your contract with the abatement company. Most professional companies will provide you with a report which shows what the problem is, how it is to be corrected, and what has been done to remove the mold. The report will also contain information and statistics on the air samples in your property.

This may, of course, turn off potential prospects. You may have to escrow some money for a period of time or reduce the asking price in order to make a sale. However, in my opinion, this is the safest course to take, especially in this day and age when everyone wants to sue everyone else.

Advice to Investors: Look to Affordable “Linear” Real Estate Markets

by Kenneth R. Harney

A new statistical study on real estate cycles suggests that smart investors in 2006 should consider markets that were bypassed by the housing price boom of 2000-2005, and that have affordable home costs but are experiencing solid employment growth.

The study, conducted by Dr. Christopher Cagan, research and analytics director for First American Real Estate Solutions, an affiliate of giant First American Corp., classifies metropolitan housing markets into several types:

• "Linear" markets, where prices over time tend to move up slowly — a few percentage points a year — and have slow, steady economic growth. Examples include Atlanta, Nashville, Wichita, St. Louis and Indianapolis.
• "Cyclic" markets that run through boom and correction cycles of 10 to 15 year durations, where prices rise rapidly, and then cool or even retreat. Most of these are located along the coasts and have little land available for new construction. Examples include San Francisco Bay, southern California in general, Miami, Houston and New York City.
• "Hybrid" markets that sometimes behave in a slow-but-steady growth "linear" pattern, but occasionally go into faster growth cyclical behavior. Cagan considers Chicago, Seattle and Dallas to be in this category.
• "Catch on" markets that traditionally behaved in a slow-growth linear manner, but that more recently have "experienced a strong move in prices up or down, in a departure from their long-term character." Cagan includes Las Vegas, Phoenix and Detroit in this category.

The study used publicly-available housing price data from 1988 to 2005, and applied proprietary analytical modeling techniques to classify metropolitan areas. The study offers no specific investment advice, but in an executive summary, Cagan comments that "markets in areas where prices have not yet risen rapidly," and where "affordability and job availability are high and economic conditions are strong may offer the best opportunities for investment during 2006."

By implication, "cyclic" markets that have peaked out may offer few opportunities — at least for the short term. Those markets are easy to spot, even from daily headlines: Most of the coastal California areas, along with Washington D.C., Florida, New York and New England are in slowdown mode at the moment. And according to Dr. Cagan's analysis, are poised for further slowdowns.

Cagan focuses on Texas metro areas — Amarillo, Austin, Beaumont, Corpus Christi, Dallas, El Paso, Houston and San Antonio — as "linear" markets that may well be poised for growth in real estate values. Texas is benefiting economically from high energy costs, and with its moderate house prices and generally attractive business climate, could well attract investors who see their opportunities restricted in some of the high-cost, highly-cyclical East and West coast markets.

Cagan lists "linear" markets beyond Texas and notes that they have not yet "tested their affordability limits" — that is, home prices still have plenty of room to grow if local economies expand — and are "not likely to be vulnerable to a downturn of magnitude."

Freddie Conforming to Higher HO Deductibles

by Lew Sichelman

Borrowers who opt for higher homeowners insurance deductibles or are forced into them by shell-shocked insurance carriers soon will qualify once again for lower-rate conventional mortgages.

In July, Freddie Mac, a major supplier of funds for home loans, will realign its underwriting rules to match current insurance industry practice by increasing the maximum allowable deductible from 2 percent to 5 percent for fire, water and wind damage coverage for one-to-four-unit properties, condominiums and planned unit developments.

The change, company officials said last week at the Mortgage Bankers Association's National Secondary Market Conference in Chicago, is in response to lenders' requests to help borrowers cope with the double whammy of higher deductibles in particular and higher insurance costs in general.

Lenders use Freddie Mac and other secondary mortgage outlets to replenish their supplies of cash for mortgages. The company and others, including Fannie Mae, buy loans from primary lenders, package them into securities and sell them to investors from throughout the world.

Not every lender sells its loans. But because most do, and Freddie Mac and Fannie Mac are major buyers, the rules set down by the two government sponsored enterprises are followed by practically every entity which originates mortgages under the federally mandated ceiling of $417,000.

Fannie and Freddie operate in what's known as the "conventional" mortgage market, where rates tend to be 0.25-0.50 percent lower than other loans.

As a result of the last two years of severe hurricanes along the Gulf Coast and Florida, most insurers have raised their minium deductible to 5 percent, an automatic "disqualifier" under Freddie Mac's current guidelines, which limits the deductible to percent.

Borrowers have always had the option of choosing a higher deductible to save money, but the mandatory increase instituted by some insurance carriers has set a new floor beyond what Freddie Mac currently finds acceptable. Consequently, loans on many coastal properties were unsaleable, at least to Freddie Mac.

By acknowledging the change in insurance company practices, Freddie Mac is making sure borrowers have access to both lower rates and lower insurance premiums, company officials said.

The current rules "defeat the purpose" of higher deductibles, said James Cotton, vice president of mortgage sourcing. "Anyone who tries to take advantage of lower insurance rates pays for it in a higher mortgage rate."

Based on a report from the state of Florida prior to Hurricane Katrina, the annual premium savings from one major carrier by going from a 2 percent to 5 percent deductible on a $150,000 house varies by jurisdiction.

In Miami, the savings was $394. It was just $48 in Jacksonville and $110 in Orlando. But in the more hurricane-prone cities of Pensacola and Tampa, the savings was $248 and $218, respectively.

The change is "especially important" in the condominium market, Cotton said, because the choice of a higher deductible is often up to the condo owners association, not individual owners