An Expert’s Weekly Real Estate Mailbag

Robert J. Bruss, a California attorney and real estate broker, answers a variety of readers’ housing-related questions in his weekly real estate mailbag. His most recent batch of queries involve agent commissions, tax implications of inheriting real estate, seller counteroffers, and more. Here’s a look…

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Q: Thank you for your recent item about the drawbacks of cutting home sales commissions below the customary rate in the community. As a real estate agent, my specialty is listings. I find working with buyers is much less productive. I’ve been selling homes for 14 years and will negotiate the sales commission on expensive homes to remain competitive.

However, I tactfully tell my sellers if I reduce my commission to 4-5 percent, the buyer’s agent will show my listings last, after showing the full-commission listings. During a recent full-commission, well-priced listing I had (which didn’t get one offer after 60 days on the market), I suggested my seller raise the commission from 6 to 7 percent, with 4 percent to the buyer’s agent. She agreed.

I held a well-publicized MLS “broker’s tour” and got about 125 local agents to re-tour the house, which is a beautiful old home but is located on a busy road. The house sold for nearly the full asking price within the week. Raising the sales commission can actually help sell a house in a slowing housing market.

A: Thank you for your insight. Too many home sellers focus on the sales commission, thinking they will save money if they cut the rate. As the volume of home sales slows, houses and condos listed with reduced commissions are usually shown last to prospective buyers.

Q: We want to buy a home in a specific neighborhood. When our buyer’s agent told us about a new, four-bedroom listing, we immediately inspected it and made a purchase offer. The house is in awful condition, but the asking price is based on recent sales prices of similar nearby homes in perfect condition. The seller wouldn’t even counteroffer. The listing agent said to make an offer at full price if we want to buy this house. As we are African-Americans trying to buy a home in a mostly Caucasian area, do you think this is illegal discrimination?

A: No. It appears you simply encountered an unreasonable home seller. They don’t have to, and often don’t, make counteroffers or wish to negotiate home prices. Many are stubborn and won’t budge, to their own detriment.

Q: Is it bad to inherit real estate because of the reduced cost basis, and is inheritance is a bad thing in general? Please explain why a “stepped-up basis” is better.

A: I often say it is better to inherit real estate than to receive it as a gift before death. The reason being that when you inherit real estate from a deceased owner, you receive it with a new “stepped-up basis” of market value on the date of the decedent’s death. If you receive a pre-death gift, you take over the donor’s usually-much-lower basis than whatever the current real estate values may be.

For example, if your grandmother’s basis for her house is $50,000, and it is worth $300,000 today, your adjusted cost basis will be $50,000 if you receive a gift deed, the same as her basis. However, if you instead inherit that same house after she passes on, your adjusted cost basis is the date of death market value at $300,000.

Q: You often hear that it’s smart for rental property owners looking to exchange properties to avoid capital gains tax by trading up. But what if you want to trade down to sell a 10-unit apartment building for a less-expensive, luxury two-unit duplex where you will live in one unit as a primary residence. Will such a trade be taxable?

A: To qualify for a tax-deferred exchange of property for another such property, the 1031 exchange, per IRS regulations, requires trading equal or up in both price and equity. In other words, you can’t take out any cash or net mortgage relief without paying capital gains tax. The number of rental units is immaterial, and your personal residence unit cannot be involved.

Q: Shortly before my grandmother died, she deeded her condo to me because she was living in an assisted-living center. I mistakenly didn’t record the deed before her death, and it turns out her will left the condo to her son (my uncle) who is now claiming it under the will. Do I have a valid claim to the title?

A: If you had recorded the deed, you would clearly own the condo today, but instead, your uncle can argue that because you failed to record the deed before your grandmother’s death, it was not delivered unconditionally, and therefore he inherits it under the will. You can argue your transfer of ownership claim in probate court, but it may not be easy.

Q: We recently bought our first home. Shortly after moving in we discovered that the roof leaks around the skylights. Also, the neighbors informed us after the fact that the sellers had tried many times to fix said leaks. A reputable contractor says there is extensive damage and the only way to correct it is to remove the four skylights, repair the rotted lumber and install new flashing — for $4,850. The written defect disclosure provided to us by the seller at closing said nothing about these problems.

After our attorney contacted the listing agent and the seller, we were told that any dispute must go to binding arbitration. However, we did not sign the arbitration clause in the sales contract. Can arbitration be forced on us without our consent?

A: Not unless you signed a written contract that calls for arbitration. You can sue the home seller, and the listing agent, if you can prove that person knew of the alleged defect, for damages. Do not sign a binding arbitration clause in a home-purchase contract. When purchasing a home, that is no time to give up your legal rights.