The Real Estate Blog

One of my favorite things to do in Mobile is to attend student performances at the University of South Alabama.

Quality performances, an eclectic mix of styles (jazz, classical, choral, operatic, etc.), comfortable seating, and an enjoyable evening await you at the Laidlaw Performing Arts Center on the USA campus—weeknights and weekends.

For the music schedule, look at the sidebar on the Music Department’s home page: http://www.southalabama.edu/music/

Tickets for most performances are $5.

Why should a home warranty clause be part of a board contract?

It seems ridiculous that my board contract is a free marketing tool for home warranty companies who provide costly, limited warranties–with trade call fees frequently dwarfing the actual cost of repairs made. On top of that, the home warranty clause is further complicated by the additional “at the expense of the (__ BUYER __ SELLER)” verbiage.

If the buyer is paying for the warranty himself, none of this belongs in the contract in the first place. Since the buyer pays for and benefits from the warranty, and the seller has nothing to do with it, there’s really no reason to establish a “meeting of the minds” through the contract over it.

What if we want the seller to pay for the warranty? Why bother with such complicated itemization? Just adjust the purchase price down by the cost of the warranty and have the buyer pay for the warranty. Ditto for surveys. The net would still be the same for both sides.

One could also ask: Why should a survey request clause be part of a board contract? Our contract has a whole section devoted to whether or not a new survey will be ordered and who will pay for it. Again, if the buyer is paying for it, it’s really none of the seller’s business. If the seller is paying, why itemize?

Speaking of surveys, something that would actually be useful in our standard contract would be a “survey satisfactory to buyer” contingency to address any misrepresentation by the seller and/or his agent(s) over lot dimensions and encroachments. Needless to say, we have no such clause in our standard purchase agreement.

All of this wastes so much time and paper…

From time to time, I get buyers who have a very limited monthly budget which absolutely cannot be exceeded. For these buyers, providing a solid estimate of what their monthly payment will be is crucial to a successful transaction.

Property taxes can be a real “gotcha” in the estimation process, since taxes on a specific property can vary greatly depending on land usage, appraised value, the owner’s age and/or disability status, and assessed value. Another complicating factor is that the property tax year starts October 1^st.

For example:

You have a client closing on a former rental property to use as his personal residence at the end of February. A rental property without the homestead exemption is assessed at 20% of appraised value for tax purposes, whereas with a personal residence, the buyer can claim the homestead exemption and only pay taxes on 10% of the appraised value. Since the tax year doesn’t start again until October 1^st, your client will be stuck paying double taxes for seven months until his homestead exemption kicks in on October 1^st. Some people just can’t swing double-taxes for that long…

When you do have a client on a really tight budget, be sure to check the current Assessed Value on the tax records to determine if it is either 10% or 20% of fair market value.

You can search property tax records for Mobile County here: http://mobilerevenue.siteonestudio.com/TaxBill/search.asp

Under the current macroeconomic climate, inflation is the rule of the day. Every year, the average buying power of the dollar decreases two to four percent. That should be discouraging news for savers, but it’s music to the ears for any buyer who has just taken out a fixed-rate 30-year mortgage on the home of his dreams. Why?

As the value of the dollar decreases, businesses increase prices to make up for it. As prices go up, wages also have to go up so that workers can maintain their current standard of living. While prices keep going up for the same goods, and wages keep going up for the same services, the principal and interest payment (the bulk of the monthly payment) on a fixed-rate mortgage remains the same!

As a result, housing expenses as a percentage of monthly income will shrink over time for buyers who take advantage of traditional fixed-rate financing. A monthly payment of $700—which may be back-breaking today—could end up costing less than your monthly fuel and utilities in as little as five years time.

Just something to think about…

Starting January 1, 2007, Alabama’s new Landlord-Tenant Law comes into effect. Agents, investors, property managers, and property owners pondering a move into the rental market would be well advised to familiarize themselves with this new law.

Thanks to Ron Gilbert and Jim Carnes at the Arise Citizens’ Policy Project in Montgomery, Alabama we have a fine at-a-glance overview of this new legislation and how it affects our businesses:

Highlights of the 2006 Alabama Landlord-Tenant Law

Act 2006-316, the Alabama Residential Landlord Tenant Act, applies to rental agreements entered into or renewed after January 1, 2007.  The law provides new obligations and protections for both landlords and tenants.

The new law requires the landlord to:

• Ensure that the rental unit complies with all applicable building and housing codes that materially affect health or safety, keep common areas clean and safe, and make all repairs necessary to keep the property in a habitable condition;
• Maintain in good working order all electrical, plumbing, sanitary, heating, ventilating and air conditioning systems;
• Provide and maintain appropriate receptacles for garbage removal;
• Supply running water and hot water and provide a source of heating for the dwelling;
• Limit security deposits to no more than one month’s rent (unless an additional fee is required for pets or provided furnishings) and return those funds or provide an accounting within 35 days of the termination of the rental agreement. If the landlord fails to meet this time requirement, he or she must pay the tenant double the amount of the original deposit;
• Provide at least two days notice of intent to enter the rental unit except in an emergency.

In addition, the law prohibits the use of certain kinds of provisions in rental agreements.  Effective January 1, 2008, a tenant may recover actual damages up to one month’s rent and attorney fees if an executed agreement contains any of the following:

• Provisions requiring or allowing the tenant to waive the requirements related to habitability or security deposits;
• Provisions requiring the tenant to pay attorney fees or the costs of collecting rent; or
• Exculpatory clauses that limit the liability of the landlord.

The new law requires the tenant to:

• Pay the agreed-upon rent; there are no provisions that allow the tenant to withhold payment of rent to enforce any provisions of the law;
• Comply with building and housing codes that govern matters of tenant responsibility (for example, automobile abandoned on the lawn);
• Keep the premises as clean and safe as conditions permit;
• Dispose of garbage and rubbish in a clean, safe manner;
• Keep all plumbing fixtures as clear as their conditions permit;
• Use all electrical, plumbing, sanitary, heating, ventilating and air conditioning systems in a reasonable manner;
• Refrain from deliberately or negligently destroying or damaging any part of the dwelling and from knowingly, recklessly or negligently permitting any person to do so;
• Avoid conduct (by the tenant or others on the premises with the tenant’s consent) that would disturb the neighbors;
• Allow reasonable access to the landlord to enter the dwelling to inspect the condition of the dwelling or to make necessary repairs.

If a landlord fails to maintain the dwelling in a habitable condition, the tenant may provide written notice of intent to terminate the rental agreement after 14 days following receipt of the notice.  If the landlord makes the necessary repairs within that time, the rental agreement continues to be enforceable.  If, however, the landlord fails to make the required repairs, the rental agreement terminates at the end of the 14 days, and the landlord must return the security deposit and any prepaid rent.

Either landlords or tenants may recover actual damages and obtain injunctive relief should the other party breach their obligations under the statute.  In addition, prevailing parties may be awarded attorney fees.

The law provides that the landlord’s rules or regulations are enforceable only if the rule’s purpose is to promote the convenience, safety or welfare of the tenants or to protect the property from abuse.  Such rules can be enforced upon the tenant only if he or she was made aware of the rule at the time of entering into the rental agreement, and if the rule applies to all tenants.  Any substantial new rule is valid only with the tenant’s written consent.

The law also prohibits retaliatory action by a landlord.  A landlord is prohibited from increasing rent, decreasing services or threatening eviction because a tenant complains to either the landlord or a governmental agency about the violation of the habitability provisions of the law.  Should the landlord retaliate against the tenant, the tenant may seek legal action and recover an amount of up to three months rent or actual damages (whichever is greater) and reasonable attorney fees.

Prior to the new law, the process for eviction varied from court to court around the state.  One of the goals of landlords in negotiating this statute was to put into place a consistent, streamlined process for all of Alabama.  Under the law, a landlord must provide seven days written notice of an intent to evict for non-payment of rent (14 days written notice is required for an eviction for other reasons).  If the tenant has not complied in the specified time, the landlord may then file with the court an action for eviction.  Upon formal notice of this filing, the tenant has seven days to file an answer to the court. Once the court has ruled, any appeal of the ruling must be filed within seven days.

This fact sheet was prepared by policy analyst Ron Gilbert and publications director Jim Carnes.  It may be reproduced with acknowledgment of Arise Citizens’ Policy Project, P. O. Box 1188, Montgomery, AL 36101;  (800) 832-9060; www.arisecitizens.org

If you are expecting to pay a lot in taxes this year, and you are also interested in investing in real estate, this is the time to schedule an appointment with your CPA to talk about the GO Zone.

The GO Zone Special Depreciation Allowance provides a special additional deduction of 50% of the property’s depreciable basis for the first year that you claim this deduction. To be eligible for this deduction, the investment property also has to be located in one of the core disaster areas enumerated by the GO Zone legislation.

The core disaster areas are as follows:

Alabama. The counties of Baldwin, Choctaw, Clarke, Greene, Hale, Marengo, Mobile, Pickens, Sumter, Tuscaloosa, and Washington.

Louisiana. The parishes of Acadia, Ascension, Assumption, Calcasieu, Cameron, East Baton Rouge, East Feliciana, Iberia, Iberville, Jefferson, Jefferson Davis, Lafayette, Lafourche, Livingston, Orleans, Plaquemines, Pointe Coupee, St. Bernard, St. Charles, St. Helena, St. James, St. John the Baptist, St. Martin, St. Mary, St. Tammany, Tangipahoa, Terrebonne, Vermilion, Washington, West Baton Rouge, and West Feliciana.

Mississippi. The counties of Adams, Amite, Attala, Choctaw, Claiborne, Clarke, Copiah, Covington, Forrest, Franklin, George, Greene, Hancock, Harrison, Hinds, Holmes, Humphreys, Jackson, Jasper, Jefferson, Jefferson Davis, Jones, Kemper, Lamar, Lauderdale, Lawrence, Leake, Lincoln, Lowndes, Madison, Marion, Neshoba, Newton, Noxubee, Oktibbeha, Pearl River, Perry, Pike, Rankin, Scott, Simpson, Smith, Stone, Walthall, Warren, Wayne, Wilkinson, Winston, and Yazoo.

For the tax-savvy reader, a pertinent excerpt from IRS publication 4492–detailing this special depreciation allowance–has been provided below. The entire IRS publication can be downloaded at http://www.irs.gov/pub/irs-pdf/p4492.pdf.

Special Depreciation Allowance

You can take a special depreciation allowance for qualified Gulf Opportunity (GO) Zone property (as defined below) you place in service after August 27, 2005. The allowance is an additional deduction of 50% of the property’s depreciable basis (after any section 179 deduction and before figuring your regular depreciation deduction). The special allowance applies only for the first year the property is placed in service.

The allowance is deductible for both the regular tax and the alternative minimum tax (AMT). There is no AMT adjustment required for any depreciation figured on the remaining basis of the property.

You can elect not to deduct the special GO Zone depreciation allowance for qualified property. If you make this election for any property, it applies to all property in the same class placed in service during the year.

Qualified GO Zone property. Property that qualifies for the special GO Zone depreciation allowance includes the following.

• Tangible property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less.
• Water utility property.
• Computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS.)
• Qualified leasehold improvement property.
• Nonresidential real property and residential rental property.

For more information on this property, see Publication 946.

Other tests to be met. To be qualified GO Zone property, the property must also meet all of the following tests.

• You must have acquired the property, by purchase, after August 27, 2005, but only if no binding written contract for the acquisition was in effect before August 28, 2005.
• The property must be placed in service before 2008 (2009 in the case of nonresidential real property and residential rental property).
• Substantially all of the use of the property must be in the GO Zone and in the active conduct of your trade or business in the GO Zone.
• The original use of the property in the GO Zone must begin with you after August 27, 2005. Used property can be qualified GO Zone property if it has not previously been used within the GO Zone. Also, additional capital expenditures you incurred after August 27, 2005, to recondition or rebuild your property meet the original use test if the original use of the property in the GO Zone began with you.

Excepted property. Qualified GO Zone property does not include any of the following.

• Property required to be depreciated using the Alternative Depreciation System (ADS).
• Property any portion of which is financed with the proceeds of a tax-exempt obligation under section 103.
• Property for which you are claiming a commercial revitalization deduction.
• Any property used in connection with any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, or any store, the principal business of which is the sale of alcoholic beverages for consumption off premises.
• Any gambling or animal racing property (as defined below).
• Property in the same class as that for which you elected not to claim the special GO Zone depreciation allowance.

Gambling or animal racing property is:

• Any equipment, furniture, software, or other property used directly in connection with gambling, the racing of animals, or the on-site viewing of such racing, and
• The portion of any real property (determined by square footage) that is dedicated to gambling, the racing of animals, or the on-site viewing of such racing, unless this portion is less than 100 square feet.

Recapture of special allowance. If, in any year after the year you claim the special allowance, the property ceases to be qualified GO Zone property, you may have to recapture as ordinary income any excess benefit you received from claiming the special allowance.