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Refinancing rentals tricky these days

The Baltimore Sun

I wish to refinance my rental property (a townhouse). I have been advised that doing a cash-out refinance isn't possible in today's climate, and that if I want to take cash out of the transaction, I have to refinance using an equity loan.

I asked if federal or state law required me to refinance this way, but I've received no definitive explanation. Can I refinance to take money using an equity loan?

The current credit markets have made it difficult to finance rental property - even if you have a large amount of equity in the deal. Doing a cash-out refinance may also be very difficult at the moment because investors have been burned and aren't looking to buy these sorts of loans.

Your property is residential, but its use to you is as an investment property. In some markets residential property is doing quite poorly, and residential lenders are looking closely at each deal and making it harder to apply for residential loans.

You don't qualify for a residential loan, and commercial lenders are limiting their investments in residential properties. Small investors like you are finding it hard to obtain financing for these types of deals. In a sense, what you are hearing is that you should be happy with the financing you have and that new lenders are not looking to give you more money. They're willing to extend additional credit to you as an equity loan on terms that are probably less favorable than your current first mortgage loan.

In any event, I don't know of a conventional lender that would allow you to borrow more than 70 percent or 75 percent of the equity in the property at the moment. So if you're looking to cash out 90 percent of the equity, the numbers might not work out.

Where might you go to get money? If you're a real estate investor with multiple properties, you might have better luck with a bank willing to look at your portfolio of properties and refinance all of them.

Try some local savings and loans or community banks, and see if they are interested in lending you money. Local banks are becoming more active in the real estate market as larger banks pull back. Any bank willing to give you a loan will probably have to keep the loan on its books. It won't be able to sell the loan on the secondary market, as your townhouse is rented and does not qualify as an owner-occupied residence or even as a second home.

As the real estate market improves, it may be easier to refinance your property.

We're selling our first home after living in it for the last six years. Is it true that I can take an exemption from paying capital gains only once in my life? Our payoff balance on the mortgage is $98,500, and the home is listed for $169,900. We were thinking that unless we had a profit of $250,000 or more each, my husband and I didn't have to pay capital gains. My mother says, no, we pay it every time we sell, unless we immediately reinvest it into real estate.

Your mother means well, but she is incorrect. She is quoting an old Internal Revenue Service rule, one that has been out-of-date since about the time that President Bill Clinton ran for re-election.

Current IRS rules allow you and your spouse to keep up to $500,000 in profits tax-free when you sell your primary residence, provided you have lived in the home as a primary residence for the past two out of five years.

There are some exceptions in the case of divorce, death or illness that would allow you to sell the home and keep a fraction of the profits tax-free. You'll want to read IRS Publication 523, Selling Your Home, for details. It is available for free at the IRS Web site (irs.gov).

If a mortgage is owner-financed and the total amount is due in three years, what happens if the deadline is not met? Can they take back the house?

When you say the property was owner-financed, you must mean that the buyer purchased a home and the prior owner financed the purchase of the home. If that's the case, the seller should have had the buyer sign a promissory note agreeing to repay the borrowed money at a certain interest rate in a given amount of time. In addition, the buyer/borrower should have signed a mortgage giving the seller a lien on the home to secure the debt.

Whether a mortgage is owner-financed or bank- financed, if a homeowner fails to comply with the terms of the mortgage, the seller (who is now the lender) can sue the owner of the home to recover what is owed. If the buyer fails to pay what is owed, the seller/lender can foreclose on the home, sell the home and use the proceeds from the sale to pay off the debt.

If the home is worth less than the debt, the seller/lender can continue to pursue the buyer to recover the difference. That difference is called the deficiency.

If the property was sold under what is generally called an installment contract or a contract for deed, the seller would sue the buyer to recover the amount owed or get back the property.

In either case, if the seller had the buyer sign the proper documentation, the seller should be able to sue the buyer. Whether the seller gets money or gets the property back will depend on the circumstances and on what the buyer does.

Getting the property back may not be what the seller had in mind when he offered owner financing, but that is one of the risks in providing owner financing to buy a home.

Contact Ilyce Glink at thinkglink.com, by mail at Real Estate Matters Syndicate, P.O. Box 366, Glencoe, IL 60022 or by calling her radio show at 800-972-8255 from 11 a.m. to noon Sundays.

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