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New twist on popular reverse mortgage

by Allison Simson & Joyce Nenninger

Question:  Allison, what do you know about reverse mortgages?  I this just a gimmick?

Answer: Reverse mortgages definitely are on the rise. Senior homeowners are taking equity out of their longtime residences to make ends meet during their retirement years, and to remodel their homes and help their children and grandchildren with the financial challenges of higher education.

In fact, the Home Equity Conversion Mortgage, which is insured by the federal government and is the nation's most popular reverse mortgage, jumped from 43,081 closings in fiscal-year 2005 to 76,276 in fiscal 2006.

As reverse-mortgage funds are spent and the interest on these mortgages accrues, the lender gains a greater piece of the home. But let's consider another possibility. What if a family member or a close friend received that equity instead of the lender?

Circle Lending, an aptly named, Waltham, Mass.-based company specializing in the organization of family and small-business loans, has introduced Family Advantage, a sort of reverse mortgage that keeps the home in the family -- or with a friend or associate -- once the senior homeowner moves out or dies.

"It's not for everybody, but it has filled a niche, especially for some adult children who are already supporting their parents," said Jim Smith, vice president of marketing and sales for Circle Lending. "It puts the arrangement into a business deal where all family members can see that it's all documented and very clear."

Conventional reverse mortgages allow senior homeowners, with a minimum age of 62, to receive proceeds from a lender -- either in a lump sum, regular monthly payments, a line of credit or in a combination of those options. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid. The borrower can't owe more than the value of the home. The HECM program has insured more than 240,000 reverse mortgages since 1990, while private "jumbo" reverse plans also have been available.

The Family Advantage concept requires a family member or friend to write a check every month -- or make a lump-sum payment -- to the parent or homeowner. In return, the person writing the check earns an equity interest in the home, plus interest, when the homeowner moves out. It's basically a home-equity loan funded by a family member or friend, secured by real estate. Hence, payments are received tax-free.

The challenge is locating a family member or friend with the means to play the bank. According to Circle Lending, the average rate negotiated between the two participating parties has been about 6 percent because the lending (related) party is not looking to maximize the return.

"A lot of times, at least one of the kids is already supporting the parents with some sort of monthly income," Smith said. "But none of these payments are documented, or other siblings have no idea that one of their brothers or sisters is even helping the folks at all. Family Advantage documents all of these payments and creates a lien on the home that is repaid before other family members receive their interest in the home -- which makes up a great deal of the average person's estate."

The cost to set up the Family Advantage loan averages $2,499 (includes documentation, lien recording, ongoing service, upfront consultation and distribution of the repayment) plus $9 for each payment made, typically a monthly check to the folks. However, lump-sum payments can be substituted at any time, allowing the lender-child to earmark expected bonuses to the program or other funds that could be coming from stock sales, home sales or potential big-ticket windfalls.

"We have one client who is a widow with no children," Smith said. "She owns her home and contacted an acquaintance -- somebody who has significant assets. They are obviously unrelated but they worked out an arrangement where the acquaintance will slowly accumulate equity in the property by making monthly payments to the homeowner. They worked out an acceptable interest rate for both sides."

The upside of the concept is that there is no age restriction; the property secured could be a principal residence, second home or investment property; and the upfront closing costs are less than the standard reverse mortgage. In addition, borrower and lender are free to negotiate a reasonable interest rate yet one that clearly reflects a genuine business deal.

The downside of the deal is that the homeowners have no immediate recourse if the payments cease.

"We were simply looking for a way for people to annuitize their home and have the relinquished equity go to somebody they knew," Smith said. "We provide a professional, third party to oversee the deal. We've found it's simply a vehicle some families and friends can use."

 

For answers to your real estate questions, call Allison at 970-468-6800 or 1-800-262-8442. Email - [email protected] or visit their web site at www.SummitRealEstate.com. Allison is a long time local in Summit County. Summit Real Estate – The Simson/Nenninger Team is located at the Dillon Ridge Marketplace. Allison’s long-time residency and years of real estate experience can help you make the most of any buying or selling situation. She’s a Certified Residential Specialist (CRS), the highest designation awarded to a Realtor in the residential sales field.  Her philosophy is simple, whether buying or selling, she understands that the most important real estate transaction is yours.  

 

Surprising things happen when owners are ignorant of land-use laws

by Allison Simson & Joyce Nenninger

Question: We are selling our property in Frisco and just found out that the neighbor’s deck ”encroaches” on our property.  Is this a big problem?

Answer: That’s a good question.   Second-home getaways often are used only during specific times of the year. For example, a riverfront cabin may go months -- sometimes even years -- without any occupants while other popular escapes in popular locations are jammed-packed every weekend with city folks fleeing the craziness of downtown.

Even though a second home may be placed on your mental "back burner," make sure you stay current on all zoning, land-use and legal guidelines. If you wait too long to build or improve, the building environment may have changed dramatically.

According to Tom Kelly, from Inman News, for example, in Shelton v. Strickland, a landowner (Shelton) filed a lawsuit against his neighbor (Strickland) to have Strickland's shed removed on one of the popular San Juan Islands in Washington state. The shed encroached onto Shelton's property. The Stricklands countered by claiming adverse possession on the land. The trial court granted Strickland's adverse possession claim, and the appeals court affirmed the claim. According to attorneys familiar with land-use cases, a person claiming adverse possession will prevail if he or she can show that the usage was open and notorious, actual and uninterrupted, exclusive, hostile under a claim of right, and for a period of 10 years.

The court held that these elements had been met and granted Strickland the land that the shed was on as well as an easement to maintain the shed. Here's how it happened:

According to court documents, Mabel Hitching acquired title to the land -- now owned by Edward and Margaret Strickland -- from her parents in November 1933. The Hitching lot was improved with a single-family cabin and a shed. Cement work for the shed had a number "59" inscribed on it, indicated the cement work had been completed in 1959.

The shed was shown to encroach upon the Shelton parcel in a survey recorded in April 1975. Mabel used the structure, built by her companion, Arthur Hedman, as a potting shed and painting studio until her death in 1982. Through her will, Mabel granted Hedman a life estate in the premises and he continued to live there until his death in 1985.

The property was left to Jack Ridley, Mabel's nephew who recorded a conveyance from the estate to himself in 1986. In 1993, Ridley, a California resident who never used nor occupied the house, sold the property to the Stricklands.

The Stricklands used the shed as an office during construction of their new home. They made some repairs to the shed, but did not change its location. They continued to use the shed and were not aware of any evidence to suggest that anyone other than the previous owners of their property had ever used the encroaching structure.

Shelton purchased his property, overgrown and unimproved, from Peter and Jenny Wangoe in 1978. Even though Wangoe owned the property for more than seven years, he rarely visited and was not necessarily aware that the shed extended over the property line onto his land. The shed was visible from the street, court papers stated.

Shelton filed a complaint to quiet title to the property and moved for a summary judgment. The Stricklands countered with a summary judgment alleging adverse possession of the area encumbered by the structure.

According to Seattle attorney Scott Henderson, the court found that all of the elements -- the usage was open and notorious, actual and uninterrupted, exclusive, hostile under a claim of right, and for a period of 10 years -- were met for adverse possession.

"The case may have turned out differently if the shed was hidden or of a temporary nature," Henderson said. "The court also finds that since there was no evidence that the Stricklands or any previous owners had abandoned or allowed another to occupy the shed (which would normally stop the 10-year timeframe from continuing) that the second and third elements were met as well.

According to Henderson, the court made quick work of the fourth element (hostility) by focusing on the precedent that "subjective beliefs are not relevant."

"In other words, the fact that the Stricklands or their predecessors may not have known that they were encroaching does not endanger their claim so long as they held themselves in a manner consistent with ownership," Henderson said. "Building a permanent shed and using it seems to fit the court's bill."

The court devoted most of its opinion to the final element -- that an owner's use of the claimed land must be for 10 years. In this case, the Stricklands themselves owned the land for fewer than 10 years. The court held that state law (Washington) provides "tacking" of a previous owner's rights -- that a current owner may take the period of possession of such previous owner as their own so long as there is a connection "or privity" between each owner.

In the end, the shed stayed.

Holding on to a family getaway property? Make sure you know what you actually have.

 

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Summit Real Estate
The Bright Choice
330 Dillon Ridge Way, Suite 10
Dillon CO 80435
970-468-6800
800-262-8442
Fax: 970-468-2195

Allison Simson, Owner/Broker, is a licensed Colorado Real Estate Broker