Can You See the Savings?

If you’ve considered changing your light bulbs to energy-saving LED bulbs but decided not to make the investment because the prices were too high, you might want to investigate again.  The prices have come down considerably.

An initial investment now will generate immediate returns through energy costs and because they last longer, you won’t need to replace them for years.

The life of LED bulbs is projected to be from 35,000 to 50,000 hours compared to an incandescent bulb at 750 to 2,000 hours.  For normal home use, a LED bulb could last more than 20 years.

80-90% of the energy used by fluorescent and incandescent bulbs is wasted by the heat generated.  In contrast, cool LED bulbs converts 80% of the electrical energy to light energy.

• The color of LED lights is bright white, more like daylight, instead of the warm yellow of incandescent or the greenish tint of fluorescent bulbs.

• LEDs light up instantly instead of building to their intensity like some of the fluorescent bulbs.

• LEDs are more durable because they don’t have filaments or thin-glass bulbs like incandescent and fluorescent bulbs.

Shop around to find the best price on LEDs. If the LED only lasted 20,000 hours, you might have to purchase 20 incandescent bulbs during that same period of time.  Using the chart below, you can see that the LED uses about 10% of the wattage without compromising on the brightness.

The Perfect Last Minute Gift

It’s part of holiday tradition to celebrate with family and friends and to share gifts with our loved ones.  There’s no measuring how much is spent on the combined effort and money to find the perfect gift. 

The challenge is to identify the right gift in the right color and size; something they really want and need; and something that won’t break the budget. 

“Eight Gifts That Do Not Cost a Cent” are suggestions that have been offered on numerous Internet sites attributed to an anonymous writer.  They may be just what you need to find the perfect gift. 

• THE GIFT OF LISTENING...but you must really listen. No interrupting; no daydreaming; no planning your response; just listening.

• THE GIFT OF AFFECTION...be generous with appropriate hugs, kisses, pats on the back and handholds.  Let these small actions demonstrate the love you have for family and friends.

• THE GIFT OF LAUGHTER...clip cartoons and share articles and funny stories.  Your gift will say “I love to laugh with you."

• THE GIFT OF A WRITTEN NOTE...it can be a simple "thanks for the help" note or a full letter.  A brief, handwritten note may be remembered for a lifetime and may even change a life.

• THE GIFT OF A COMPLIMENT...a simple and sincere, "you look great in red" or "you did a super job" or "that was a wonderful meal" can make someone's day.

• THE GIFT OF A FAVOR... go out of your way every day to do something kind.

• THE GIFT OF SOLITUDE...there are times when a person wants nothing more than to be left alone.  Be sensitive to those times and give the gift of solitude to others.

• THE GIFT OF A CHEERFUL DISPOSITION...the easiest way to feel good is to extend a kind word to someone.  It’s really not that hard to say, Hello or Thank You. 

Up to $500 for Doing Home "Work"

The energy-efficient home upgrades tax credit is scheduled to expire on December 31st this year.  If you need to make improvements to your home, this could be an incentive to do it before the end of the year.  If you have already made qualifying improvements without realizing the tax credit is available, it may seem like a holiday gift you weren't expecting.

The equipment must be installed to qualify for the credit which can put you under a time crunch.  Heating and cooling systems, insulation, windows, doors, skylights, water heaters and home weatherization may qualify.

The Residential Energy Efficiency Tax Credit has been available for purchases since January 1, 2011.  The tax credit is 10% of up to $5,000 of qualifying improvements which would make a maximum of $500 tax credit.

The cumulative maximum amount of tax credit that can be claimed by a taxpayer in the different years this law has been in effect is $500.  If it has been claimed in previous years, the taxpayer is not eligible for this credit for additional new purchases.

For more information, see energy.gov or talk to your tax professional.

Winter Maintenance

With a 2,000+ mile long winter storm affecting much of the country, there are plenty of home owners who wish they were better prepared.  Even when you live in warm climates, some of these things are important to check periodically.

Preparing for the change of seasons can make your home more comfortable and protect your investment.  Regular maintenance extends the various components of a home and can generate savings in operating costs while avoiding expensive replacements.

• Weather strips around doors and windows should be checked for possible air leaks.
• Caulking around windows and doors should seal out moisture and air leaks.
• HVAC should be inspected and serviced by a professional annually.
• Smoke and carbon monoxide detectors should be tested regularly.
• Ductwork and supply lines from water heaters should be insulated.
• Fireplace chimneys should be cleaned regularly and fireplaces should be inspected for cracks in mortar and to see if the damper closes properly.
• Gutters should be free of leaves and debris to prevent rainwater build-up.
• Tree branches touching or hanging over your roof should be trimmed.

Please contact us if you need a service provider recommendation.

Motivated Sellers, Better Prices and Less Competition

The Winter Home Buyer Report conducted in the second week of November by REALTOR.com^® revealed the sentiments of current home buyers expecting to buy a house during the winter months.  It appears that there is pent-up demand with buyers who were unable to purchase a home recently.

Most cited as an impediment to purchase was the challenge of low inventory.  Strong demand coupled with short supply explains why home prices have been increasing.

"This summer and spring home buying season was particularly challenging for buyers, especially first-time home buyers trying to compete with all-cash offers and bidding wars because of reduced inventory.  In fact, a quarter of the winter home buyers revealed they are in the market now because they were unable to find a home during this last home buying season," said Alison Schwartz, vice president of corporate communications at REALTOR.com^®.  "While buyers are still experiencing challenges with inventory and approximately one in five buyers plan to put down all cash, there are advantages to looking for a home in the winter. Motivated sellers, better prices and less competition between buyers are some of the top reasons winter home buyers are interested in purchasing a home during the colder months of the year."

Some interesting statistics taken from the report are:

Biggest challenges when searching for a home during winter:

• 34 percent shared that there is not enough inventory on the market
• 29 percent believe that winter weather makes house hunting unpleasant 

Traditionally, the industry has found that the fourth quarter of the year has a lower sales volume and is generally attributed to distractions from the holidays and not wanting to make a move during consistently inclement weather.  Even in areas that are not affected by extreme winter weather, there seems to be a mindset about moving in the winter.

Indications are that it may be advantageous for sellers to put their home on the market now rather than wait until after the first of the year.

Thanksgiving is Always in Season

Most school children would probably say that Thanksgiving dates back to the Pilgrims at Plymouth as early as 1621. By the late 1660’s, it had become traditional to hold a harvest festival in New England.

President George Washington declared the first nation-wide thanksgiving in 1789 “as a day of public thanksgiving and prayer to be observed by acknowledging with grateful hearts the many and signal favours of Almighty God.”

One hundred fifty years ago during the Civil War, in October, 1863, President Abraham Lincoln proclaimed the first national day of Thanksgiving.

William Seward, Lincoln’s secretary of state, drafted the proclamation: “No human counsel hath devised nor hath any mortal hand worked out these great things. They are the gracious gifts of the Most High God…they should be solemnly, reverently and gratefully acknowledged as with one heart and one voice by the whole American People.”

Even though the country was in the middle of the costly Civil War, the people of America started an enduring tradition to give thanks. In 1941, Congress determined that Thanksgiving will be celebrated on the fourth Thursday in November.

 

Refinance to Remove a Person

Most people are familiar with the various reasons a homeowner refinances their home which generally result in two major benefits: saving interest and building equity. 

There is however another reason to refinance which may not be as common which is to remove a person from the loan. In the case of a divorce, when one party wants to keep the home and the other party wants their equity out of the home, it is possible for the remaining party to refinance the home. If the equity is sufficient to justify it and the remaining owner can qualify for the new loan, the refinance can provide the proceeds to buy out the other spouse.

Refinancing to remove a person from the loan could also involve a situation where two or more heirs jointly own a property and have differing opinions on when to sell. The same situation could apply to a rental property with multiple owners and the refinance would provide a way to buy out a partner.

Sometimes, it’s not about taking cash out of the home to buy out the other party. If a person’s name is on the mortgage, they’re responsible if it goes to default. One party may be willing to deed the home to the other party but it doesn’t necessarily relieve them of the liability of the mortgage they originated.

Many times, once a person has made their mind to move on, they’ll take the fastest and easiest way out. Removing a person from the deed or a mortgage is a reason to consider obtaining legal advice to protect your interests. Refinance Analysis calculator.

Reasons to Refinance

1. Lower the rate
2. Shorten the term
3. Take cash out of the equity
4. Combine loans
5. Remove a person from a loan

Who's Paying Your Mortgage?

As a homeowner, you obviously pay for your mortgage but as an investor, your tenant does.  Equity build-up is a significant benefit of mortgaged rental property.  As the investor collects rent and pays expenses, the principal amount of the loan is reduced which increases the equity in the property.  Over time, the tenant pays for the property to the benefit of the investor.

Equity build-up occurs with normal amortization as the loan is paid down.  It can be accelerated by making additional contributions to the principal each month along with the normal payment.  Some investors consider this a good use of the cash flows because interest rates on savings accounts and certificates of deposits are much lower than their mortgage rate.

In the example below, is a hypothetical rental with a purchase price of $125,000 with 80% loan-to-value mortgage at 4.5% for 30 years compared to a 3.5% for 15 years.  The acquisition costs were estimated at $3,000, the monthly rent is estimated at $1,250 and $4,800 for operating expenses. 

Notice that both properties have a positive cash flow before tax.  The cash on cash return is the revenue less expenses including debt service divided by the initial investment to acquire the property.  The 15 year mortgage will obviously have a smaller cash flow and lower cash on cash but the equity build-up is significantly higher.

If the goal of the investor is to pay off the property to provide the highest possible cash flow at a later date, a shorter term mortgage with a lower interest rate will help them achieve that.  A simple definition of an investment is to put away today so you’ll have more tomorrow.  Sacrificing cash flow now, during an investor’s earning years, is a reasonable expectation to provide more cash flow in the future when it might be needed more.

Contact me if you’d like to explore rental property opportunities.

Real Estate 411

When you’re buying or selling, the obvious source to get your real estate question answered is your agent but where do you go the rest of the time?  As a homeowner for many years to come, you’ll need reliable help and solid suggestions.

Our business goal is to have a select group of our friends and past customers who consider us their lifelong real estate professional. We want to earn that trusted position so they’ll enthusiastically refer their friends to us.  Our plan to achieve this is simply to help these people with all of their real estate needs not just when they buy or sell but for all the years in between.

Throughout the year, we offer reminders and suggestions by email and social media that benefit your homeowner experience.  When we find good articles to help you be a better homeowner, we’ll pass them along.  You’ll discover new ways to maintain your property, minimize expenses and manage debt and risk.

We want to be your “Go-To” person for everything to do with real estate.  If we don’t have the answer you need, we’ll point you in the right direction to find it.

We’re here for you and your friends…now and in the future.  Please let us know how we can help you.

Why Borrowers Pay Different Rates

Lenders, like any business, have to make a profit.  The cost of acquiring the funds, the operating costs to service and the expected profit margin are easily identified.  The variable in pricing is the type of mortgage and the credit worthiness of the borrower. 

A loan with a 3.5% down payment is riskier than a loan with 20% down payment.  If the lender has to take the property back to recover their expense, the margin is greater between what is owed and what the property is worth on an 80% mortgage. 

Credit scoring is a risk-based pricing method that allows a lender to be competitive in the market for the best loans from different borrower groups.  Individual lenders set their own levels for what they consider “A” credit which is reserved for the best rates.  If good credit is approximately 710 to 740, scores below that are considered higher risk and will have higher rates.

Risk must be assessed for both the borrower and the property that collateralizes the loan.  The borrower’s credit history and income stability are strongly evaluated by the lender but if a default should occur, the property must secure the loan to avoid a loss to the lender. 

The challenge for some buyers is they are unaware of what their credit score is and how it will affect the interest rate offered by the lender.  It is to the buyer’s advantage to be pre-approved by a reputable lender prior to starting the process of looking for a home.  In some cases, the lender can actually improve the borrower’s credit score to help them qualify for a lower interest rate.

Contact me for a recommendation of a trusted mortgage professional - thevannestegroup@gmail.com

Lower Anxieties/Improve Marketability

One of the anxiety highpoints during the sale of a home is waiting for the buyer’s home inspection report.  Most sellers willingly disclose what they know about their home to any potential buyers.  The concern stems from the inspector finding something that they’re totally unaware of and that it will either cost them a lot of money to correct or the buyer will simply use it to void the contract.

If the inspection does reveal some unknown problem with the home, it’s probably as big a surprise to the buyer who is not as emotionally or financially invested as the seller.  It is human nature to fear what you don’t understand and when a report identifies defects, they may simply opt-out of the home.

The solution to the situation may be for the seller to have the home inspected prior to putting it on the market.  There is still a risk of becoming surprised by an unknown defect which at that point, would have to be disclosed to potential buyers or repaired by the seller.  The advantage is that it creates a baseline to compare discrepancies that may arise when a future buyer has the home inspected.

If the seller’s inspection report is made available during the marketing process, it could give buyers a sense of confidence about the home even though they may still choose to have the home checked by their own inspector.

The cost of the inspection, possibly $500, keeps some sellers from taking this initiative when selling their home.  In an effort to minimize their expenses, they forego getting valuable, disinterested 3rd party advice that could help sell their home.  On a $175,000 home, the fee for the inspection will probably be less than 3/10 of one percent of the sales price.

Another option to the seller to increase marketability of the property and bolster buyer confidence in the home would be to offer a home protection plan.  Generally, the seller doesn’t incur cost for this coverage until the home is sold and there may even be some coverage for the seller during the listing period.  The benefit to the buyer is avoiding unanticipated expenses for specific items that are covered during their first year of ownership.

Contact me for recommendations of home inspectors or home protection plans.

Rating Your Best Friend

Man’s best friend enjoys many of the benefits of his master’s home besides food and shelter and a comfortable place to live and play.  In return, dog owners expect companionship and possibly, protection; after all, even a small dog can bark to signal intruders.

Few people doubt that most dog owners love their pets and treat them well.  The costs associated with having a dog can include medical and dental that rivals human expenses, premium food, toys, grooming and license fees.  However, one of the expenses not anticipated by pet owners is a higher homeowner’s insurance premium.

There are almost five million dog bites a year with children being the main victims.

“Dog bites accounted for more than one-third of all homeowner’s insurance liability claim dollars paid out in 2012, which amounted to more than $489 million,” said Peter Robertson, representing the Property Casualty Insurers Association of America, testifying against the bill at a hearing of the Committee on Financial Services.  He said, “The total cost of dog bite claims increased by more than 51 percent between 2003 and 2012.”  It is now estimated that dog bites cause losses of over one billion dollars a year.

Some insurance underwriters have denied or canceled coverage or increased the premium of the owner’s liability insurance based on the homeowners’ specific breed of dog such as Pit Bulls, Dobermans, Akitas, Mastiffs, Malamutes and even German Shepherds.  The aggressive nature of certain types of dogs combined with specific training or lack of training, abuse or neglect are identified by insurer’s refusal to provide liability coverage.

If you are considering what insurers identify as a high-risk pet, you might want to visit with your insurance agent prior to acquiring your new best friend to see if it affects your rates.

Don't Do It!

You’ve seen lists telling buyers what to do to find the right home but knowing what not to do can be just as important.  After finding the right home, negotiating a contract, making a loan application and inspections, buyers, understandably, start making plans to move and put their personal touches on the home.

In today’s tenuous lending environment, little things can derail the process which isn’t over until the papers are signed at settlement and funds distributed to the seller. Verifications are made by a lender at the beginning of the loan process to determine if the buyer qualifies for the mortgage. The verifications are usually done again just prior to the closing to determine if there have been any material changes to the borrower’s credit or income that might disqualify them.

Simply stated:

1. Don’t make any new major purchases that could affect your debt-to-income ratio
2. Don’t apply, co-sign or add any new credit
3. Don’t quit your job or change jobs
4. Don’t change banks
5. Don’t open new credit accounts
6. Don’t close or consolidate credit card accounts without advice from your lender
7. Don’t buy things for your new home until after you close
8. Don’t talk to the seller without your agent

Your real estate professional and lender are working together to get you into your new home. It’s understandable to be excited about one of the biggest decisions you’ll make and that you feel you need to be getting ready for the move.

Planning is smart but don’t do anything that would affect your credit or income while you’re waiting to sign the final papers at settlement.

Equity Dynamics

Equity is the difference in what your home is worth and what you owe. Ideally, as the value goes up and the unpaid balance goes down with each amortized payment made, the equity grows from two directions.

This dynamic leads to increasing a person’s net worth much faster than many other investments.

A homeowner has minimal control over value. It is necessary to maintain the property to avoid depreciation and make good decisions on capital improvements. After that, appreciation is generally controlled by supply and demand and the economy.

Mortgage management is something that the homeowner does have control. Making the decision to select a shorter term mortgage at a lower interest rate can have an impact on equity build-up. Lower interest rates amortize faster than higher interest rates which will also affect equity growth. Currently, it is possible to get a 1% lower rate on a 15 year mortgage than a 30 year mortgage.

Compare two alternatives of a 30-year and a 15-year mortgage. The payments will definitely be higher on the shorter term because it pays off quicker. However, if a person can afford the higher payments of $362.53 more per month in this example, the equity will be greater. Even after you take into consideration the higher payments, the increased equity is $17,236 at the end of the seven year holding period.

Another decision that can affect equity build-up is making additional principal contributions along with the regular payments. Whether you’re making an occasional lump sum payment toward principal or regular monthly contributions, it will save interest, build equity and shorten the term on a fixed rate mortgage. Estimate your personal savings with this Equity Accelerator.

Who is my agent?

More often than you’d expect, homeowners refer to the person they bought their insurance from as their agent. It sounds reasonable but it’s definitely not accurate. That person is the agent of the insurance company and they legally represent the company, not the customer. Even an independent agent who can place a policy with different companies is still an agent of the company.

A mortgage officer, in most cases is an employee and represents the company. And the same is true for a title or escrow officer. It’s important to understand the actual relationship to know what you can expect from them.

Any business person who wants to stay in business must treat their customers fairly and with a high degree of service. As a customer, you should be able to reasonably expect honesty and accountability. The difference is that employees owe their loyalty to their employer and agents owe their loyalty to their principal.

An agent owes more than just honesty and accountability. The principal can expect complete disclosure, obedience, loyalty, reasonable skill and care and confidentiality from their agent.

This advocacy is very beneficial during the buying or selling process to coordinate all aspects of the transaction. The agent can bring valuable experience to your side of the transaction to provide confidence that your best interests are being represented from start to finish.

Most states have a recognized procedure for the real estate professional to create a formal relationship between themselves and a buyer or seller. This requires a fiduciary/statutory responsibility that places the principals’ interests above the agent’s own personal interests.

Mortgage Interest Deduction

Originally, in 1913 with the Sixteenth Amendment, Income Tax allowed a deduction on any interest paid by a taxpayer. Prior to World War I, most interest was paid for business purposes and very little paid by individuals. Credit cards, revolving credit, student loans and home equity loans that would charge interest would not become popular for decades.

However, by the 1930’s, the Federal Housing Authority was created to help people to finance homes. Later, other quasi-governmental agencies like FNMA, FHLMC and GNMA were created to help facilitate mortgage lending. 

Even though, Congress never intended to use this deduction to encourage homeownership, it has certainly benefitted millions of people who couldn’t pay cash for their home. This deduction has made owning a home more affordable for tens of millions of people.

The Tax Reform Act of 1986 eliminated the deduction of interest on most personal debt with the exception of qualified mortgage interest debt. Two new terms were introduced to specify what was qualified.

Acquisition Debt is the amount of debt incurred, up to a maximum of $1,000,000, to buy, build or improve a principal residence or second home. It must be a recorded lien and the amount cannot be increased by refinancing. In other words, the acquisition debt is a dynamic amount that decreases as the loan amortizes.

Home Equity Debt is any amount up to a total of $100,000 over Acquisition Debt. It must also be a recorded lien against either the first or second home. It can be used for any purpose and is no longer restricted to medical or educational purposes.

In the example below, a person borrowed money to buy a home and the entire first mortgage was acquisition debt. The unpaid balance was reduced by the payments made and the acquisition debt followed accordingly. At some point in the future, after the home had gone up in value considerably, the owner refinanced a much larger amount.

The existing acquisition debt was transferred into the new mortgage. Any borrowed funds that were used for capital improvements could be added to the existing acquisition basis. The interest on those funds would be deductible.

The owner/borrower could also deduct the interest on up to a maximum of $100,000 of home equity debt. If there was still debt above the acquisition and home equity debt, it would be classified as personal debt and the interest on it would not be deductible.  

 

 

 

 

 

 

 

 

 

 

 

Lenders are not concerned if they are making a tax deductible mortgage on a home. They want to make sure there is sufficient equity in the property to secure the mortgage should it have to be foreclosed. A homeowner should consult with their tax professional if there is a question about deducting the interest on their mortgage.

Click Here to use a Refinancing Analysis.

The Rules

The profit potential in single family homes for investment has been a consistently good long-term investment. They offer investors the opportunity of high loan-to-value mortgages at fixed interest rates for 30 years on appreciating assets, tax advantages and reasonable control that other investments don’t offer.

Last year, Warren Buffett said that if he had a way of buying a couple hundred thousand single-family homes, he would load up on them. Blackstone group L.P. (BX) has now purchased over 30,000 homes and American Homes 4 Rent (AMH) has more than 19,000 for rental purposes.

Individual investors actually have an advantage over the institutional investor but if they are not familiar with rental real estate, some basic rules could be very helpful.

1. Invest now to get more in the future. 
   Whether it is time, effort or money, the prudent investor is willing to forego immediate gratification for something more at a later date.
2. Real estate is an IDEAL investment. 
   IDEAL is an acronym that stands for income, depreciation, equity build-up, appreciation and leverage. 
3. Invest in single family homes in predominantly owner-occupied neighborhoods at or below average price range. 
   This strategy should involve homes that will increase in value, rent well and appeal to an owner-occupant in the future who will pay a higher price than an investor.
4. Location, location, location. 
   The same homes in different areas will not behave the same. You can improve the condition, modify the terms or adjust the price but the location can’t be changed.
5. Understand your strategy – buy and sell, buy and hold or buy, rent and hold. 
   These three distinct strategies involve big differences in acquisition, management and taxation.
6. Know where your profit is coming from before you invest. 
   The four contributors to profit are cash flow, appreciation, amortization and tax savings. They don’t contribute equally or the same in all investments.
7. Profit starts with purchase. 
   Buying the property below market value builds profit into the investment initially.
8. Risk is directly proportionate to the reward involved. 
   An investment that has a high degree of upside also will have considerable downside possible.
9. Avoid functional obsolescence unless you have a plan before you buy. 
   The lack of usefulness or desirability of a home that exists when you buy it will still be there when you sell it. Unless it can be cured, it will affect future profit.
10. Good property + good tenant + good management = great investment.
    These are three solid components for a successful investment.
11. Problems left unresolved have a tendency to get worse. 
    It is generally cheaper in time or money to fix a problem earlier rather than later.

If you’d like more information about the opportunities in our market, contact me.

Find the "Right" Agent Before the "Right" Home

It’s a common practice for buyers to make a list of what they want in a home during the search process and to explain it to their agent. However, maybe the first list they should make would have the skills they want their agent to have.

The Profile of Home Buyers and Sellers identifies what buyers want most from their agents and as you’d expect, help with finding the right home was ranked highest most often. While it is important, it may not be the most unique of the desired area of expertise.

Equally essential to the success of the transaction are the combination of help with price and terms negotiations and assistance with the paperwork, comparable sales, qualifying and financing.

To summarize the responses in the survey, Buyers want help from their agents with two things: to find the right home and to get it at the right price and terms. Some agents are actually better equipped with tools and acquired knowledge to assist buyers with financial advice and negotiations.

Since an owner’s cost of housing is dependent on the price paid for the home and financing, a real estate professional skilled in these specialized areas can be invaluable in finding the “right” home. An agent’s experience and connections to allied professionals and service providers is irreplaceable.

Ask the agent representing you to specifically list the tools and talent they have to address these areas.

A Home is More Than an Address

A home is a place to call your own, raise your family, share with your friends and feel safe and secure. It is also one of the largest investments most people have.

Leverage is the ability to control a larger asset with a smaller amount of cash through the use of borrowed funds. It has been described as using other people’s money to increase your yield and it applies to homeowners and investors alike. Positive leverage causes the yield to increase as the loan-to-value increases. 

Even a modest amount of appreciation combined with the amortization of a loan can cause a substantial rate of return on the down payment and closing costs.

Homes build equity as the price goes up due to appreciation and the unpaid balance goes down due to amortization. 

 

 

 

 

 

 

The example above indicates the yield on a home considering 3% acquisition costs on the home with a 4.5% mortgage rate and the resulting equity at the end of five years. The different down payments will affect the yield based on the leverage effect. 

Whether you rent or buy the home you live in, you pay for what you occupy. The question a person is faced with is whether they are going to buy it for themselves or their landlord. Take a look at the cost of Renting vs. Owning.

Get Regular Check-ups

Following his heart surgery last week, after an issue was discovered during his annual physical, President George W. Bush encouraged everyone to get regular check-ups. 

Another important checkup that should be done on a regular basis and can be just as beneficial for your finances is an annual homeowner advisory. Why would you treat your investment in your home with less care than you treat your car or even your HVAC system?

Consider investigating the following:

• Know the value of your home by obtaining a list of comparable sales in your immediate area as well as what is currently on the market for sale.

• Have you compared your assessed value for tax purposes to the fair market value in order to possibly reduce your property taxes?

• Even if you’ve refinanced in the last two years, can you save money and recapture the cost of refinancing in the time you plan to remain in your home?

• Have you considered reducing your mortgage debt with low-earning cash reserves that will not be needed in the near future?

• Have you considered investing in rental homes in good neighborhoods to increase your yields and avoid the volatility of the stock market?

• Recommendations of repairmen and other service providers from a trusted source who deals with them more frequently than you do.

Our goal is to create a lifelong relationship to help you be better homeowners. We want to be your “go to” person whenever you have a real estate question. We want to help you not only when you buy and sell but all of the years in between.

We want to provide good, consumer-based information about homeownership on a regular basis through email and social networking. If it benefits you by helping you be a better homeowner, hopefully, you’ll consider us your real estate professional for life.

Anytime you or your friends need help, please call. Knowing where to get the answer is just as important as knowing the answer. If you’d like information on any of the items we suggested, please let us know.

Where Is It Invested?

You’ve saved for a rainy day or retirement. Congratulations but don’t get too comfortable yet; where is it invested? It’s estimated that over 25% of Americans have their long-term savings in cash instead of investments like stocks, bonds or real estate.

The memories of the financial crisis of 2008 are recent enough to understand why some people may want to avoid the stock market and real estate. Even though Wall Street and housing have rebounded considerably, uncertain investors are sitting on their cash. However, trying to avoid a bad decision can have serious costs too.

If your money is not earning at least at the current inflation rate, you’re losing the purchasing power of your dollars. Bankrate.com estimates the average money-market deposit yields 0.11% and the average five-year certificate of deposit currently yields 0.78%.

Rents are continuing to rise and there is a shortage of good, affordable housing. Single family homes have a significant advantage over many other types of investments. They have high loan-to-value mortgages available at fixed interest rates for long-terms on appreciating assets with distinct tax advantages.

The cash flows are considered to be one of the most attractive features of rental properties. Some investors think of it as a growth stock that pays substantial dividends. In the example shown below, a $125,000 rental with an 80% loan-to-value mortgage at 5% that rents for $1,250 per month, has a positive cash flow before taxes of $3,000 a year.

The rate of return on rental property can be substantially higher than other investments while allowing the investor control that isn’t available in alternatives.

It Can't Hurt to Wait, Can It?

It’s been said that more money has been lost due to indecision than was ever lost because of a bad decision. Regardless of whether you agree with the statement, delaying the decision to buy in today’s market is going to cost the buyer more. 

Home prices have gone up considerably in almost every market in the country in the past year and while inventories are beginning to grow, prices are expected to continue to rise. Mortgage rates jumped 1% from the beginning of May to now. They could easily reach 5% by the end of the year and continue to rise in 2014.

Many of the financial experts in the country believe that the economy will not be strong until rates are in the 7% area.

The two components that move the cost of housing are price and mortgage rates. Escalation of either one will have an affect but when both are going up simultaneously, it is dramatic. It can literally eliminate buyers who could have purchased earlier.

The following example shows what would happen to the payments on a $200,000 home if the price were to go up 3% at the same time that the mortgage rates went up 1%. Not only would the payments go up by $150.81 per month, the price of the home would be $6,000 more. Even though the down payment may not change much, the new owner would have to borrow more money. By not acting, it is costing them more in price and payment. The loss of the appreciation would have been equity had they purchased prior to the rise in price.

 

 

 

 

 

 

 

 

 

Check out the Cost of Waiting to Buy to see what the effect will be using your own projections.

If I'd Known...

We’ve probably all said or at least thought “if I knew then, what I know now, I would have done things differently.” We should have stayed in school longer. We should have listened to our parents. We should have bought Apple stock in 2002 for $8.50 that sells for $400 today. Or we could have bought gold in 2000 for under $300 for a four-fold profit today.

Years from now, if we look back at 2012, we may say that it was the best buyer’s market ever. Even now, in 2013, it’s apparent that both housing and mortgage prices are going up and they may never return to the record low levels.

The housing affordability index, which is considered to be good at 100, had increased to over 200 this past December, January and February. Shrinking inventories and rising prices in most markets have caused the index to fall to 172.7 for May 2013.

This market applies equally to acquiring a home to live in or a home to use as a rental. It is estimated that about 30% of the property purchased last year was done by investors. It is understandable because the positive cash flows far exceed most other investment alternatives.

Homeowners moving up in a rising market may sell their home for more by waiting but it will also cost them more for a new house. Typically, a person buys a 50% larger home when they move up. If they wait for prices to go up 10% on the $150,000 home they're selling, they’ll realize $15,000 more but will pay $22,500 more for the new home purchase. They’ll actually net $7,500 less by waiting for prices to go up and may have to pay a higher mortgage rate too.

The question homebuyers and investors alike are faced with today is whether they will be saying years from now that they seized or missed an opportunity of a lifetime.

Retirement Without a Mortgage

Planning for retirement is obviously important and many times, an activity plagued by procrastination. Some people plan to have their home paid for by that magical date so they won’t have payments after they retire. It makes sense to eliminate a large recurring expense before they quit working.

One strategy would be to be make regular principal contributions in addition to the payments so that it will eliminate the debt by the target retirement date.

Let’s say that a homeowner refinanced their $200,000 mortgage at 4% last year with the first payment due on May 1, 2012. Under normal amortization, the home would be paid for at the end of the term; 30 years in this example.

By making additional principal contributions with each payment, it would accelerate the payoff on the home. An extra $250.00 a month would pay off the mortgage in 10 years. $524.55 extra with each payment would pay off the loan in 15 years; and $796.23 would pay off the loan in 12 years.

Having a home paid for at retirement has the obvious benefit of no house payment. It is also a substantial asset that could be borrowed against or sold if unanticipated events should occur.

Another strategy might involve purchasing a smaller home now to use as a rental that you intend to live when you retire; see Retirement Home Now.

To make some projections to pay off your own mortgage, use this Equity Accelerator.

 

When Rates Go Up

Rising interest rates are great if you are renewing a certificate of deposit but not so much when you’re borrowing money. With interest rates on the rise as well as home prices, housing affordability is a concern for would-be homeowners.

A rough rule of thumb is that a person’s or family’s housing should not exceed 28% of their monthly gross income. While rental rates and home prices have been consistently increasing, mortgage rates have been soaring in the past month. In one week, according to the Freddie Mac Primary Mortgage Market Survey, they jumped by .5%.

This means that people have to pay a larger percentage of their income for housing unless their incomes have been increasing at an equal pace.  A $200,000 mortgage would be over $100 more per month if closed in July compared to closing at the interest rates available in January of 2013.

If rates increase by .5% by the time you close on the same size mortgage, payments would increase by almost $60 per month. In order to keep the payments the same, a borrower would have to put an additional $11,000 down to lower the mortgage amount. 

Check out how your payment would be affected if interest rates continue to rise.

The National Association of REALTORS® suggests that housing is more affordable now than one year ago. However, with all of the variables in play including inflation that was not addressed in this piece, it is unclear how long conditions will remain “affordable”. 

FHA & VA Assumptions

Not many buyers have assumed a mortgage in the past 25 years. Most people think it was because FHA and VA in the late 80’s began to require that buyers qualify for the assumptions. Not having to qualify for a mortgage would certainly benefit certain buyers. 

If a homeowner must qualify for an assumption like a new loan, they'll generally choose the mortgage with the lower interest rate.  Over the past 25 years, rates have been trending down but it appears that rates have bottomed out and will gradually increase.   As they continue to rise, the lower rates on the FHA and VA loans created in the last few years will appeal to buyers even if they do have to qualify for the assumption.

There are significant advantages to assuming one of these government insured mortgages if the current interest rate on a new loan is higher:

1. Mortgage is further into amortization schedule
2. Lower interest rate loans amortize faster than higher interest rate loans
3. Lower closing costs than a new mortgage
4. Easier to qualify than on a new mortgage
5. No appraisal required

FHA assumptions are only allowed as owner-occupied residents. The borrower must meet current FHA guidelines for borrowers. The total debt ratio including house payment to be assumed cannot exceed 41% of borrowers’ monthly gross income.
VA loans are also assumable with buyer qualification. However, in order for the veteran Seller to have their eligibility reinstated, the buyer must also be a veteran with eligibility.

A 1% difference in the current rates and a lower assumable mortgage rate begins to make it very attractive to assume a mortgage. When the differential becomes even greater, assumptions will become more prevalent than they’ve been in over twenty years.

Debt Relief = Income

Many times a homeowner might feel relieved being out from under the obligation of a mortgage they can’t afford even though the property was lost due to foreclosure or short sale. If a lender cancels or forgives debt, a taxpayer must include the cancelled amount in their income for tax purposes depending on the circumstances. The tax significance could be serious.

Congress enacted the Mortgage Relief Act specifically to help homeowners who might be affected in the housing crisis that started approximately in 2007. The Act expired on 12/31/12 but was temporarily extended by Congress until December 31, 2013.

This relief only applies to a taxpayers’ principal residence which does not include second homes and investment property. The maximum amount is limited to $2 million of mortgage debt forgiveness or $1 million if filing separately.

Another provision is that the debt relief is limited to acquisition indebtedness used to buy, build or improve the property. It excludes cash equity loans whether made separately or in a refinance of the original mortgage.

Due to the serious consequences involved in short sales and foreclosures, it is advised that homeowners faced with this possibility should seek expert advice from their legal and tax professionals.

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Inventory is dramatically shrinking and it is commonplace in many markets to have multiple offers on a home. While the sellers would prefer to be able to choose the best offer for them, it can be incredibly frustrating for the buyers who might consider the following tips to get their offer accepted. 

1. Remove the uncertainty that you may not be approved for a mortgage by having a pre-approval letter from your mortgage company.

2. Show your sincerity by increasing the normal amount of earnest money customary for the area and price of the home. The earnest money will be applied toward your down payment and closing costs. Consider placing even more money in escrow when the contingencies have been met.

3. Specify a closing date in the contract but acknowledge that you can be flexible to accommodate the sellers moving date. If it becomes an issue, it still must be mutually agreed upon.

4. Make the contingency periods shorter if possible to make the seller feel that they’ll know sooner that the offer is solid.

5. If the contingency really isn’t important to you, leave it out of the offer. The more contingencies included in a contract, the more the seller will feel might happen to keep it from actually closing.

6. Write a personal note to the seller explaining why you like and want their home. Consider including a picture of your family and pets.

7. Physically sign the offer with a felt tip pen of contrasting color. You’d be surprised how this adds a personal touch to the offer.

Offer a fair price for the property in your initial purchase agreement. It shows sincerity and good faith that you’re actually trying to purchase the home and not trying to take advantage of the seller. The old adage that you can always go up later may never happen if there are multiple offers on the property in the beginning.

Renters Want to Buy

Fannie Mae, in a recently released study, states that consumer attitudes continue to be favorable about homeownership, particularly with the younger generations, ages 18 to 34. Slightly over half of them think that owning makes more sense than renting when comparing the financial and lifestyle benefits.

90% of aspiring owners expect to purchase a home someday and slightly over half think they’ll do it within five years. The primary challenges are having sufficient savings and the difficulty of getting a mortgage today. Younger renters see renting as a temporary stepping stone toward homeownership.

Homeowners are far more likely than renters to be “very positive” about their housing experience. Some of the benefits identified are:

• Having control over what you do with your living space
• Having a sense of privacy and security
• Having a good place for your family or to raise your children
• Having the best investment plan
• Living in a nicer home
• Building up wealth
• Saving for retirement
• Living in a place where you and your family feel safe
• Feeling engaged in your community

To satisfy a buyer’s doubts about qualifying for a mortgage, make an appointment with a trusted mortgage professional. If you’d like a recommendation at no cost or obligation, please contact me at thevannestegroup@gmail.com.  Check out this Rent vs. Own to see the real cost of owning a home.

For more information about the Fannie Mae survey in presentation form, Click Here.

 

What's It Worth?

How much is a one carat diamond worth? Anyone who has shopped for one knows that the price could have a significantly wide range of value. It's been said that purchasers  should consider the color, cut, clarity and carat size to compare stones but when it gets down to decision time, buyers still want to know “how much is it worth?”

Real estate valuation can be equally as confusing to the public. There are three commonly used tools that today’s home buyers rely on to make decisions but they vary significantly in the methods used to make the determination as well as the possible final consideration.

Appraisals are an opinion or estimate of value based on specific guidelines made by individuals who are licensed and possibly certified. Buyers and sellers may be reluctant to engage an appraiser because there is a fee of several hundred dollars that must be paid in advance even if no sale is ever consummated.

A Broker’s Price Opinion (BPO) as defined by the National Association of REALTORS® is an “estimate of the probable selling price of a property.” The Dodd-Frank Act describes a BPO as “an estimate…that details the probably selling price of a particular piece of real estate property and provides a varying level of detail about the property’s condition, market, and neighborhood, and information on comparable sales, but does not include an automated valuation model.”

A Comparative Market Analysis (CMA) is a commonly used tool of salespeople to provide information to buyers and sellers to facilitate a sale. In most cases, it would be difficult to distinguish a CMA from a BPO because the steps considered are essentially the same and practitioners commonly use the terms interchangeably.

Another method called Automated Value Model (AVM) use software to search available data on the Internet to arrive at an approximation of value. Zestimates found on the Zillow site use this method. AVM’s may not consider all the market activity such as MLS sales and active listings. They can’t make adjustments based on human experience and market knowledge.

For what it’s worth, a buyer or seller might want to acquire as much current and factual information as possible from a trusted real estate professional familiar with the market before making a decision on the largest single asset most people acquire.

Will the "Good Life" Be Ready When You Are?

The Life of Riley was a TV show from the 50’s starring William Bendix but the title’s origin came from an expression meaning that a person was living the “good life.” Most people envision themselves living the good life by retirement but don’t really have a plan to get there.

There’s a rough rule of thumb used to estimate how much net worth a person would need by the time they retire to generate a certain income. The target annual income is divided by a safe, conservative yield to determine the investable assets needed.

A person who wanted $100,000 annual income generated from a 5% investment would need investable assets of $2,000,000. If a person had $500,000 now, they would need to accumulate $1.5 million more by the time they retire. If it was estimated to be 15 years away, they would need to save about $100,000 a year, each year until retirement.

It is a sobering example that could be depressing without a plan. It might be easy to say, “I should have started sooner” which may be true but there is still hope.
Gradually, over the next several years, accumulate rental property and allow the tenant to retire the debt for you. The equity in each property will grow from the amortization of the loan each time a payment is made. It also grows as the property increases in value due to appreciation.

Single family homes as rentals offer the investor an opportunity to meet their retirement and financial goals for the following reasons:

• The ability to borrow large loan-to-value mortgages
• At fixed interest rates
• For long terms (easily up to 30 years)
• On appreciating assets
• With significant tax advantages
• And reasonable control not offered by alternative investments.

 

Breathe Easy

The benefits of regularly changing the heating and air-conditioning filters are obvious to homeowners; the real challenge is creating a system to make sure it gets done. 

A reasonable schedule would be to replace it with a new one-inch pleated filter every 60-90 days. Households with shedding pets should consider replacing them every month. Some people change their filters every month when they pay their electric bills.  A simple system would be to set a recurring appointment on your calendar like Outlook or Google.

Filters trap dust, mold and bacteria which can directly affect the air quality and play havoc with your allergies. When a filter is dirty, it prevents proper airflow and allows dust, dirt and allergens to blow through your home. Changing your filter regularly helps to avoid maintenance, improves equipment life and produces increased energy savings.

When shopping for filters, it’s understandable to look for the best bargain but the cheapest price may not be the best choice. When purchasing, recognize that HEPA-rated and HEPA-type filters are not the same thing. HEPA stands for high-efficiency particulate air. A HEPA filter meets or exceeds standards for efficiency set by the U.S. Department of Energy. Most HVAC contractors recommend HEPA filters.

Some filters need to be changed monthly and other types have manufacturer recommendations of every three months. An alternative to disposable filters are the permanent, washable types. These will cost more initially but because you can clean them and re-use them, eventually, you’ll recapture the cost and realize savings.

 

Whose Commission Is It?

One of the most common reasons buyers want to deal directly with the seller is because they feel they can save the commission. It’s a valid consideration but interestingly, it’s the same reason the seller isn’t employing an agent.

Both parties cannot save the commission. The buyer feels they have earned it because they’ve had to find the home, determine its value and negotiate with the seller. They had to arrange their own financing, title and inspections.

The seller equally feels that they have earned the commission because they too have had to research value, financing and title work.  They have incurred all of the marketing expenses and have invested hours upon hours to be available to show the property, hold open houses and answer inquiries. 

There is certainly value in all of the things that buyers and sellers are willing to do.  However, only one person can save the commission assuming the buyer and seller can reach a written agreement.

The Profile of Home Buyers and Sellers survey reports that 14% of sales were For-Sale-by-Owners in 2003 and 2004 compared to just 9% in 2012. The trend shows that agent-assisted sales rose to 88% in 2012 from 82% in 2004.

The three most difficult tasks identified by for-sale-by-owners is attracting potential buyers, getting the price right and understanding and performing the paperwork. When surveyed, sellers most value the home selling in an anticipated time frame and for an expected amount.

Experienced, third-party advocates helping buyers and sellers is a valuable contribution to the transaction which may determine whose commission it is.

"Please take our offer..."

It’s interesting that the housing climate has changed so quickly. Some buyers, who think they’re still in the driver’s seat, find the market is now going up and they’re losing the home that they really want.

Multiple offers are increasingly more common and buyers are frustrated because even full-price offers don’t guarantee that they’re going to get the home. In an effort to personify a contract offer and add emotional appeal, buyers are including a personal letter to the seller.

In most cases, the seller wants to maximize the net proceeds from the sale by getting the highest price with the least expenses and an assurance that the home will actually close on time without surprises. When a seller is faced with multiple offers that may be close to the same net, an emotional appeal might make the difference in them accepting a particular offer. That’s where the letter comes in play.

It should be a relatively short letter that gets to the point. The tone of the letter should be humble while positive and definitely, shouldn’t mention that you may have lost other homes due to multiple offers.

1. Try to identify a common feature or characteristic of the home that is important to the seller and you.
2. Don’t criticize the home or tell them about all of the improvements you need to make to justify your offer.
3. Do verbalize why living in this home is important to you and your family.
4. Assure the seller that you can indeed qualify for the home and that if they accept your offer, the sale will be consummated.

After writing the letter and eliminating the non-essential parts, read the letter a few times to your spouse or friend. Polish the verbiage and check the spelling and grammar. If your handwriting isn’t attractive and easy to read, print it. Use nice paper to appeal to the tactile senses. Attach the letter to the offer so they’re considered simultaneously.

Being pre-approved with good credit, adequate financial resources, good employment, sufficient earnest money and a reasonable offer with minimum contingencies will favorably position you. A personal letter might be the deciding factor in your favor.

Cut Refinancing Expenses

Every single day, homeowners who are excited about lowering their rate have a tendency to ignore the refinancing costs because they’re being rolled back into the new mortgage. If the payment is lower than what they’re currently paying and there’s no money out of pocket, it seems like a good deal.

Refinancing your home because a lower rate is available is one thing but the closing costs associated with that new loan could add several thousand dollars to your mortgage balance. By following some of the suggestions listed below, you may be able to reduce the expense to refinance.

•  Tell the lender up-front that you want to have the loan quoted with minimal closing costs.
•  Check with your existing lender to see if the rate and closing costs might be cheaper.
•  If you’re refinancing a FHA or VA loan, consider the streamline refinance.
•  Shop around with other lenders and compare rate and closing costs.
•  Credit unions may have lower closing costs because they are generally loaning deposits and their cost of funds is less.
•  Reducing the loan-to-value so that mortgage insurance is not required will reduce expenses.
•  Ask if the lender can use an AVM, automated valuation model, instead of an appraisal.
•  You may not need a new survey if no changes have been made.
•  There may be a discount on the mortgagee’s title policy available on a refinance.
•  Points on refinancing, unlike purchase, are ratably deductible over the life of the loan.
•  Consider a 15 year loan. If you can afford the higher payments, you can expect a lower interest rate than a 30 year loan and obviously, it will build equity faster and pay off in half the time.

A lender must provide you a list of the fees involved with making the loan within 3 days of making a loan application in the form of a Good Faith Estimate. Every dollar counts and they belong to you.

 

Shifting Debt to Tax Deductible

The Mortgage Interest Deduction is available to homeowners for up to $1,000,000 of acquisition debt on the combination of their first and second home.  They can also deduct interest on up to an additional $100,000 of Home Equity debt.

While Acquisition Debt is used to buy, build or improve a principal residence, the Home Equity Debt can be used for any purpose.  It can be used for educational or medical expenses, to purchase a personal car or boat, consolidate debts or pay off credit cards.

A homeowner with $15,000 of credit card debt at 19% and sufficient equity in their home could replace it with a home equity loan at much lower interest rate. Not only would the interest rate on the home equity loan be about 1/3 of the rate paid on the credit card, it’s would now be tax deductible.

If the taxpayer was in the 28% bracket, the net interest on a 6.5% loan would be 4.68% after tax benefits are considered.
Shifting personal debt to Home Equity debt can result in an interest deduction and probably, a lower interest rate. For more information see IRS Publication 936 page 10 and consult your tax professional.

When to Sell the Temporary Rental

Some homeowners, who were not able to sell during the recession, chose to rent their homes instead.  In some cases, they didn't need to sell their home at the depressed prices and opted to rent it until the market recovered.

It's a valid strategy but there are time restrictions that could have serious tax implications for some homeowners.

The section 121 exclusion for gain in a principal residence requires that the home is owned and used as a main home for at least two years during the five year period ending on the date of the sale.  This allows a homeowner to rent their home for up to three years and still have some part of the exclusion available.

The sale of a home with a $200,000 gain that qualifies as a principal residence would result in no tax being paid by the owner.  Comparably, a rental property with the same gain could have a $30,000 or higher tax liability depending on the length of ownership and tax brackets of the investor.

The housing market has dramatically improved in the last year.  If you have a gain in a home that has been your principal residence and it has been rented less than three years, you might want to consider selling it while you qualify for the exclusion.

If you are considering a sale on your principal residence that has been rented, consult with your tax professional for advice on your specific situation.  For additional information, see IRS Publication 523.

Boomerang Buyers

It's estimated that 10% of the homes sold in 2013 will be to buyers who lost a home in the past five years.  Approximately 500,000 buyers who may have thought they wouldn't own a home anytime in the near future will be homeowners again.

It's estimated that several million of these previous homeowners will purchase again in the next eight years.  This kind of activity will contribute significantly to the housing recovery.

Some people thought that the housing crisis would cause a shift in values placed on owning a home but the boomerang buyers definitely don't support that theory.  Having a home of your own, where you can raise your family, share with your friends and feel safe and secure is still part of the American Dream.

The rising rents, increasing prices and low, low mortgage rates are also influencing buyers into the market.  In many cases, it is cheaper to own that to rent.

All new buyers, including those who have experienced foreclosures or bankruptcies, must have good credit history and the ability to repay the loan.  It just may not take as long to reestablish the credit as some would-be buyers might have thought.

Read more about Bidding Wars This Spring, Spring's Wild Card and Boomerang Buyers.