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.