Moving UP or DOWN

Staying at home in 2020 caused of lot of owners to think about how nice it would be to have a larger home to accommodate the additional activities that come along with isolating. Particularly for people with children at home or possibly, the potential of either adult children or parents coming to live with them.

There are other owners who are trying to weigh the pros and cons of selling their larger home and downsizing. For entirely different reasons, the advantages could be very appealing to an owner. A smaller home is easier to maintain and usually, has lower utilities, insurance, and property taxes.

Some people might be considering the convenience and ease of mobility of a single level home. It may be finding a location with proximity to the activities they are now interested in. A newer home might have less maintenance and be more energy efficient.

Married taxpayers who have owned and occupied a principal residence for two years can exclude up to $500,000 of capital gain while a single taxpayer can exclude up to $250,000. Liquidating the equity in their home without a tax liability could have multiple benefits.

Some people might choose to pay cash for the replacement home. Others might put 20% down to avoid mortgage insurance and possibly, even get a 15-year loan to get the lowest rate. The balance of the equity could be invested at a rate higher than the interest on their new mortgage. Still, others might want to have some reserve funds available for whatever the next unanticipated crisis might be.

It could be a way to fund a longtime goal like children’s or grandchildren’s education, or wedding, or a once-in-a-lifetime trip. Maybe part of the equity could be used to start a business or make a grant to a worthwhile charity.

Selling a home and purchasing another will have expenses involved that have to be taken into consideration. Purchase costs could be 1.5 to 3% while sales expenses could be easily be 2.5 times that much.

Regardless of whether it is moving to a larger home or a smaller one, now is a good time to make the move. Due to the low inventory in most markets, homes are selling quickly, many times, in less than three weeks. Normally, the winter months have less activity which means less competition also.

And then, there are the mortgage rates. As of 1/21/21, the 30-year fixed rate was at 2.77% and the 15-year at 2.21%.

Like any other big change in life, it is recommended that you take your time to consider the possible alternatives and outcomes. Your real estate professional can provide information that can be valuable in the discernment process such as what your home is worth, what you will net from a sale as well as, alternative properties for your next stage in life.

Rental Home Investments

Rental homes whether they be single-family detached properties, condos, two, three or four-unit properties share many of the same benefits. Most people instinctively understand many of the working parts because they are the same as their home. They have a basic understanding of value and how to maintain the property. The service providers for a home would be the same for a rental home.

These properties allow an investor to obtain a large loan-to-value mortgage at fixed interest rates for up to thirty years. They appreciate in value, currently exceeding many other assets; have defined tax advantages and allow an investor more control than many alternative investments.

Most lenders require 20-25% down payment and will finance the balance at rates close to owner-occupied homes. Buyer closing costs will add another three to four percent to the amount of cash needed to close. It is also prudent to have available funds for repairs and maintenance.

There are successful real estate investors in every price range and part of town. If your ultimate goal is to have the rent handle the holding costs and to sell the appreciated property at the end of a seven to ten year holding period, it might be advantageous to stay in predominantly owner-occupied neighborhood. They usually appreciate faster and will appeal to a buyer who wants it for their home. Chances are, this type of buyer will pay a higher price than an investor who may not be willing to pay as high a price.

By staying in an average price range, or possibly, slightly lower, you’ll be able to appeal to the broadest group of not only buyers but also tenants while you are renting the property. Even during the mid-80’s when FHA interest rate was 18.5%, buyers were still purchasing homes. Whereas the higher priced homes have a tendency to slow down during trying economic times.

Ask your real estate professional what price ranges sell the best, rent the best and have mortgage money available.

Some investors manage their properties themselves and others don’t want to be involved. Professional property management has advantages like expertise, established contacts, operating statements and economies of scale. The main disadvantage is the cost factor but if they can rent it for a higher price and keep expenses lower than you can, it could minimize the difference.

A possible consideration might be to have a real estate professional place the tenant, check the credit and write the lease. There would be a one-time fee for this, but the owner/investor could then, manage the property, saving the expense of a monthly fee.

Understanding the landlord tenant laws would be particularly important to an investor managing their own property but regardless, the investor needs to have a basic familiarity of the law. There can be civil as well as criminal aspects. Examples might be that a landlord is required to change the locks on a property for a new tenant; the number of days before a landlord must return a deposit and what to do if there are damages causing all or part of it to be withheld.

Another tool that can be very helpful for investors is an investment analysis that will assist them in selecting a property that is likely to provide a satisfactory rate of return. Ask your real estate professional if they can provide this for you. They should be more familiar with rents and expenses to be able to determine the cash flow and what kind of yield you may be able to expect over your intended holding period.

For more detailed information, download our Rental Income Properties and contact me to schedule a meeting to talk about the possibilities.

Pre-Listing Inspections

Imagine what happens when there is not a pre-listing inspection. The buyer contracts for the home with a provision for professional home inspection. When it is made, there could be things that the buyer didn’t expect or even, anticipate. If it doesn’t trigger an action to terminate the contract, the buyer will inevitably, ask the seller to make all the repairs.

When presented with the buyer’s request, the seller may take the opposite position of not wanting to do any of the repairs. The buyer could accept the property in its “as is” condition or negotiate the repairs or a reduced price with the seller.

Any experienced agent can tell you that sometimes a mutually agreed negotiation is reached and other times, an impasse is met that cannot be resolved. The contract is terminated, and the house has to go back on the market but this time, a disclosure has to be made to all parties looking at the home which may deter showings.

Taking a pro-active approach, by obtaining a pre-listing inspection, the seller can find out about things that will probably show up in a buyer’s inspection. They can get them repaired before the home is shown and it will help the buyer feel more confident with the home. Another option would be to disclose them as not working and make a price adjustment, either way, the seller is in control and is taking a position of transparency with potential buyers.

In some cases, the pre-listing inspection may show things in working order that the buyer’s inspection indicates as needing repair. With two disinterested parties having opposing opinions, negotiations have a more likely chance for a mutual agreement.

Disclosing things that are not in working order can reduce liability in the future. Some deficiencies with the home are not discovered prior to the closing and the surprise issues could lead to liability. The pre-listing inspection by a professional combined with the seller disclosing it properly can reduce potential liability.

For the small investment in the pre-listing inspection, the benefits are well worth the expense. You and potential buyers will have a better idea of the condition of your property and know what to expect. You can present the property in a transparent way that will build confidence with the buyer. You’ll avoid unpleasant surprises as well as possible delays. Pre-listing inspections can lead to faster sales and satisfaction for everyone involved.

For more information, download the Sellers Guide.

Would you move if it was to your advantage?

A much-repeated investment strategy is to buy low and sell high. Some people who purchased around the financial crisis of 2010-2012 are poised to make considerable profits.

The median home price in America is now $295,300 up from $155,600 in February 2012 which calculates close to an 8% annual increase. The median equity that homeowners have earned during the same period is $140,000.

Inventory is in short supply while demand is high which has caused prices to increase. Factors that continue to contribute to the lower number of homes on the market are record low mortgage rates and housing starts have not met expectations since the Great Recession. This year, people spending more time at home due to the pandemic has caused some people to rethink their current living space which has added to the demand.

Some experts believe that a significant portion of the workforce will continue to work from home after the pandemic has passed making the motivation for a larger home more of a long-term effect.

The median days on the market for a listing is 24 which is a direct result of the low inventory and heightened competition. Sold homes are receiving an average of three offers with some situations ending in a bidding war. This is an advantage for a seller who can not only realize a higher sales price but also accelerate a move into another home.

While the pandemic has certainly wreaked havoc on some businesses like the hospitality industry, real estate has continued to boom. Seven out of ten sales contracts are closing on-time which can give sellers a great deal of confidence.

Taxpayers can exclude up to $500,000 of qualified gain if they are married and up to $250,000 if single. Some homeowners are taking the profit from their homes while at the top of the market, reserving part of their equity for investments, and purchasing another home with a higher loan-to-value mortgage at the incredibly low mortgage rates now available.

If you’re curious to see if this might work for you, contact us at (901) 484-9494 to find out what your home is worth now and what homes are available that may fit your lifestyle better. Download our Sellers Guide.

Debt-to-Income Ratio Affects Approval & the Interest Rate

Debt-to-Income ratio is a tool that lenders use to qualify buyers for a mortgage and is an important factor in determining loan approval. It provides an indication of the amount of debt that a potential borrower is obligated to in relation to how much income they have.

Total monthly debts are determined by adding the normal and recurring monthly debt payments such as monthly housing costs, car payments, minimum credit card payments, personal loan payments, student loans, child support, alimony, and other things.

By dividing the monthly income into the monthly debt, you arrive at a percentage of the monthly income. Lenders actually look at two different ratios commonly called the front-end and the back-end.

The front-end ratio is the proposed total house payment including principal, interest, taxes, insurance, mortgage insurance if required, and homeowner association fees. Lenders generally don’t want these expenses to be more than 28% of the monthly gross income.

The back-end ratio includes the same items that are in the front-end ratio plus any other monthly obligations like the ones mentioned earlier. Lenders prefer to see this ratio not to exceed 36% of monthly gross income but some lenders may extend that to 43%. Borrowers obtaining an FHA mortgage might also be allowed an even higher back-end ratio.

If a borrower had $8,000 monthly gross income, their proposed house payment should not exceed $2,240 or 28% of their monthly gross income. Then, their house payment and monthly debt should ideally not exceed $2,880 or 36% of their monthly gross income.

For the sake of an example, let’s say that their monthly debt was $900. That would only leave $1,980 for the maximum house payment. The monthly debt became a limiting factor affecting the house payment.

In addition to determining whether the buyer qualifies for the mortgage, it could affect the interest rate. Having good credit and having the proper ratios can result in being approved for a mortgage. On the other hand, if the debt is on the upper side of an acceptable range, the lender may charge a higher interest rate for the addition risk of a marginal borrower.

While the math is not difficult to come up with your ratios, it is not necessarily a do-it-yourself project. A trusted lending professional can assess your situation and give you an accurate picture of what price home you can afford and the rate you can expect to pay.

Both things are important to know before you start looking at homes and especially before you contract for one. All lenders are not the same. Call me to get a recommendation of a trusted mortgage professional who specializes in the type of mortgage you want. Download this FREE Buyers Guide.

Buyer’s Closing Costs

Ideally, each party will pay their own closing costs associated with the purchase and the sale of a home, but they can be negotiable based on lender requirements and market conditions.

The fees are usually paid at the settlement and will be itemized on the closing statement. Buyers should be aware of them before contracting for a home. If a mortgage is involved, the lender will want to verify that the borrower has ample funds available at closing to pay for them.

Buyer’s closing costs can range between two to five percent of the sales price. The real estate agents should be able to give you an estimate of what a buyer can expect. The most accurate estimate will come from the lender at the time the loan application is made. They may or may not include other fees that will be charged to buyers by the title or escrow company.

Buyers are required to be provided a standard Closing Disclosure form at least three business days before the loan closing date. This document will include the loan terms, estimated monthly payments, loan fees and other charges. This can be compared to the loan estimate provided by the lender when the application was made.

Fees connected to a mortgage

Loan origination fee … This is the lender’s fee for processing the mortgage application. It can vary in amount but typically, it can be one percent of the mortgage amount. It may be possible to negotiate this fee into the rate of the mortgage.

VA funding fee … This is a fee charged to the veteran for closing the loan. It can be paid in cash or rolled into mortgage. The amount is based on the status of the veteran, their down payment and whether they have had a VA loan before.

Appraisal … This is a fee paid for a licensed appraiser to determine the value of the property. It validates that the mortgage will not exceed the purchase price and that the buyer has enough down payment based on the type of mortgage applied for.

Attorney fee … This fee is charged to ensure that the legal documents are drawn properly so the lender will have an enforceable mortgage. It is not for legal representation of the buyer.

Discount points … A point is one percent of the mortgage. These fees are considered prepaid interest and can be used to adjust the interest rate on the mortgage.

Lender’s title insurance … This coverage insures that the lender has an enforceable lien from title claims on the property. This policy is usually issued in connection with an owner’s title policy and is priced separately.

Mortgage insurance … Most loans made in excess of 80% of loan to value require mortgage insurance to protect the lender from loss if the property must be foreclosed on. There is no mortgage insurance requirement on VA loans. FHA mortgage insurance premium has two parts. There is an up-front charge of 1.75% of loan amount and then, a monthly amount which is added to the payment. Conventional loans usually collect the first month’s premium in advance and subsequent amounts are rolled into the mortgage payment.

Recording fees … These are fees that are for filing the legal documents with the municipal or county recorders. The documents would include the mortgage and the deed.

Survey fees … This fee is necessary, based on requirements of the lender, to verify property lines, shared fences and driveways and to identify any other encumbrances.

Underwriting fee … This is a separate fee that covers the research and determination that the entire loan package meets the lender’s requirements.

Fees required by mortgage for escrow account

Property taxes … Lenders can require two to three months taxes to be held in escrow so that there will be enough to pay them in full 60 to 90 days before they are due.

Property insurance … Insurance is paid in advance and the annual premium will be due at closing. The lender further requires one additional month’s amount so that one month prior to the anniversary date, the premium can be paid for the renewal.

Flood insurance … The lender may require flood insurance on the property based on their assessment of the location in a flood zone or proximity to a flood zone.

Fees connected to purchase of a home

Settlement fee … This is the buyer’s portion of the fee paid to the title or escrow company, or attorney who handles the closing of the sale.

HOA Fee … Home Owner Association fees are usually paid in advance by the owner. They are prorated at closing for the amount paid that the seller does not benefit from.

Owner’s Title insurance … This coverage insures that the buyer, the new owner, received clear and marketable title from the seller. It will protect the new owners’ interests should they be challenged. Even though it may not be required, it is recommended.

Pest inspection … A pest inspection by a licensed exterminator can be required by a buyer to determine if there are active termites or termite damage, dry rot or another pest infestation.

Property inspection … A home inspection conducted by a professional can be required to determine structural integrity of the property as well as all the systems in the home. It can include but not be limited to plumbing, electrical, roof, heating and air conditioning, appliances and other things.

Title search … Sometimes, title companies waive this fee when an owner’s title policy is issued. It can be customary that a separate fee is charged in addition to the premium for the title insurance.

Transfer taxes … When government taxes are required, these fees must be collected.

The Consumer Financial Protection Bureau is a U.S. government agency that makes sure banks, lenders and other financial companies treat the public fairly. You can download a Closing Disclosure Explainer from their website.

Where Did the Assumptions Go?

Mortgage assumptions have not been a practical matter for the last 30 years because mortgage rates have been on a steady decline. Even if the seller had a rate lower than the current rate, the new purchaser must qualify to assume the loan.

In the case of conventional loans, the lender has the right to increase the rate to the current rate which neutralizes the reason for assuming the loan. This change took place in the early 1980’s when lenders added due on sale provisions so lower rates could not be assumed.

FHA and VA loans can be assumed at the existing rate with the provision that the purchaser qualifies for the loan. This could be an advantage if the rate on the loan to be assumed was lower than the current mortgage rate for FHA or VA and the buyer is going to owner-occupy. Unfortunately, investors are prohibited from assuming FHA and VA loans.

Besides the obvious advantage of a lower rate which would have a lower payment, the closing costs are lower on an assumption than originating a new loan. Another benefit is that the loan will be further into the amortization schedule than starting a new 30-year loan which means it would be retired sooner while the equity is also growing faster.

The current rates are close to one-percent lower than they were a year ago, so, assumptions are probably not a method of financing a home purchase in the near future. The Freddie Mac forecast expects rates to remain low, possibly at a yearly average of 3.0% in 2021.

Mortgage rates have remained low since the Great Recession even though experts anticipated they would start trending upward. If rates increase, especially rapidly, assumptions of FHA and VA loans could easily be a tool that buyers and real estate professional alike will be employing. For sellers with an assumable loan at a below market rate, it could add to the value of the property as well as the marketability.

Vacation Home Sales Up 44%

Vacation home sales are up 44% year-over-year according to the National Association of REALTORS® based on sales during the July to September period. Not only are the number of units up, but they are also selling faster than in previous years.

On a national basis, 72% of existing vacation homes closed in October were on the market for less than one month.

The increased desirability and affordability of vacation homes, according to the National Association of Realtors, seems to be influenced by the pandemic and low mortgage rates. The ability to work from home seems to be contributing to this increase.

Freddie Mac reports the average commitment rate for a 30-year, conventional, fixed-rate mortgage decreased to 2.83% in October compared to the aver commitment rate for all of 2019 which was 3.94%.

There may also be a safety factor involved with these decisions to purchase vacation or second homes. Contagious diseases flourish more in highly populated areas like big cities and suburbs. The locations of the vacation or second homes are generally in areas with less residents.

The slower pace from the city may also add to the appeal of considering second homes. Proximity to the mountains or water, whether it be the ocean, rivers or lakes, have become a lure to people who realize that if where they work doesn’t matter, they can select a place where they want to be.

Historically, Americans on the east coast left the cities during the 1793 yellow fever epidemic. The same migration took place in the mid-19th century during three waves of Cholera and Scarlet fever.

Trends have yet to determine whether some of these new vacation home buyers may consider moving permanently or may reconsider the decision after the pandemic. Currently, it does have broad-based appeal and offers a lot of flexibility to owners who can afford it.

Home Inspections

A home inspector is another key professional involved in a real estate transaction. Many times, the sales contract will have a provision that allows the purchaser to have inspections made to discover issues that are not readily apparent or have not been disclosed by the seller.

It is important to have a qualified individual perform the inspection. Regardless of whether a license is required, buyers should ask about the inspector’s experience, training, years in business and if they are familiar with the area and type of property involved.

Membership in professional associations can indicate an inspector’s commitment to education and training. References from both customers and agents are helpful and may be more meaningful. You are encouraged to call the references, especially, if you are concerned about any specific areas.

Errors and Omission insurance is intended to cover mistakes made during an inspection. It would be good to find out if the inspector has this type of insurance and how mistakes are handled or if omissions are made.

Find out exactly what is included in the inspection and what will trigger the inspector to recommend that you get an opinion by a specialist. They should be able to provide you with a sample report so you can see the detail with which the items will be explained. Ask if items that need attention will also be documented with pictures.

Some inspectors will allow you to accompany them during the inspection. They will be able to point out their concerns and answer any questions you may have about different things. An inspection can take two to three hours depending on the size of the property.

Generally, there is a time allotted in the sales contract for the inspections to be made and not completing them in a timely fashion could waive your right to use the contingency. Your real estate professional will be able to guide you through this process.

First Things First

If you are making a particular meal for the first time, it is essential to have a recipe so that it turns out the way it should. Knowing the ingredients and preparation can guide you through the process.

Buying a home is really no different than making a new recipe. There are certain things that need to be done, many of which should occur in a particular order to save time, money, effort and disappointment.

Your first inclination may be to start searching the Internet for homes and schedule some showings or possibly visit open houses. Even though this is very gratifying, it shouldn’t be done until you have gone through the preliminaries.

Buying a home for the first-time implies you haven’t been through the process before and even though, you may have a rough idea of what needs to be done, selecting the right agent in the beginning will give you the benefit of years of personal and professional experience that can help you avoid some of the common mistakes made when buying a home.

This agent can direct you to find the other team members that are required like the lender, title company, inspectors and others. Each member of the team has an important role to play that if not done correctly, could cause delays and possibly, jeopardize the transaction.

An important step is getting pre-approved so that you’ll know exactly what price mortgage and home you’ll qualify for. This may even allow you to lock-in a mortgage rate before you contract for a home. The pre-approval could also prove very helpful in negotiating with the seller by removing some of the doubt in their mind regarding an unknown buyer. Another advantage to pre-approval is that if you are competing with multiple offers, you have the advantage of being more of a known commodity.

You’ll need to assemble some documents for the lender including pay stubs from the past two months, W-2’s from last year, proof of additional income, tax returns for the past two years, bank statements for the last three months, list of all open credit accounts and balances, copy of driver’s license and history of residence for past two years.

Buying a home is one of the most important decisions in your life and it should be done with care and research. When all the things are done in the right order, finding the “right” home is just like following a recipe. For more information, download this Buyers Guide that includes great information to help you through the process.