More Time at Home

We are all spending more time at home and will probably need to continue to do so for a while longer. Depending on the makeup of your family, your home is now a home office, a gym, a virtual classroom and considerably more meals have been prepared in your kitchens in the past six months than normal.

Some businesses have undergone a metamorphosis that has shown them that maybe they do not need the big commercial spaces for their employees. They realize that they can be just as productive with their work force offsite which will cut expenses.

If this scenario sounds familiar, it may be worth exploring what moving would look like for your situation. To analyze the options, you will need to know what your home is worth and what the net proceeds will be after selling it.

You will need to know what homes are available with the amenities you are looking for together with the prices and mortgage money. Depending on the interest rate on your current mortgage, there may not be much difference in payment for a larger mortgage at today’s incredibly low rates.

Another option that some homeowners are considering is to not reinvest all the proceeds from the sale of their existing home into the new home. They are reserving some of the cash as a contingency fund for the unexpected. This strategy is providing peace of mind in uncertain times.

It is said that an investor is faced with three decisions every day: buy, sell, or hold. The equity in a home represents, for most people, their largest investment asset. While it is an asset, it is also an amenity.

Prudential thinking would insist on protecting your investments, but it would also suggest that you would evaluate alternatives to avoid missing opportunities. Having the facts available will make the options clearer and possibly, the decisions will become obvious.

We are available to help you assemble the information you need to consider what is best for you.

Moving “Down” in an “Up” Market

Selling a home and buying a lower priced home that meets your current needs can be to your advantage in an “Up” market like the current one with low inventory. The advantage is that you can maximize the price for the home you’re selling and not have to reinvest it all in your replacement.

Just to illustrate the point, let’s say there is a 10% premium in the sales price of a home currently. If you’re selling a home for $750,000, it would be $75,000. If you replaced the home with a $500,000 home, the premium would be $50,000 which means you’re $25,000 ahead.

Let’s further assume that your home is debt free so that when you sell it, you have a large cash equity. Instead of paying cash for the replacement home, get an 80% loan at today’s low interest rates and reinvest the proceeds to supplement your retirement.

You may be able to get as low as a 2.5% mortgage and earn significantly more on the proceeds in other investments.

Home prices are up significantly over last year and they’re selling on average in three weeks. Inventory is down and there is less competition for your home than normal which can lead to a higher price. Closed sales increased 9% from August to September according to a Zillow report.

Moving down in an “up” market may be to your advantage. It could lower your cost of housing by saving on property taxes, insurance, utilities and maintenance while being able to take cash out of your home to reinvest in your retirement.

You’ll be using “other people’s money” to free up your equity that you can reinvest at a rate higher than you’ll be paying on your mortgage. The difference would be profit.

To explore this opportunity, give me a call and we’ll look at your numbers.

Cutting Your Housing Costs in Half

Cutting the price will generally bring buyers of anything out of the woodwork that were not serious before. Some renters could easily lower their monthly cost of housing by half or more by purchasing a home with all the financial benefits that come with it.

The most obvious thing in today’s market is that the mortgage payment could be less than the rent the tenants are paying. With mortgage rates hovering around 3%, this is a major factor of the savings.

The two other major contributing factors are appreciation and amortization of the mortgage, neither of which benefit tenants continuing to pay rent. According to the FHFA House Price Index, home prices rose 5.4% from July 2019 to July 2020. There were 400,000 less homes on the market during the summer of 2020 than the previous summer which is influencing appreciation.

With each payment a homeowner makes on their mortgage, a portion is used to reduce the principal amount owed. This is like a savings account for the owner because it lowers their unpaid balance and increases their equity.

The equity becomes an asset that can be accessed by doing a cash-out refinance or a home equity line of credit once the equity has reached 80% loan-to-value.

A $300,000 home purchased with an FHA loan at 3% for 30 years would have a payment of approximately $2,013 including principal and interest, taxes, insurance, and mortgage insurance premium. If the tenant were paying $2,400 in rent, this would be a savings of almost $400 a month.

The monthly principal reduction would average $500 a month for the first year which would lower the net cost of housing. The other major item to consider would be the appreciation. Assuming, in this example, the home was appreciating at 3% annually, the monthly appreciation in the first year would be $750 which would further lower the cost of housing.

Rent	$2,400
Total House Payment	$2,013
Less Monthly Principal Reduction	$513
Less Monthly Appreciation	$750
Plus Estimated Monthly Maintenance	$200
Net Cost of Housing	$950

In this example, it would cost over $1,400 per month more to rent than to own.

A different approach to this would be that the equity in this home in seven years would be $121,579 based on appreciation and principal reduction. If the same person continues to rent, there would be no equity build-up.

If you’re curious as to how much you could cut your housing cost, go to the Rent vs. Own or contact your real estate professional.

Some Mortgage Interest May Not be Deductible

Banks are concerned about making loans that will be repaid not about making loans that are tax deductible for homeowners. It is good business for the bank but how is the homeowner supposed to know?

Most homeowners and potential homeowners are aware there are tax benefits associated with ownership. For instance, mortgage interest and property taxes have been deductible expenses from federal income tax since it was enacted in 1913.

The current law provides that homeowners can deduct the interest on Acquisition Debt which is the amount of debt incurred to buy, build or improve a first or second home up to $750,000. The amount of acquisition debt decreases as payments are made and it cannot be increased unless the additional funds borrowed are used for capital improvements.

It is not uncommon for a homeowner to refinance their home for any number of reasons. It could be to get a lower interest rate that would lower the payments or remove mortgage insurance. However, when additional funds are borrowed for reasons beyond “buy, build or improve”, the excess is considered personal debt and the interest is not deductible according to IRS.

Maybe this is not important if the owner is taking the standard deduction because it is higher than the total of the property taxes, qualified mortgage interest and charitable deductions made by the taxpayer. Currently, it is estimated that 90% of homeowners are electing to use the increased standard deduction implemented with the 2017 Tax Cuts and Jobs Act.

A confusing issue that occurs at the end of the year is when the lender reports to the borrower the amount of interest that was paid. While that amount is most probably accurate, the bank doesn’t know if it is qualified mortgage interest for the borrower.

It is the responsibility of the taxpayer to keep track of outstanding acquisition debt and whether part of the balance is considered personal debt.

Another area where it could become important is if the property was lost due to foreclosure, deed in lieu of foreclosure or a short sale. The provisions of the Mortgage Forgiveness Act have been extended through 12/31/20 which exempts the forgiven debt from being considered income and therefore taxable. However, it only applies to acquisition debt. Any part of a mortgage refinance that is considered personal debt could be taxable in that situation.

As an example, let’s say that homeowners originally borrowed $300,000 to purchase a home that they owned for 15 years. During that time, the home appreciated significantly, and they refinanced it twice. Once, they made some improvements and took out cash to pay off personal loans and the second time, it was only a cash out.

Original acquisition debt	$300,000
Remaining acquisition debt including improvements	225,000
Unpaid balance on current mortgage	$550,000
Personal debt	325,000

In the example above, the personal debt of $325,000 would be considered income on foreclosure and recognizable as income on that year’s income tax return.

If you have never refinanced your home or have refinanced it but never taken any money out of it except to make capital improvements, your unpaid balance in most likely acquisition debt. However, it you have refinanced your home and pulled money out of it for purposes other than capital improvements, those funds may be considered personal debt.

This article is for information purposes. If you are unclear about the current acquisition debt on your home or need advice for your individual situation, contact your tax professional. Additional information can be found in IRS Publication 936, Home Mortgage Interest Deduction.

Seven Questions to Ask Before You Choose an Agent

The concern today when putting your home on the market should not be whether you’ll get a contract; it’s whether you are going to recognize the majority your net proceeds without any unnecessary delays.

What you realize from the sale of your home has to do with maximizing the sales price while minimizing the sales expenses. Interestingly, the buyers will be trying to minimize the price they have to pay for your home and possibly, have you pay some of their expenses.

Taking a few pictures with a cell phone and putting a sign in the yard may be enough to get a buyer but successfully selling a home in today’s market requires expert marketing and expert negotiations.

Marketing begins with the preparation of the property to optimize the first impressions it makes to potential buyers. A skilled professional can make recommendations that can help the home sell for the most money and in the shortest amount of time. Cleaning, painting, depersonalizing, removing unnecessary items and possibly staging are a few of the recommendations you might receive.

93% of buyers rely on the Internet to search for properties and information and is something they engage even before they find an agent. Positioning the home so it only can be found effectively in the search is making it appeal favorably and requires careful consideration.

Professional-level photography will make the property look appealing. Experience knowing the right angles, the proper lighting, and having the right lens are only a few of the things can make a property stand out from the competition.

Negotiations plays a huge part in the sale of any home. There will be negotiations during the offer/contract stage with the buyer and the other agent. After that, there may be negotiations regarding inspections, repairs, the appraisal, or anything that might threaten the ultimate closing.

The following are seven questions that you can ask when interviewing an agent to market your home. The answers should help you evaluate and select an agent who can represent you and your interests.

1. Do you use a professional photographer?
2. Have you sold homes in this area recently?
3. Explain your timetable for preparation, “going live” and market exposure.
4. Describe your efforts during the negotiation process.
5. Do you have a pricing analysis, showing actives and solds, for my neighborhood?
6. Which properties will be our strongest competition?
7. How do you get the most exposure to get competing offers?

On the surface, it may appear that all agents are the same. They are all be licensed to sell real estate and can put your home in the MLS for other agents to find. Experience and skill sets can vary widely among agents and the questions provided in this article can help you determine who can do the best job for you in today’s environment and the market your home is located.

Four Things Sellers Should Do Before the Sign Goes in the Yard

Just like buyers should be pre-approved before they begin to look at houses, Sellers should have their home pre-approved. The reasons are similar: appeal to the “right” buyers, discover issues with the home early, improve marketability, increase negotiations position and close quicker.

For the seller, there are few things that need to be done before the sign goes in the yard and definitely before prospective buyers see the home. The first is to understand that once you decide to sell the home that it needs to appeal to the broadest base of buyers and that means depersonalizing your home.

Once the home is sold, you will need to pack your things for the new home. Think of this as starting the process early. Get moving boxes and make decisions on what you intend to give away or discard in each room and closet. Identify and pack those items before the home goes on the market. This will be the first wave of making your home more marketable.

When your home hits the market, it needs to be a neutral commodity and not “your” home. A good rule of thumb is to remove items that involve religion, hunting and sports. That means removing personal items like family photos or collections displayed in the room.

Next, in round two, go through every room to remove the items that make too large of a statement or take up too much room. Pool tables may be appropriate in a game room, but they are not in a dining room or a living room.

Personal collections may have taken you years to accumulate and you’re proud of them but the people who come to see your home will either not appreciate them or they will become distracted by looking at them instead of the home. The livability of your home needs to be the focal point. The buyers need to visualize themselves living in the property that will become “their” home.

The four most important rooms to address are the primary bedroom, kitchen, living room and dining room. These rooms have a major influence on buyers when determining whether “it is the right home.” Bright colors, possibly used as accent walls, should be neutralized.

After you have depersonalized the home and removed non-essential items that could make the rooms or closets look small, you might want to consider another technique referred to as staging. Rearranging furniture so the room shows to its best advantage is simple and doesn’t cost a thing. You might decide that a coffee table or statement piece would be nice and your REALTOR® or stager can suggest a place to rent it rather than buying it.

Once the home is depersonalized and staged, you are ready to have a professional photographer take the pictures that visually describe your home to potential buyers long before they ever look at the home physically. These will be used on websites, portal sites, MLS, and social media. Anyone with a point and shoot camera thinks they are a photographer but a pro with the correct wide angle lens, who understands lighting and has an “eye” for what makes a great picture is worth every dime you’ll spend.

One more consideration should be to have the home inspected before it goes on the market. It won’t replace the buyer’s inspections but it will discover any items that need repair and they should be done before the home goes on the market. This will probably save you money because it might cost less to repair them than they’ll want in second round of negotiations when their inspector finds it.

Another benefit is that if their inspector identifies a problem area that your inspector did not, you have a basis for legitimate disagreement that could just be personal opinion instead of a “fact.”

While the process of depersonalizing should take part before you put the home on the market, you’ll want you have the benefit of your real estate agent’s experience to help you with the process. At age 18, a person can expect to move nine more times but by age 45, they may only expect to move another 2.7 times. Your REALTOR®’s experience can be valuable not only in saving your time and money but actually, make the difference in a successful sale.

Selling or Buying Smart Homes

More and more homeowners are employing smart home technology within their homes. It may start with a video doorbell or lights and progress to other devices. The smart-home device market is rapidly growing and Forbes research expects it to grow from $55 billion in 2016 to $174 billion in 2025.

The popularity of these high-tech features will require a few additional steps to consider when selling a home. The seller should determine which items will and will not stay with the sale of the home and identify them in the listing agreement.

Confusion can arise when a home’s marketing mentions its smart-home technology and is unclear if a piece like the hub, which is easily considered personal property but is integral to the working of the system. Some might consider it an accessory and others a component.

A smart home can contain multiple technology devices connected to the Internet that allow them to be controlled or accessed from computers, tablets or most commonly, on mobile apps. Many of the devices can also be accessed through a hub like an Amazon Echo or Google Home.

Thermostats and lights may have been some of the first such devices but the video doorbells added a new level of WOW factor by being able to see and talk to the person at your door and even get a video recording. Porch pirates are now seeing their images on social media caught in the act thanks to these devices.

Homeowners sometimes start with one item like a smart sprinkler system control. When they find out how cool it is and that it actually saves them money not to mention how convenient it is, they starting planning their next smart-home device purchase. Some of these items absolutely are permanent and become real property and others, border between personal and real property.

If the seller is including smart devices with the sale of the home, they should have administrative access and any personal information removed and return the devices to the default settings. The seller should also review the privacy settings and delete the permissions for their personal mobile devices. For the benefit of the buyer, any manuals or warranties should be left for the new owner.

Equally as important, the buyer should verify that the smart devices have been returned to their factory settings and no longer coupled with the seller’s mobile devices. The buyers can create their own account to register the devices in their name. Then, as security updates are available, they will be notified. At the same time, the buyer will want to create new access codes and preferences.

Alternative Investments

In a recent article, The Wall Street Journal reported that investors have rarely been this flush with cash. The economic uncertainty due to the pandemic and the volatility of the stock market has caused assets in money-market funds to increase to approximately $4.6 trillion, the highest level on record according to Refinitv Lipper.

The question becomes should an investor be “out of the market” until things settle down or should they seek to find alternative investments to produce satisfactory results. Even in the middle of this uncertainty, residential rental property has been a stable performer.

Rents are continuing to increase along with values. Investor mortgages are available at 80% loan-to-value at fixed interest rates for 30-year terms. Most other investments must be purchased for cash or at best, are limited to low loan-to-value loans, at floating interest rates for relatively short time frames.

The use of borrowed funds, especially at today’s low interest rates, contribute to the rate of return and in some cases, increase it. This characteristic is known as leverage.

Income properties enjoy specific tax advantages like long-term capital gains rates lower than ordinary income rates, standard depreciation, which is a non-cash deduction, as well as expensing many big-ticket items in the year purchased.

Tax deferred exchanges are available for investors wanting to avoid the tax due on sale and defer the profit into the replacement property.

One of the most cited reasons people invest in rental homes is that they feel they are more in control. They understand a rental home because it is the same type of property and requires the same maintenance as the home they live in. They can make the decisions to improve it, repair it, what rent to charge and when to sell it. For most owners, a home represents their largest financial asset. That familiarity becomes a natural bridge to decide to invest in rental property rather than something they are less familiar.

If you’d like to know more about the benefits, download the Rental Income Properties guide and call me at (901) 484-9494 to discuss what kind of opportunities are available.

How Does It Measure Up?

People are always looking for a “down and dirty” way to determine the value of a home and square footage seems to be one of the most common things used by people whether they are buyers, sellers or real estate agents. While it seems straight forward, there are several variances that can lead to inaccurate determinations.

The market data approach to value uses similar properties in size, location, condition and amenities to compare with the subject to arrive at a price. Differences in any of these things can affect the price per square foot. Appraisers are trained and licensed to make these adjustments but the differences are not necessarily objective and that is where opinions start to influence the value.

Even if a person were to make accurate adjustments, they would be based on the assumption that the square footage of the comparable properties is correct. That leads to the next area of concern: how was the subject property measured.

It is commonly accepted to the measure the outside of the dwelling on detached housing. Is it customary in this area to include porches and patios under roof and if so, do they get full value or only partial value? Is there any value given to the garage since it isn’t living area? What about other areas that do not have HVAC coverage?

Some areas don’t give consideration to basement square footage at all. Others might give some value if it is finished or has access directly to the outside like a walk-out basement. Similarly, attic space could be finished and under HVAC but if the ceiling height is not standard for the home, it may not receive value.

The problems become exacerbated when different comparables are not treated consistently and yet the common denominator ends up being an average of the square foot price of each. This is calculated by taking the sales price and dividing it by the number of square feet being quoted.

The source of the square footage should be listed to help determine the accuracy. It could be what the builder said it was to the original purchaser. If there is a set a plans available, that might seem credible but it is not uncommon for the builder to make changes while the home is being built which could increase or decrease the square footage.

Another source is the tax assessor. In many cases, they don’t actually measure the home but take the word of the builders or appraisers for it. If permits were obtained to add on to the home since it was built, it should be reflected in the square footage. However, sometimes permits are not secured properly.

After reading this, you may think that more doubts have been introduced than solutions and you are correct. It takes diligence on the part of all parties to determine the correct amount. The most highly trained person will be the appraiser and they should be measuring the home in its “as is” condition but understand that even a competent person can inadvertently make a mistake.

It’s Worth Digging a Little Deeper

There are hundreds of thousands of people who believe, for one reason or another, they cannot afford to buy a home currently. Some people may not for any number of reasons but it would be very surprising to know how many who can buy but have gotten some bad information along the way. It’s worth digging a little deeper to find out the facts.

John and Karen have been renting a home for the last five years at $2,000 a month. During that time, the value of the home they were renting went up by $30,000 in value while the unpaid balance decreased by $18, 400. Even though they were fortunate enough the rent remained constant over the five years, they missed out on close to $50,000 of equity that the owner realized instead of them.

Another thing to consider with today’s low interest rates, it is quite common for a mortgage payment to be lower than a tenant is paying rent for a similar property. So, in this example, John & Karen paid more to rent than a house payment would have been and missed out on the equity build-up that occurred due to appreciation and amortization.

The simple fact is when tenants like John and Karen pay their rent, the landlord is the beneficiary of the rent received as well as the equity earned. Over time, the rent paid by John and Karen and other tenants will pay for the landlord’s rental. It a great concept and a good investment.

True, not everyone can afford a home. A buyer needs money for a down payment and closing costs. They also need to have income and good credit to qualify for the mortgage. Some of these may seem insurmountable but instead of imagining that buying a home is not in the cards at the current time, talking to a real estate professional is a better route to take.

There are lots of low-down payment mortgages available including 100% financing for qualified veterans and USDA eligible buyers. It is sometimes more difficult to find sellers willing to pay all or part of a buyers closing costs when inventory is low, but lenders do allow it. It is a matter of finding the willing seller.

The source of the down payment could be a gift from a family member as long as there is no repayment expected. It’s amazing how many parents or grandparents might be willing to help a relative get into a home. Funds for a down payment may be available as loans or withdrawals from qualified retirement programs like IRAs or 401k plans. It’s worth investigating based on what retirement programs you have.

Good credit is necessary to qualify for a loan but buyers should not assume that theirs is not adequate. A trusted mortgage professional can assess a situation and may be able to suggest some things that will not only raise the score enough to be approved but possibly, even raise the score enough to qualify for a better interest rate.

There are a lot of misunderstandings about whether a person can or cannot qualify for a home at this time. Instead of relying on second hand information or something that might be floating around on the Internet, spend some time with a real estate professional who can give you the facts, assess your situation and if necessary, point you in the right direction to get help from a trusted mortgage professional. Call (901) 484-9494 to schedule an appointment where we’ll help you dig deeper to determine whether you can buy a home now.

Download our Buyers Guide to give you more information.