Buying and Selling • May 24, 2022

Today is a Skills Market

by GLENN ELLIOT

In today’s ultra-competitive real estate market where there is only 1.7 months supply of inventory compared to 6 months in a balanced market, and the average home is getting 4.8 offers per sale, it is more important than ever to have the right person “champion” your cause.

In the Middle Ages, it became customary for a person of nobility to appoint a “champion” to fight for them in their stead. Trial by combat ended in the 15^th to 16^th centuries but the practice of “fighting” or speaking in one’s behalf continues even to this day.

Lawyers will take up the cause of their client to win justice for them. Professional athletes are recruited for their abilities to help their team become victorious. Craftsmen of every type imaginable are in high demand because of their finished product.

Sellers’ and buyers’ objectives are different and, in many cases opposing in nature. Sellers, rightfully so, believe they should get the most for their home while minimizing expenses and avoiding any issues that could cause delays. Buyers want to be treated fairly; have an opportunity to buy the home of their choice and enjoy the protections of normal contingencies for things like mortgage approval and inspections.

In most situations, there are two real estate agents involved in a single sale. While there could be legal agency distinctions, it is commonly felt that the agent on their side of the transaction is “championing” their cause. It is natural to want your champion to be the most capable person available.

There are skills that agents need in today’s market not the least of which is negotiations. Regardless of which side of the fence you’re on, your agent needs to be skilled in negotiating on your behalf. Every part of the contract is a negotiation starting with the price, then, whether it is cash or subject to a mortgage. What’s a reasonable amount of earnest money? Can it be “as is” and still allow the buyer inspections so they’ll be fully aware of what they’re buying?

The buyer wants to negotiate the best terms possible with the seller and they are depending on their agent to work for them to get them. The home inspector has been hired by the buyer to determine the condition of the home and will most likely, ask the seller to make any necessary repairs.

The lender hires an appraiser to determine the value of the home so that the loan will be secured by the property. Recent sales are used as comparables, but they trail the market which becomes a challenge in rapidly appreciating markets, especially, when there are multiple offers.

And since multiple offers are the norm currently, how is the best way to handle them based on the seller’s or buyer’s perspective. There could be legal and ethical procedures that must be followed but an agent’s experience may also contribute to the favorable outcome.

The skilled and experienced negotiator understands that every transaction is different because of dealing with individuals, their families, their needs, and their emotions. The role of the third-party negotiator can be invaluable to the success of the transaction based on not only their experience but the juxtaposition to the principals and their objectivity of trying to reach a compromise.

Homeownership • May 8, 2022

Homeownership and the Three M’s

by GLENN ELLIOT

Homes are valuable assets and must be maintained so they function properly, are safe, enjoyable and hold their value.  Attention to maintenance, minimizing expenses and managing debt & risk will protect your investment.
Maintenance
It is interesting that people understand the necessity to maintain a car and regularly have the car inspected, repaired and do regular maintenance.  Even though a house could be worth many times more than a car, homeowners regularly neglect what should be routine maintenance.
Failure to maintain a home properly adversely affects the value.  Many times, buyers will discount the price they are willing to pay for a home more than the actual cost of the repair or expenditure.  A home in good condition instills confidence while a home in less than good condition generates concern about unknown items that may also need repair.
HVAC systems, as well as appliances, run more efficiently when they are maintained which will result in lower utility bills.  Another big benefit is that small items in need of repairs, many times, turn into more expensive repairs or having to replace the items completely.
For example, failure to replace the air filters regularly could lead to a more expensive repair like having to clean the coils or it could even lead to a larger issue like burning out a HVAC motor.  In this example, the aggregate cost of replacing the filters is much less than the cost of a new furnace or A/C unit.
It can be more expensive to fix something that is not working rather than rather than prevent it from failing by regularly maintaining it.
Minimize Expenses
Every dollar you spend on maintenance, increases your cost of housing.  Some maintenance items may be easily done yourself and you’ll save the cost of having a professional do them, like changing the filters.  However, the list of minimizing expenses goes way beyond maintenance.
Replacing all your light bulbs with energy efficient alternatives like LEDs is a great example.  In the spirit of Ben Franklin’s adage that “a penny saved is a penny earned”, every dollar you save on utilities lowers your overall cost of housing.
Windows and doors whose seals are not adequate, or a home not properly insulated could be using considerably more energy than necessary.  The cost of making these adjustments could be recaptured in utility savings in a short period of time.
Knowing the right service providers can be a big source of savings as well as give you peace of mind.  Your real estate professional has developed a wide range of trusted service providers who are both reputable and reasonable.  You should feel comfortable asking for a recommendation whenever you need one.
Manage Debt & Risk
Refinancing your home to get a lower interest rate can be a big savings but you’ll need to analyze it to determine how long it will cost you to recapture the cost involved.  A Refinance Analysis calculator can help.
Other cost-saving items could be investigating multi-policy discounts for insurance, lowering your property tax assessment, low-flow toilets, smart thermostats, unplugging small appliances when not in use, and adjusting the temperature on HVAC units and water heaters.
While you are talking to your insurance agent about possible discounts, ask about your liability coverage also.  Homeowner policies have a stated amount of coverage, but your financial situation or exposure may indicate that you need to increase those amounts.  Generally, homeowners with pools or boats have increased risk and you’ll want to ask your agent about your other extracurricular activities.
Owning a home has a lot of responsibility and having a good source of information is valuable.  Your real estate professional is uniquely qualified to be your source of credible real estate information.  If you are wondering why they would be helpful even when you are not buying or selling a home, it is because they want to establish long-term relationships so that whenever you need their help or services, not only will you feel comfortable asking but that you’ll feel confident to refer them to your friends.

Taxes • May 6, 2022

Will Selling Your Home Increase Your Tax Bill?

by GLENN ELLIOT

With home prices rising 20% nationwide in the past year and in some markets, even dramatically more, many homeowners are excited about the equity in their homes. In the past, most homeowners were not concerned about profit from the sale being taxed but some may be surprised.

The profit homeowners make on the sale of their homes have enjoyed a generous exclusion. Since 1997, for qualified sales, single taxpayers exclude up to $250,000 of capital gain and married taxpayers filing jointly, can exclude up to $500,000 of gain.

Prior to the Taxpayer Relief Act of 1997, homeowners over the age of 55 were only allowed a once in a lifetime exclusion of $125,000. The new rule greatly increased the amount of excluded profit to the extent that most homeowners did not think about paying tax on the profit from their principal residences.

Section 121, commonly called the Home Sale Tax Exclusion, requires that you owned and used the property as your principal residence for two out of the previous five years. This allows for a temporary rental of the property and still be able to qualify for the exemption. It can be claimed only once every two years.

Cost basis is determined by Purchase Price plus certain closing costs at acquisition plus capital improvements made to the home during ownership. Sales price, less selling expenses, is considered net sales price from which the cost basis is subtracted to arrive at capital gains on the sale.

If the capital gain is less than the applicable exclusion, no tax is owed. When the gain exceeds the exclusion amount, the overage is taxed at long-term capital gains rate which could be 0%, 15% or 20% depending on the taxpayer’s taxable income.

Capital improvements made to a home increase the cost basis and effectively, lower the gain in the sale. It is important for homeowners to keep records of the money they spend during the time they own the home.

Some improvements are apparent like a swimming pool, new fence, or roof but some are not so obvious. Replacing a faucet or a light fixture can be a capital improvement and even though the cost is small, lots of these items over the lifetime of owning the home add up.

The three rules for identifying capital improvements listed in IRS publication 523 are: 1) does it materially add value to the property? 2) does it extend the useful life of the property? 3) does it adapt a portion of the home to a new use?

While taxpayers are allowed to reconstruct a register of the improvements made during the time they owned their home, some things will undoubtedly, be overlooked. It is much better to have a written record of all money spent on the home in a contemporaneous manner and keep receipts for items over $75.

It is better to have the record of all items available when you are ready to make the capital gain determination. You’ll save time and probably pay less taxes having the list readily available whether you do your taxes or have a professional do them.

For more information, download the Homeowners Tax Guide.

Buying • C.L.U.E. Report • April 29, 2022

Buying a Home…Ask for a CLUE Report

by GLENN ELLIOT

People purchasing a used car have most likely heard of CARFAX vehicle history reports to help them avoid buying a car with costly hidden problems. Less likely are buyers to know that there is a way to discover some of the repair history of homes they are interested in.

Lexis Nexis C.L.U.E. (Claims Loss Underwriting Exchange) is a claims history database that enables insurance companies to access consumer claims for the previous seven years when they are underwriting a risk or rating an insurance policy.

An insurance underwriter could identify a previous claim for substantial damage to a property and try to find out whether the repairs were completed properly before assuming the risk as a new insurer. Similarly, a buyer could benefit from knowledge of former claims that may affect the value of the property or possible, future repairs.

A CLUE report can discover insurance claims on a home to investigate whether the repairs were done properly. These reports are not directly available to potential buyers, but their property casualty insurance agent could order a report subject to successful negotiations with the seller to agree on a contract of sale.

If a buyer had a CLUE report on a home that they were buying and were concerned about specific issues, the buyer could address those things with the inspector during the inspection period. Conversely, the CLUE Report could detect items that may not be visible during a home inspection.

In some cases, a listing agent might suggest a seller get a CLUE report in the spirit of full disclosure to potential buyers. Even if there were claims and the work was done properly, a high number of claims could affect the premium paid by a new homeowner.

A current homeowner can request one free CLUE report every twelve months online or by calling 888-497-0011. They can also email consumer.documents@LexisNexisRisk.com. Please be ready to provide your first and last name, social security number, driver’s license number and state in which it was issues, date of birth, current home address and phone number. For more information, see Lexis Nexis Consumer Portal.

If a buyer doesn’t have a property casualty insurance agent, your real estate agent can recommend one.

Buying • Selling • April 18, 2022

Coordinating the Sale and Purchase of Your Home

by GLENN ELLIOT

Side view portrait of couple is embracing, getting a key from their future apartment from a broker, and signing contract, all are dressed in formal outfits, sitting in workplace, workstation

It is very important to depend on the experience of your agent to guide you through the options and find the best solution for your individual situation.

Usually, it is easier to buy a home than to sell a home but that isn’t necessarily the case currently. In today’s market, it can be scary to sell your home before buying another because you could find yourself without a home.

Most sellers will not accept a contingency on the sale of a buyer’s home in today’s market. So, let’s look at some of the alternatives that homeowners are using to facilitate the transactions.

If you have the income, credit, and cash available, the replacement home can be purchased with a new 80-90% loan-to-value mortgage and sell the existing home after you have moved into the new home. This would require making two payments for a while but probably gives the seller the least amount of pressure to find the replacement property before the existing one is put on the market.

If the mortgage on the new home has the option to recast the payment, additional down from the equity in the previous home after it sells would lower the payments without causing any additional expense to refinance.

Another alternative may be available if your home has enough equity to borrow against it in a Home Equity Line of Credit or a bridge loan. This type of loan is generally made by banks who will loan qualified owners up to 80% of the appraised value less the current mortgages on the property. Freeing up the equity in your existing home will give you a down payment for purchasing the new home before you sell the previous one.

If a seller has assets in qualified retirement programs, it is possible to do temporary loans against them to facilitate the interim purchase. There can be penalties on some of these if they are not repaid in a timely manner. It would be good to investigate with your tax professional to see if this is a viable option.

Hard money lenders provide a source that will be more common to investors than homeowners. These types of loans are generally approved and funded quickly, have less requirements than bank loans and provide funding for projects that cannot be financed elsewhere. Interest rates are higher than bank loans, are written for short terms (1-2 years), and usually require 25-30% down payment or equity.

Power Buyers and iBuyers offer to purchase your home for cash and provide a quick closing. Deeper investigation into these options may reveal that you will not receive the full equity of your home because they have to discount the home to cover the expenses they will incur as a seller.

In today’s very complicated market, the value of a real estate professional representing your best interests, providing you advice, options and experience has never been greater. While there are similarities in transactions, each one is unique, and you certainly need a professional to be guiding you through the process.

Agents are trained and experienced in coordinating the purchase and sale of homes. This can be especially beneficial in navigating unfamiliar waters.

Buying • April 18, 2022

A New Opportunity for Homebuyers

by GLENN ELLIOT

FHA VA

You may not have heard of anyone assuming an existing mortgage for over thirty years and didn’t know they were even possible any longer. The reason is simple, it didn’t make financial sense but now that interest rates are increasing, it may be an opportunity for some homebuyers.

Conventional loans added clauses to mortgages back in the early 80’s that gave the noteholder the right to raise the interest rate if a loan was assumed, as well as require the new buyer to qualify for the loan. This essentially ended the practice of assuming conventional mortgages.

Then, in the late 80’s, FHA and VA mortgages did impose the right to qualify the new buyers, but the big difference was that the mortgage rate would remain the same as the original borrower. Even so, it still effectively ended the assumptions of FHA and VA mortgages because rates on mortgages trended down for the next thirty years.

There was really no benefit to assume a mortgage that still required qualifying because it was possible to obtain a new mortgage with a lower rate. Generations of buyers have never even contemplated assuming a mortgage but now, in 2022, it might well be an alternative that will lower the cost of buying a home.

Mortgage rates hit a bottom in early 2021 and have been increasing since, this year especially.

Since qualifying is required for assuming an FHA or VA mortgage and only owner-occupants are eligible, you might be asking what are the benefits? If the interest rate on the existing mortgage is less than the rate on a new mortgage, there could be a savings.

In addition to that, there are fewer closing costs involved on assumptions of FHA and VA mortgages than originating new mortgages. Another benefit is that assuming an existing mortgage will be further into the amortization schedule than a new one which means equity-buildup occurs faster. And finally, lower interest rate loans amortize faster than higher rate loans.

The rub in this situation is that many buyers don’t have enough money to purchase an equity but there is a remedy for that. Let’s assume the buyer was considering a 90% conventional loan. If they identified a home with an assumable mortgage, they could put the same 10% down payment in cash, subtract the existing mortgage balance from what would be the 90% new mortgage and secure a second mortgage for the difference.

There are lenders that make this type of loan and buyers need to shop and compare rates and fees on them just like they would if they were getting a new first mortgage. Your agent can suggest lenders for second mortgages.

Most search filters on portal websites do not include assumable mortgages. You will need to rely on your agent to ferret them out. If the agent you are working with hasn’t suggested assumptions, it may be that they are unaware of their existence.

Buying • April 4, 2022

Cost of Waiting to Buy in Both Price and Interest Rates

by GLENN ELLIOT

Have you ever been shopping on a website where you were looking at something that was on sale? You were interested in it but there wasn’t a sense of urgency and maybe, you had a lot going on and didn’t get back to it for a few days. When you did go back to the website, the price on the item had returned to its regular price.

How did you feel? Did you go ahead and purchase it for the current price? How did that make you feel knowing that if you had acted more decisively, you would have saved money and had the product by now?

In 2021, homes across the United State went up 19.1% on average. There were some markets where the prices soared 30 to 40%. Fortunately, last year the mortgage rates did remain relatively stable but that isn’t the situation this year, in 2022.

At the end of 2021, economists from Fannie Mae and Freddie Mac, felt like prices would go up around 7% for 2022. The Mortgage Bankers Association and the Home Price Expectation Survey predicted more like 5% and Zelman Research and the National Association of REALTORS® forecast closer to 3%.

While the number of sales did decline at the end of February 2022 to 7.2% month-over-month and 2.4% year-over-year, that could be explained as a lack of houses for sale. In the same month, inventory was 1.7 months which is down from 2 months in February 2021. The median sales price had a year over year increase of 15.0% to $357,300.

The Fed had their first of what may be four or five interest rate hikes this year to try and get control of the inflation rate. We have already seen mortgage rates at the 4.5% price and that is for borrowers with the best credit. Those with less than sterling credit can expect to pay more.
It is anyone’s guess at where rates will end a year from now, but many experts think this decade of low rates is over and we’ll not likely to see them again.

There is a pent-up demand for houses to buy and an urgency to buy before the rates get higher. If a buyer waits a year to purchase a home but the price goes up by 5% and the interest rate goes up by 1%, it will have a dramatic effect on the payment.

		5% price increase	10% price increase
Sales Price	$400,000	$420,000	$440,000
Mortgage	$360,000	$378,000	396,000
Current Rate vs Possible 1.00% increase	4.5%	5.5%	5.5%
Monthly Payment	$1,824	$2,146	$2,248
Payment Difference		$322.18	$424.38
Additional Cost for 7 years		$27,063	$35,648
Additional Cost for 30 years		$115, 983	$152,776

If the appreciation is closer to 10% increase, the negative effect of waiting is exacerbated.

The equity in a person’s home contributes greatly to their overall net worth and wealth position. The effect is very apparent in contrast to renters compared to homeowners whose net worth is 1/40^th of the homeowners $300,000 or $8,000 for the renters.

As people stair step their way into larger homes to not only meet their increasing demands but also to enjoy the amenities of a nicer home, the equity will continue to grow based on two dynamics: appreciation and equity-build up. The renters do not benefit from either of these.

To run your own comparison, using your own numbers and what you believe will happen in the marketplace, go to Cost of Waiting to Buy. If you haven’t developed a plan to purchase in today’s market whether it be your first home or a move-up, you need facts and a trusted team of professionals to work for you.
It starts with finding an agent who will be as committed to find your home as you are. We would love to help you or your friends. It is what we do.

Today is a Skills Market

Homeownership and the Three M’s

Will Selling Your Home Increase Your Tax Bill?

Buying a Home…Ask for a CLUE Report

Coordinating the Sale and Purchase of Your Home

A New Opportunity for Homebuyers

Cost of Waiting to Buy in Both Price and Interest Rates

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