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| Ocean View Executive Estate Gated 6 BR, 4.5 BA, Built in 2003, 4280 sq. ft. area, 9,600 sq. ft. yard, End of Cul-De-Sac location http://www.idxre.com/idx/detail.cfm?cid=8020&pid=S481460&bid=11 |
Articles and Advice |
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| Leveraging the most from your real estate investment By Dian Hymer Many homeowners recently have realized more financial gain from the homes they live in than they have from their stock portfolios. Thanks to several sequential years of rapidly rising home prices, homeowners in many cases have seen their net worth rise even though their stock market portfolio values declined. Now, many experts are predicting that the rate of home price appreciation will wane as interest rates rise and the real estate market settles into a more balanced market. A balanced market is one that doesn't overwhelmingly favor either the buyer or seller. During the first quarter of 2005, the national median existing single-family home price was up 9.7 percent from the first quarter of 2004, according to the National Association of Realtors. In a balanced market, you're more likely to find an annual home price appreciation rate in the 4 to 5 percent range. When real estate markets change, you can actually lose money on your home if you have to sell soon after buying. This can occur even though home prices are still appreciating, but at a lower rate. Suppose you purchased your home in its "as is" condition, and it needed a lot of work. In areas that experienced a strong seller's market, buyers often made "as is" offers in order to be competitive. Real estate markets are cyclical, so you can't always count on home price appreciation to improve the value of your investment. You could experience several years of rapid appreciation followed by years of low or no appreciation. HOUSE HUNTING TIP: To preserve and enhance the value of your real estate investment, it's wise to cure deferred maintenance, establish a good regime of ongoing home maintenance and make value-adding improvements to the property. The best time to tackle deferred maintenance is as soon as possible after title to the property is transferred into your name. This may be difficult for buyers who stretched to their financial limit in order to buy. If you have no resources that you can tap immediately for home improvement projects, establish a budget and a plan to take care of necessary work over time. It might help to ask your home inspector to prioritize the defects listed in his report in terms of how quickly repairs should be made. If you can't afford to correct all the deferred maintenance at once, at least you'll know which items to concentrate on first. It's natural to want to spend money on making your home look pretty. But, don't make the mistake of overlooking defects that will diminish the value of your home when you sell. Even though you may have purchased your home "as is" regarding a poor drainage system or a rotted deck, a future buyer may not be willing to overlook these defects. Serious drainage, foundation and wood pest problems should not be neglected. Some problems will become worse--and more expensive to correct--over time. Unless you're selling in a very strong seller's market, you'll probably have to subtract the cost of overlooked repairs from your equity when you sell. From an investment standpoint, it's risky to make major improvements to your home unless the infrastructure is sound. When you do get around to making improvements to add value to your home, make sure to do your homework first. Over-improving your home for the neighborhood is likely to cost you more money than you make. THE CLOSING: Before making a major investment in improvements, consult with a real estate professional. Find out if the changes you have in mind will actually add market value to your home. |
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| How can I combat rising interest rates? By Dian Hymer Recent increases in interest rates have had buyers scrambling. When interest rates rise, so do monthly mortgage payments, which makes buying a home more expensive. It's hard to think about paying more to buy a home when weeks earlier it would have cost a lot less. What can you do to ease the pain of higher rates? One option is to scale back your price range. A less expensive house means a lower mortgage amount and lower monthly payment. But it also might mean a less desirable neighborhood. This isn't too appealing especially if you're buying in a high-priced area like the North East or West Coast where it's not uncommon to pay $500,000 for a starter home. If you drop back to a lower price range, you may find that you can't find a home to buy in the area where you want to live. A more palatable option for many buyers is to switch mortgage products. Let's say you qualified for a 30-year fixed rate mortgage when rates were in the mid-5 percent range. But, at close to 6.5 percent, you no longer qualify. A popular alternative is an adjustable rate mortgage that's fixed for five years. During the first week of September, these mortgages were being offered in the mid-5 percent range. Before signing up for a 5-year fixed-rate loan, make sure you understand how the loan works. After the first five years at a fixed interest rate, the loan converts to an ARM with an interest rate that fluctuates. Interest rates could be significantly higher in five years than they are now. If so, refinancing into a lower-interest-rate fixed mortgage at that time may not be possible. You don't want to find yourself having to sell your home in what could be a down market. So, make sure you can afford to make higher mortgage payments if that's what you're stuck with at the end of five years. HOUSE HUNTING TIP: Some 5-year fixed-loan buyers are opting for the no-point option. This way, if the economy slows and interest rates drop again, they can refinance into a fully fixed-rate loan and pay points at that time to buy down the interest rate. This avoids paying points twice. Points is a term lenders use for the loan origination fee. One point is equal to 1 percent of the loan amount. Mortgages that are fixed for seven or 10 years are also available. Although interest rates on these loans are better than they are on 30-year fixed loans, they're not as competitive as 5-year fixed ARM loans. Interest-only mortgages are also gaining in popularity as buyers search for a way to keep their monthly payment down as rates rise. The entire monthly payment goes to interest so none of the principal (the amount borrowed) is paid back during the course of the loan. These loans can be risky if the market softens, prices drop and you have to sell. Some interest-only loans convert to an amortizing loan after a number of years. Once this happens, you will start repaying the principal with each monthly payment. Sellers who are looking for a way to enhance the salability of their home might offer to pay points to buy down the interest rate for the buyers. As far as the lender is concerned, either the buyer or seller can pay points. However, under normal market conditions, buyers usually pay points. THE CLOSING: If a seller agrees to pay points, the lender may call this a credit for buyer's closing costs. Lenders have limits of how much they will permit a seller to credit for closing costs. |
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| Cooling real estate market presents challenge for sellers By Dian Hymer The housing market has changed. There are fewer multiple offers. Negotiation is back in vogue. Listings, in general, are taking longer to sell. And some listings are not selling at all. What are your options if your home is less desirable in the current marketplace than you'd hoped it would be? One option is reduce your price. Another is to hold out for a while, hoping that the market improves to meet your price. In most cases, however, the latter option is unlikely to yield results. The robust housing market of the last several years appears to be taking a break. No one knows how long it will be before we see double-digit price appreciation again. Many experts believe it will be years. A third option, if there's no urgency to sell, is to rent the property for a time and sell at a later date. This might be worth considering. However, as with any scheme, there are pros and cons that should be evaluated carefully before making a decision. On the positive side, a property that is, or will soon be, sitting empty will generate income. This income can help offset mortgage and property tax obligations and homeowner association dues for condo owners. Another plus is that you can buy time until the market improves. On the other side, consider that the market in most places is still good. 2006 isn't expected to be as strong a year for homes sales as was 2005, which was the best year ever. However, David Lereah, chief economist for the National Association of Realtors, predicts that the 2006 home sales volume will be the third best ever. A risk in renting now and selling in 2007 or later is that the home sale market might not be as good then as it is now. If interest rates rise considerably in the interim, it most certainly won't be better. A downturn in the general economy also wouldn't bode well for the housing market, particularly if accompanied by higher interest rates and oil prices. HOME SELLER TIP: An important factor to consider is the tax implications of renting rather than selling. If you have owned and occupied the property as your primary residence for two of the last five years, you are entitled to a capital gain tax exemption. For a single individual, $250,000 of capital gain is tax-free. The exemption is $500,000 for a married couple who files jointly. If you wait over three years to sell because of market conditions, you would lose this valuable exemption unless you move back in to the property, which might not be convenient or possible at that time. You could forgo the exemption and turn the property into a permanent rental for tax purposes. At some later date, you might do a 1031 exchange and trade this investment property for another, thereby deferring tax on the gain. However, deferring gain on an investment property may not be as advantageous as taking the tax-free gain you can realize when you sell a personal residence. Be sure to consult with a knowledgeable tax adviser about the consequences of turning your single-family residence into a temporary or permanent rental. Even if you do sell in time to preserve your capital gain tax exemption, you're likely to face additional expenses preparing your home for sale. Tenants usually don't care for a property as an owner would, so you should anticipate that repairs and renovations will be necessary. THE CLOSING: When you take into account the cost of future renovations and staging, and the uncertainty of a future market, you might be better off lowering your asking price and selling now. |
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| Should I fix up my home or just sell it? By Paul Bianchina Making the decision to sell your home is always a tough one. There are financial and emotional decisions to make, and any number of factors that can tip the balance one way or the other. The emotional decisions are ones that only you can answer, but as to the financial side of things, there are some common sense questions that may make the decision a little easier. What Is Your Home's Condition? If you are faced with large home improvement repairs such as a new roof, dryrot repairs, or major plumbing or electrical system overhauls, you need to weigh that carefully. If your home has substantially appreciated in value over the years and the needed repairs would create a financial burden for you, it may be wise to consider selling – you'll have to ask a little less than you would if those repairs weren't necessary, but you may still make a sizeable profit on the sale. On the other hand, perhaps the housing market is down, or you haven't had the house that long and your equity is not substantial. It may be wise to refinance or secure other funding, and make the repairs now before the situation worsens. Can You Expand? Quite often, the reason people want to move is because the house is simply too small to meet their current needs. If that's the case, and if you like the neighborhood and like the house in general, you might want to consider adding on. Room additions can make a huge difference in the size, layout and livability of any home, provided they are done correctly. Take a good look at your needs, and what you have to do to meet them. Do you have the room to add onto the side or rear of the house? Can you add a second story? Are their city, county or homeowner's association restrictions that will limit your ability to expend sufficiently? Remember that as much as you love a house and a neighborhood, and as much as you would like to stay in it, remodeling is not always the answer. No matter how good your contractor is, remodeling will not increase the size of a small lot, it won't add a wood shop in a neighborhood that doesn't allow them, and it probably won't be able to alleviate major flaws in room layout. Beware Of Overbuilding Suppose you are considering adding 500 square feet to your 1,000-square-foot home. If your entire neighborhood consists of 1,000-square-foot homes, you may be overbuilding for that neighborhood. For some people, overbuilding is a serious consideration, since part of the reason for the improvement is to make the house more valuable, and to hopefully see a return on your home improvement investment. For others who are primarily interested in creating a home that meets their needs and that have no plans to sell the house in the foreseeable future, overbuilding may be very much a secondary consideration. Overbuilding is not limited to additions – it can apply to everything from upgraded roofing materials to kitchen remodels to extensive landscaping. You need to take the neighborhood into consideration, the general housing market, your future plans, and even your relationship with your neighbors. Get That Homework Done If the time seems to be drawing near for making the decision to move or improve, do your homework first. Look at what your neighborhood is doing, and what housing prices are. Talk with a trusted real estate agent, and consider an independent market appraisal of your home. Consider paying a general contractor a consultation fee to discuss your home's general condition, and the cost of potential improvements. And be sure you don't ignore municipal and homeowner's association requirements and restrictions as part of your fact-finding. |
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| No-cost mortgage may be unwise in today's market Points and fees add to overall loan payment By Dian Hymer No-cost mortgages are popular with home buyers who are trying to scrape together enough cash to buy a home. Now that the cost of mortgage money is rising, it makes sense to re-evaluate this financing strategy. To say that a mortgage has no costs is a bit of a misnomer. The borrower pays few if any upfront fees to originate a no-cost mortgage. But the upfront fees, like points, are added to the cost of the mortgage. The cost is reflected in a higher interest rate. "Points" is a term lenders use for the mortgage origination fee. One point is equal to 1 percent of the mortgage amount. So, if you pay one point to originate a mortgage for $500,000, you will pay $5,000 cash to the lender at closing. There is an inverse relationship between points and the mortgage interest rate. The more points you pay, the lower the interest rate. One point is roughly equal to a quarter percent on the interest rate. If you were to pay one point, you'd buy the interest rate down 0.25 percent in relationship to a borrower who chooses to pay no points. For a no-point loan, your interest rate will be approximately 0.25 percent higher. A no-cost mortgage was an attractive option when interest rates on fixed-rate financing were under 6 percent. Now that rates are moving higher, paying points may make more sense, particularly if you're buying for the long-term. For example, let's say you're trading up to a home that you plan to own 20 years or so until your children are in college. You're financing the purchase with a $500,000 mortgage. For one point, the interest rate will be 6 .25 percent with a monthly payment of $3,078.60. The zero-point option will cost 6 .5 percent with a monthly payment of $3,160.35--a difference of $81.75 per month, or $918 per year. If you opt to pay one point, you will need to keep paying on the mortgage for approximately five years and two months to break even when compared to the cost of the no-point mortgage. HOUSE HUNTING TIP: To arrive at the break-even point when comparing a no-point loan to one with points, divide the points, or $5,000 in this example, by the annual difference in monthly payment, or $918. The result is the length of time in years that you need to keep the loan to make it worthwhile to pay points. In the above example, there is an advantage to paying points for a lower interest rate if you keep the loan for over five years. The longer you keep the loan, the bigger the savings. In today's market, buying for the long term is a good strategy. Paying upfront points also can be advantageous to home buyers who will benefit from a tax deduction. Points paid on a purchase mortgage are tax-deductible in the year of purchase by homeowners who itemize deductions on their federal tax return. Talk to your tax advisor for advice on whether you'll benefit tax-wise by paying points. Keep in mind that paying points can be an unnecessary expense for buyers who purchase for the short term. You would also come out ahead with a no-point loan if interest rates were to decline over the next few years. In this case, you could refinance into a lower interest rate mortgage. THE CLOSING: If you're short of cash and there are a lot of homes for sale that aren't moving quickly, you might ask the seller to pay points for you. This strategy will have less chance of success in a market where listings are selling quickly. Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers," and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books. |
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| Realty Tax Tips Everything you need to know about the $250,000 home sale tax exemption By Robert J. Bruss It's difficult for most of us to get very excited about income taxes. But when it comes to earning up to $250,000 tax-free (up to $500,000 for a qualified married couple), have I got your attention yet? EASY QUALIFICATIONS FOR THIS TAX BREAK. Of course I'm referring to the Internal Revenue Code 121 principal residence sale tax exemption. To qualify, you must have owned and occupied your primary home at least 24 of the 60 months before its sale. Only one spouse's name need be on the title but each spouse can qualify for up to $250,000 ($500,000 total) tax-free profits if both meet the 24-month occupancy test and file a joint tax return in the year of sale. The method of holding title doesn't matter even if title is held in a living trust. Of course, if two individuals not married to each other both hold title and each owns and occupies the principal residence at least 24 of the 60 months before its sale, then each co-owner qualifies for up to $250,000 tax-free capital gains. If you are in the military or Foreign Service, special rules apply and your 24-month home occupancy can be as far back as 15 years from the date of sale. Your 24-month principal residence occupancy need not be continuous. However, if you bought and occupied your primary home as recently as 24 months ago before selling it, you meet the 24 out of the last 60-month ownership and occupancy test. Watch out if you acquired your home in an Internal Revenue Code 1031 tax-deferred exchange. The reason is for such home sales after October 22, 2004 you must have owned the property at least 60 months although you only need 24 months of principal residence occupancy during that time. The property need not be your principal residence on the date of sale. For example, if you occupied your home for at least 24 months during the 60 months before sale, you could rent the house to tenants as long as 36 months before losing your entitlement. Home sellers of any age can qualify. There is no need to buy a replacement principal residence. This generous tax break can be used over and over without limit. However, it cannot be used more frequently than once every 24 months. WHERE IS YOUR PRINCIPAL RESIDENCE? If you own and personally use more than one home, such as a Florida winter home and a summer Michigan home, this tax break only applies when you sell your "main home" as the IRS calls it. Occupancy time alone doesn't determine your principal residence. For example, in the tax case of Guinan v. U.S. (2003-1 USTC 50475) the Guinans sold their Green Bay, Wis., home where they spent more time than at their other homes. Although they met the 24 out of last 60-month occupancy test, and kept a bank account and automobile in Wisconsin, the U.S. District Court said it wasn't their primary residence because the Guinans never filed their income tax returns from Wisconsin. The sad tax result for them was paying a $45,009 capital gain tax on the sale. In addition to meeting the occupancy test, the IRS says principal residence indicators (when you own more than one home) include (1) place of employment; (2) principal place of abode for the taxpayer's family members; (3) address on taxpayer's federal and state tax returns; (4) location of taxpayer's banks; (5) location of automobile and driver's license registrations; and (6) civic affiliations, such as taxpayer's religious organizations and recreational clubs. CONFUSION ABOUT SALE OF HOME IN YEAR OF SPOUSE'S DEATH. When a principal residence is sold in the year of a spouse's death, IRC 121(b)(2) permits full use of the tax exemption up to $500,000, if qualified. The tax reason is a surviving spouse can file a joint tax return with the deceased spouse in the tax year of that death but not in future tax years. However, surviving spouses should not rush to sell their principal residence within the same year as the spouse's death. The reason is when the surviving spouse inherits the deceased spouse's share of the home, the surviving spouse receives a new "stepped-up basis" for at least 50 percent of the home's market value on the date of death. In community property states, the surviving spouse usually receives a new 100 percent stepped-up basis to market value. LITTLE KNOWN TAX BREAK FOR DIVORCED AND SEPARATED HOME SELLERS. Most divorced and separated couples are not aware they can still qualify for up to $500,000 total tax-free principal residence sale profits. In a little-known provision of IRC 121, if one divorced or separated spouse (called the "in spouse") qualifies for the $250,000 tax break by owning and living in the residence at least 24 months, the other spouse (called the "out spouse") can also qualify for up to $250,000 tax-free profits when the home is sold. This tax break is frequently used when one spouse stays in the home until the children become 18 or 21 and the home is sold. Even the non-resident co-owner ex-spouse can then qualify for up to $250,000 tax-free home sale profits. SALE OF ADJOINING VACANT LAND CAN ALSO QUALIFY. Another little-known provision in IRC 121 permits the sale of an adjoining vacant lot to qualify for the exemption. However, this special tax benefit is only available if the adjacent principal residence is sold within 24 months before or after the lot sale. PARTIAL EXEMPTION IF YOU DON'T MEET THE 24-MONTH OCCUPANCY TEST. Even if you don't fully meet the 24-month occupancy test within the last 60 months before the principal residence sale, you may qualify for a partial exemption. Acceptable reasons for the home sale include (1) change of employment location qualifying for the moving cost tax deduction; (2) health reasons; and (3) unforeseen circumstances. The change of work location and health reasons exceptions haven't caused problems. But "unforeseen circumstances" are more difficult as acceptable reasons are still evolving. The IRS says these reasons are acceptable: (1) divorce or legal separation; (2) death in the immediate family; (3) unemployment; (4) decreased income leaving the taxpayer unable to pay the mortgage or basic living expenses; (5) multiple births from the same pregnancy; (6) damage to the home from a natural or man-made disaster or terrorism; and (7) condemnation, seizure or other involuntary conversion of the property. If you meet the partial exemption test with one of the above reasons for the home sale, a percentage of your $250,000 or $500,000 exemption is available. For example, suppose you owned and occupied your primary residence for 12 months before you moved due to a qualifying change of employment location. You would therefore be entitled to a partial exemption of 12/24 or 50 percent of $250,000 or $500,000. HOW TO AVOID TAX ON MORE THAN $250,000 OR $500,000 HOME SALE CAPITAL GAIN. Thanks to large recent increases in market values, many home sellers have the nice problem that their home sale capital gains exceed the IRC 121 tax exemptions. The only way to make a fully tax-exempt property sale in that situation is to make an Internal Revenue Code 1031 tax-deferred exchange. To do this, the home seller must (1) move out of their home and rent it to tenants (most tax advisers suggest at least six to 12 months); (2) then sell your former home rental property, and (3) use the sales proceeds to acquire another rental or investment property of equal or greater cost and equity. Be sure to comply with IRC 1031(a)(3) (known as a Starker exchange) which requires designating the replacement property within 45 days after the sale and taking title within 180 days. Meanwhile, the sales proceeds must be held by a qualified intermediary exchange accommodator beyond the trader's "constructive receipt." CONCLUSION. Internal Revenue Code is a very generous tax exemption allowing principal residence sellers to earn up to $250,000 (up to $500,000 for a married couple) tax-free every 24 months. But the easy qualification rules must be followed. For full details, please consult your tax adviser. |
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| Contingent sale offers: how to keep everyone happy A look at release clauses, time limits By Dian Hymer As the home sale market turns from a strong seller's market to a more normal market, we're bound to see an increase in offers that are contingent on the sale of another property. This is good news for buyers who must sell first before they can afford to buy another home or who just don't want to own two homes at once. Keep in mind that an offer made contingent upon the sale of another home still is unlikely to work in markets where the inventory of homes for sale is low and where buyer demand remains high. Prime candidates for a contingent sale offer are listings that have been on the market for a while or listings in areas that are bloated with inventory. Here's how a contingent sale offer works. The buyers include a contingency in their purchase offer that says the purchase is subject to their existing home. If the buyers' property sells, the sale goes through. But, if it does not, the sale is off and the buyers' deposit is usually returned. Given the choice, most sellers would prefer a non-contingent offer. It's less risky. However, there are ways to structure a contingent sale offer to make it appealing. HOUSE HUNTING TIP: One way is to include a release clause in the contract. A release, or kick-out, clause allows sellers to continue to market their home in the hopes of finding a better offer. If such an offer comes along, the sellers notify the buyers that they must remove their contingent sale contingency by a certain date and show that they are able to close. Otherwise, they must withdraw from the contract. The sellers are then free to proceed with the other offer. A release clause usually includes a time period--often 72 hours. But, it can be any time period that the buyers and sellers agree to. If you're dealing with obstinate sellers, you might shorten the time period to 48 or 24 hours. This means that you'd have to move quickly if the sellers exercise the release clause. You may want to line up interim financing if you're confident that your home will sell and if you don't want to lose the new home to another buyer. This way, you would be prepared to remove your sale contingency and provide proof of your ability to close. A contingent sale offer should include a time period of the buyer's home to sell. Some contingent sale contingencies are structured so that the time period runs until the closing date. This is advantageous to the buyer, but it ties up the sellers' home without giving them certainty that the sale will close. Sellers might be more receptive if you structure your offer with two deadlines: one for the sale of your home and another for the closing of the new home purchase. This gives the sellers the option to cancel the deal if your home is not sold within a certain time. Ideally, the release clause would expire as soon as you have an accepted offer on your home. This will preclude the seller from selling to another buyer after you've sold your home. Buyers who have already entered into contract to sell their home are in a better position to negotiate. This is particularly so if the contingencies in this offer have been removed. In this case, you can make your offer contingent on the close of that sale. This is a stronger offer than one made contingent on the sale of your home. THE CLOSING: Sellers who are entertaining an offer that's contingent on the close of the buyer's home sale should make sure that this sale is not contingent upon the sale of yet another property. Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers," and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books. |
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| Best time to take out mortgage when buying home Paying cash, refinancing later has its benefits By Jack Guttentag Q: I have enough cash to swing an all-cash purchase if I want to, but I don't want all of my money tied up in the house; I want to get some of it back in a mortgage. What is the downside of paying cash and taking out the mortgage later versus taking out the mortgage at the time of purchase? A: The downside of taking the mortgage after you have purchased the house is that the mortgage will then be classified as a "cash-out refinance" as opposed to a "purchase mortgage." Why does that matter? Cash-out refinance loans are viewed as riskier than purchase loans, and therefore are priced higher. On prime loans, the rate difference is about 0.125 percent. Only a small proportion of those who take cash-out refinances have houses that don't already have a mortgage, as in your case. Most have a mortgage and want to raise cash, and some of those are in financial distress and end up in default. That's why cash-out refinances have higher loss rates than purchase mortgages, and are charged a higher price. The other side of the coin is that it is more difficult to shop effectively for a purchase mortgage than for a refinance. Borrowers purchasing a house are faced with a closing date on which they must provide funding to complete the purchase. This means that at some point in the process there is not enough time for the purchaser to back out of a deal and start anew with another loan provider. Once past that point, they are vulnerable to a variety of tricks by unscrupulous loan providers that can cost more than 0.125 percent In contrast, the refinancing borrower who feels badly treated by a loan provider can opt out of the deal at any point and start again with another loan provider. Usually, timing is not critical on a refinance. Even after a loan closes, a borrower refinancing with any lender other than his current lender, has three days to rescind it. The lender must then return all fees and remove any liens on their property. This right is not granted to loans used to purchase or construct a house. I think if it were me, I would pay cash and mortgage later, despite the price difference. With a refinance, I'm in charge. Q: "Is there a limit on the number of mortgage payments one can make in a given year?" A: This question turns out to be a little more complicated than you may have imagined. The reason is that lenders may accept a payment without necessarily crediting it to the borrower's account at that time. That means that your question is really two questions. One, how many times a year will a lender accept the borrower's payment? Two, how many times a year will a lender credit the borrower's account? To illustrate the distinction, some lenders have weekly payment programs under which they accept payments every week. However,they credit the payments to the borrower's mortgage monthly. They thus accept 52 payments a year but they only credit 12. In effect, the borrower paying weekly is making his monthly payment early, which gives the lender the use of his money until month-end. It doesn't amount to a lot but it certainly compensates the bank for the additional processing expense. The same distinction applies to biweekly payments. On biweekly programs that are run by third parties, the borrower pays biweekly but the lender credits the payments monthly. The interest earnings on the borrower's money, which is held by the third party until the monthly payment is due, is part of the income of the third party. Most of them also charge the borrower a fee. A biweekly program offered by a lender may go either way. Some lenders credit the biweekly payments biweekly, some monthly. On a $100,000 loan at 6 percent for 30 years, the biweekly that credits payments monthly pays off in 297 months and total interest payments are $92,193. The same loan with payments applied biweekly pays off in the equivalent of 294 months, and total interest is $91,022. These numbers are derived from calculators 2b and 2bi on my Web site. The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. |
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| Who's entitled to buyer's deposit in failed real estate deal? By Dian Hymer Sellers often feel that they should be entitled to keep the buyer's deposit money if the buyer fails to complete the purchase for any reason. But, more often than not, when a home purchase transaction falls apart, the deposit ends up being returned to the buyer. Most purchase contracts include contingencies. These are conditions that must be satisfied in order for the sale to go through. Usually, the buyer is entitled to have his/her deposit returned if he/she is unable to satisfy a contingency, depending on how the contract is written. For example, suppose the buyers include a contingency that specifies the terms of the financing they'll need to arrange in order to close the deal. Furthermore, the clause stipulates that if the buyers are unable to obtain that financing, their deposit will be returned to them. They earnestly attempt to line up the financing, but are unable to do so. Maybe interest rates rose to a point where they could no longer qualify for the loan they needed. Or, perhaps their credit report turned up issues that made it impossible for them to qualify. In either case, the buyers would probably be released from the contract without penalty. However, let's say these buyers didn't attempt to obtain financing. Instead, they went out and bought another house. They strung the sellers along for a couple of weeks and then claimed they couldn't get a loan and wanted out of the deal. In this case, the sellers could have a legitimate claim to the buyers' deposit. But, to find out a definite answer to this question you would need to consult with an attorney – ideally one who specializes in residential real estate. In some states, home buyers use attorneys to draft their purchase contracts and to handle the closing. In most states, however, home buyers have their real estate agent prepare the purchase contract using preprinted forms that have been drafted by attorneys. Once the purchase contract is signed by the seller it becomes legally binding, and it includes all the terms and conditions that will apply to the transaction. HOUSE HUNTING TIP: Having real estate agents prepare purchase contracts usually works fine. But, if there is a glitch in the transaction that requires a legal interpretation, your real estate agent will not be able to help you unless your agent is also an attorney. It's against the law for someone who is not an attorney to practice law. Many buyers and sellers have a hard time understanding why their real estate agent who prepared the contract for them can't advise them on such things as who's entitled to the deposit if the transaction fails. However inconvenient it might be to consult with an attorney before deciding to lay claim to a buyer's deposit, it's absolutely essential. In one case, a buyer backed out for what he thought were sound reasons. The seller asked his agent if he was entitled to the buyer's deposit. The agent said yes. Based on this advice, the seller refused to return the buyer's deposit. The buyer then hired his own attorney, sued the seller and won. Residential purchase contracts often include a liquidated damages clause, which sets a limit on the damages that could be awarded to the sellers if the buyers breach the contract. A breach occurs when the buyers back out for a reason that's not provided for in the contract. Sellers frequently assume that if both the buyers and sellers have agreed to include a liquidated damages clause in the contract, this means that the buyers will automatically lose their deposit if they fail to close the transaction. In some cases this might be so; in some cases not. THE CLOSING: Before jumping to a conclusion, consult an attorney. |
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| Shopping for a good home deal By Dian Hymer Everyone wants a good deal. But, good deals are few and far between in the many low-inventory markets around the country. Recently a couple was trying to buy a starter home in El Cerrito, a hot housing market in the San Francisco Bay area. They lost out over and over again in multiple offer competitions. So they decided to try a new strategy. Rather than continue making offers on hot new listings in their price range, they made an offer on an over-priced listing that had been on the market awhile and hadn't sold. The seller had lowered the list price just as the buyers made their offer. The buyers had no competition and were successful in buying the property. Their good fortune was that they were the first to hear that the seller was willing to accept less than his list price. HOUSE HUNTING TIP: If you're having troubles finding a home to buy—or a home to buy at the right price—consider listings that aren't drawing a lot of attention from other buyers. Well-located listings at the best price and in the best condition are the ones that sell the fastest, and for the most money. To find a good deal, you have to be willing to go against the herd. There is a certain comfort, however, in buying a property that everyone else wants. A listing that's in high demand is likely to be desirable when you want to sell it. Buying a prime listing can be a good investment, as long as you don't over-pay. But, in a multiple offer competition, you may have to pay a premium to be the successful bidder. You don't want to buy just any listing that's not selling. If the property has defects that can't be fixed—like too many levels or a chopped up floor plan—you may have a difficult time selling it later. Also, if the sellers are unrealistic about the price or condition of their property, you may not want to waste your time. Before you make an offer on an over-priced listing, have your agent talk with the listing agent and try to determine the seller's motivation. Find out if there have been any offers. If there have, why didn't the property sell? If the seller is obstinate about his price, go on to another property. However, if the seller is considering a price reduction, give it a go. If the listing agent thinks the seller is not ready to negotiate, ask to be informed when the seller has a change of heart. The best time to make an offer on an over-priced listing is usually just before the seller drops the price. Otherwise, you could face competition. Most buyers gravitate to the most attractive listings. Buyers who can see past a dowdy décor may pick up a property at a bargain price. The trick is to know a house with potential when you see it. Looking at a lot of listings and analyzing what you see can help. Often it's the paint colors, updated finishes and attractive furnishings that make a listing desirable. With a little imagination, you could create an appealing ambience yourself, after you buy. Listings that are back on the market because a deal fell apart present another opportunity. These listings often sell for less the second time around. Find out why the deal fell apart. But remember to buy a house with good bones, not one with serious problems. THE CLOSING: Homes with good appreciation potential are always a good deal. Look in areas that are adjacent to neighborhoods that have already experienced a significant run-up in prices. These areas could be the next hot markets. |
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| Strategies for changing real estate markets By Dian Hymer It appears that the home sale market in some areas may be changing from a hot seller's market to a more balanced market. A balanced market is one in which neither the buyer nor the seller has the upper hand. When this sort of shift in home sale market occurs, you usually find a larger inventory of homes of sale. Therefore, it generally takes longer for homes to sell, there are fewer multiple offers and fewer listings sell for more than the asking price. As the inventory of homes on the market increases, buyers have more to choose from. Given more choice, buyers tend to be pickier. For instance, a home with freeway noise—that might have sold quickly, maybe even with multiple offers in a strong sellers market—could take longer to sell in a more balanced market. Sellers should tone down their expectations as the market shifts. With more inventory on the market, pricing your home for sale will be critical. Why should a buyer pay more if there are other more reasonably priced listings to choose from? HOUSE HUNTING TIP: Buyers that are contemplating trading up to a larger home or down to a smaller home should carefully consider whether it's better to buy the new home or sell the old one first. In a hot seller's market, there's less likelihood that your home would sit on the market unsold for long. When the market shifts, and it starts taking longer to sell, it may make more sense to sell first, particularly if you're stretching financially to afford the next home. You never know exactly how much your home will sell for until you've found a buyer and you've worked through any inspection contingencies. In a market that's racing higher price wise, this is less of a concern. When the market slows, you may not be able to count on a quick sale and numerous over-list price offers to choose from. If you need every dime out of your house to make the move, you should carefully consider selling first. Then you'll know exactly how much money you have to invest in the next home. In general, buyers should find less competition. This doesn't necessarily mean there will be no competition. This will depend on where you're buying and in what price range. Usually, there are fewer buyers in the higher price ranges. Recently, buyers who had looked for months for a home were the successful bidders on an attractive listing. There was only one other offer. Months earlier, when the inventory was scant, these same buyers lost out in a multiple offer competition. Six other buyers bid on the same property. The recent increase in interest rates has been a major factor in the changing market. When rates first started up, buyers rushed into the market. A buying frenzy ensued. This pushed prices up to record highs in some places. As sellers became convinced that the good times wouldn't last forever, many decided to sell. And, the inventory of homes for sale grew. A dilemma for many buyers is this. Since more listings are coming on the market, do you wait to buy until something you like better comes along? Or do you buy now to lock in an interest rate that is likely to be lower than it will be in the future? THE CLOSING: The best strategy is to buy when you find the right house. And beware of unrealistic sellers who are only interested in selling if they can get an astronomical price. |
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| Homebuyer Checklist Important questions you should be asking what you should ask the seller or the listing agent when you're interested in a home? If you know why a seller wants to sell, it can help you negotiate a better offer. The more motivated the seller, the more you can negotiate. It may take some finesse, but see if you can work these questions into conversation with the seller or the listing agent. Which of these reasons apply to the seller? These can go either way. You will have to get a sense from your conversation how quickly they want to sell the house if they: ___ Need more space ___ Need less space ___ Want to relocate ___ Are unhappy with neighbors or the neighborhood You may be able to negotiate to have the seller finance part of your purchase. Explore this possibility if they: ___ Have lived there a long time ___ Owe little or nothing on the house ___ Are retiring You may have some leverage when negotiating if the seller needs to sell the house quickly because of: ___ Relocating involuntarily (for example, a job transfer) ___ Changing marital status ___ Financial reasons ___ Health reasons ___ A death in family ___ Is the seller highly motivated to sell? A highly motivated seller MUST sell soon. Job transfer, divorce and financial difficulties put pressure on the seller, which can benefit you when you make an offer. ___ Has the seller bought another house that has yet to close? The seller will be more anxious to facilitate your purchase if the seller needs to complete the purchase of another house soon. ___ Is the seller trying to cash in on this investment? If so, you will have trouble negotiating too many concessions. ___ Has the seller lived there a long time? If a seller has been in a home a long time and accumulated a lot of equity, you may be able to negotiate to have the seller finance part of your purchase. |
| Understanding differences among condos, co-ops, PUDs A lesson in common-interest developments By Robert J. Bruss What is the difference between a condominium, cooperative apartment, tenancy in common (TIC), and a planned-unit development (PUD)? As we will see, there are major differences between these types of "common interest developments." Please be sure you fully understand the distinctions because your legal rights will vary depending on what type of unit you decide to buy. Condominiums are just airspace within the unit surfaces. When you buy a condominium, all you are really buying is very expensive airspace! Condo owners own only the inner surfaces of their walls, ceilings and floors. The building structure is part of the "common area" owned by the homeowner association, or HOA, of which all the condo owners in the complex are automatically members. That means the HOA owns the walls, foundation, roof, plumbing, wiring, the land (although a few condo buildings are constructed on leased land – usually a very bad situation because when the land lease expires, the condos then belong to the landowner), parking areas, hallways, elevators, and other areas shared with other condo owners. Individual condo owners often have an exclusive right to occupy part of the common area, such as a patio or balcony, and an assigned parking space or two. In some condo complexes, the recreation area is owned by the developer who signed a "sweetheart lease" with the HOA. Due to abuses by some developers, these sweetheart leases are now either forbidden or greatly restricted by law in several states. Prospective buyers should inquire if any part of the condo complex is leased and not owned by the HOA, such as the recreation center or parking area. A Planned Unit Development is a condominium variation. PUDs are usually townhouse developments where each townhouse owner owns their structure and the land beneath it. But the HOA owns the common areas and is responsible for exterior maintenance, such as mowing the lawns and repairing the roof. If you are considering buying in a PUD, be sure to understand what is your maintenance responsibility and what the HOA maintains. Cooperative apartments are rare, except in New York, Florida, Georgia, California, Illinois and Washington, D.C. A co-op building is owned by a non-profit corporation where each co-op stockholder owns a proprietary lease for their apartment unit. Although co-ops involve the sale of a personal property stock certificate rather than real estate, Congress has made co-op ownership virtually the same as condominiums for tax deductions and the 24-out-of-last-60-month principal residence $250,000 exemption resale tax benefits of Internal Revenue Code 121. Up to $500,000 tax-free resale profits are available for a qualified married couple filing a joint income tax return. Co-ops are often created because they are usually exempt from condominium ordinances. To illustrate, suppose you own a luxury apartment building that you want to convert to condominiums so you can earn huge profits. But you discover the city condominium ordinance requires two parking spaces for each condo unit and your building doesn't have that much parking. Unless you can get a parking ordinance variance from the city, your best viable alternative is probably a co-op. Because there is usually a master mortgage on the co-op structure, when a co-op project is new it is relatively easy for the first buyers to purchase with an affordable cash down payment, such as 10 percent to 20 percent. However, as time goes on and the master mortgage balance is gradually paid down, each co-op owner's equity slowly rises. Except in New York and a few other areas, it is often very difficult for a co-op buyer to obtain resale financing because the lender's only security is the personal property stock certificate. For this major reason, many co-ops have converted to condominiums, which can be financed almost as easily as single-family houses. As a result, when a co-op converts to a condominium, the market value often rises 25 percent to 50 percent or more because of the easier marketability. Another major drawback of co-ops is the dreaded interview of prospective buyers by the co-op board of directors. This interview is easy and painless at some co-ops. But other co-op directors demand detailed financial statements from buyer applicants. There are many co-op interview horror stories, including radio personality Rush Limbaugh, ex-President Nixon, and many others who were rejected by New York City co-op boards of directors. No reason for the co-op rejection need be given, thus sometimes leading to subtle racial discrimination. The alleged reason for the interviews is to determine if the co-op buyer applicant can afford the monthly payments, plus any special assessments, because the remaining co-op shareholders must make up any missing payments or risk default on the master mortgage. By comparison, most condominium associations do not have the right to approve or disapprove prospective buyers. However, some condo HOAs have a "right of first refusal" to match any purchase offer received from a condo buyer – but this right is rarely used. Tenancy in common is jointly shared co-ownership. Residential TICs are a variation of both condominium and cooperative ownership. TICs usually involve a small group of owners buying a building together, such as a four-unit apartment building, as tenants in common with rights of each co-owner to occupy a specific apartment exclusively. There is one mortgage on the entire TIC property and all tenants in common are legally responsible for the mortgage payments. TIC owner-occupants receive tax benefits similar to other principal residence owners. TICs have primarily arisen in jurisdictions where condominiums, cooperatives and/or PUDs are difficult or very expensive to create. Examples include San Francisco, Berkeley and Santa Monica, Calif., where rent control makes apartment conversions to condominiums very difficult. Although most TICs work out quite well, some have fallen on "hard times" where the owners disagree, or one or more tenants in common can't or won't pay their share of the mortgage payments and operating expenses. If one co-owner doesn't pay his/her share, the other co-owners must either make up the deficit or watch the mortgage go into foreclosure. Removing a non-paying tenant in common can be very difficult since it is not as easy as foreclosing on a regular mortgage borrower. Because of the many potential problems with TICs, they are not recommended unless there is no other joint ownership alternative available. Of course, TICs require a carefully drawn agreement among the joint tenant co-owners. Consideration should also be given to resales and whether a prospective purchaser must be approved by the other TIC co-owners. Due to TIC difficulties, many real estate agents refuse to handle TIC resales, thus limiting the number of prospective buyers and the potential for market-value appreciation. However, residential TICs should not be confused with commercial TICs, which have become very popular with real estate investors making tax-deferred Internal Revenue Code 1031 exchanges. To illustrate, an investor can make a tax-deferred exchange from an investment or business property, such as an apartment building, into a management-free TIC share, such as an office building or shopping center, which is managed by the TIC development company. Although the long-term viability of commercial TICs has yet to be proven, many commercial TIC investors are very pleased. EXAMPLE: I've written before about my friends Dory and Andy who sold their California rental house about 10 years ago for around $300,000. They made a tax-deferred IRC 1031 exchange into a TIC which owns and leases an Applebee's Restaurant in Kentucky! Now in their 70s, Dory and Andy look forward to receiving their monthly TIC rent checks with no management hassles. Their TIC co-owners are individuals; they have never met. |
| Not all home sellers equal in a hot market By Dian Hymer Hot real estate markets can mean high home prices and that's great for home sellers. But all sellers will not benefit equally. Also, extreme markets can be risky. Here's what to watch out for: As tempting as it might be, don't automatically assume that you're going to receive a huge price for your home. The media tends to report the excesses in the marketplace. You'll see a listing that sold with 35 offers, or one that sold for hundreds of thousands of dollars over the asking price. You're not likely to find reports about the listings that sold with only one offer. Yet, many homes sell this way. Even if you do receive a flurry of fabulous offers, you could end up selling for a much lower price. The number of failed transactions usually climbs during a sizzling market. For example, a home recently sold in the Oakland Hills in Northern California for considerably over the list price. The offer that was accepted was $100,000 higher than the next best offer. Within a day that buyer backed out. The seller's euphoria waned when $100,000 of profit evaporated overnight. In frenzied markets, buyers feel pressured to push their offer prices higher in order to be competitive. It's not uncommon for buyers to break through their financial comfort zone in the peak of a multiple offer contest. After more sober consideration, a certain number of these buyers realize they made a mistake and withdraw from the contract. Sellers in this situation wonder whether they're entitled to keep the buyers' good faith deposit money. You'd need to consult an attorney for the answer. If the purchase contract includes an inspection contingency, the buyers may be able to back out without penalty, depending on how the contingency is written. Before you count on the proceeds from your sale, make sure that the buyers have removed their inspection contingency. Buyers, who are particularly generous at the offer stage, could end up settling the score a bit by asking the sellers to repair defects found during their inspections. HOME SELLER TIP: Beware of offers made without contingencies. This may seem like a seller's dream. However, no contingency offers can lead to trouble, especially when the buyers don't understand what they're getting themselves into at the time they make their offer. For example, if the contract doesn't have an appraisal contingency and the property appraises for less than the purchase price, the lender might not be willing to give the buyer enough money to close the sale. If the buyer has enough cash to make up the difference between the purchase price and the appraised value, and he's willing to do so, the sale can close. But, if the buyer is short of cash, you may have to reduce the purchase price to keep the deal together. Letting a buyer purchase your home without the benefit of an inspection contingency can be very risky, particularly if there were no pre-sale inspection reports for the buyer to review before making an offer. What happens if the buyer finds significant defects in the property soon after closing? This is another legal question that requires an opinion from a knowledgeable real estate attorney. The seller could have liability, or face and unpleasant legal hassle after closing. It's best to counter an offer that does not include an inspection contingency to provide the buyer an opportunity to inspect. THE CLOSING: You can minimize your risk somewhat by providing pre-sale inspection reports. But, these shouldn't be a substitute for buyers having the opportunity to perform any inspections they deem necessary. |
| All about "Points" The best chance to waste money while getting a mortgage is to misunderstand the relationship between discount points, origination fee, and the interest rate on the loan. Borrowers carry the intuition that the lowest interest rate is always the best deal, and expect to pay some sort of loan fee and “point” along the way somewhere. This intuition is half right: The lowest rate is a good idea, but it's not worth paying for. Mortgage jargon contributes to the confusion: "Origination," “discount” and “point” require definition. When a loan is created at an interest rate below the bond market's desired yield, the market value of the loan is less than its face value. Just like a bond, the loan is said to trade at a “discount.” If the market wants 8 percent, and you are determined to pay no more than 7.875 percent, you must make up the difference between the face value of the loan (100 cents on the dollar), and its market value. In the inexorable time value mathematics of the bond market, the 7.875 percent loan would be worth 99.50 cents on the dollar, and you would have to pay .50 percent in “point” to get your rate. Before exploring the wisdom of paying such a fee for a lower rate, we still need to define this “origination fee” business. In the dark ages of mortgage lending, back before 1983, origination fees were the primary compensation for mortgage people. Today, an origination fee is exactly the same thing as a discount point (in the “modern” era, we get paid for creating and selling the right to service a loan; long story, separate column). Loan origination fees are still quoted separately from discount points out of historical habit, and perhaps the hope that borrowers will lose track of the real price. Worse, origination fees are often treated as automatic and inescapable (in the rate quotes near this column, note that origination fees are omitted altogether, thereby making the rates look lower than they really are). This antique pricing system leads to the absurd mortgage patois of "pluses." Such-and-such a rate costs “a half plus one,” while a lower rate might cost “two plus one,” the first number referring to discount points, and the second to origination. Ask your banker to quote total points. Any fee charged as a percent of the loan amount is a point, and present in the deal to buy down the interest rate. Having defined terms, is paying points a good deal? Nope. Never? Never is a long time. If you promise not to move or refinance within six years, paying points will turn out OK. “Break-even” or “recapture” math goes like this. On a $100,000 loan, each one-eighth (.125 percent) in rate usually costs .50 percent in point ($500). Each eighth in rate amortizes to about $8.70 per month. If you divide the monthly benefit ($8.70) into the cost ($500), you get the number of months it takes to recapture the fee you paid. In this example, 57 months; but really closer to six years because you paid the fee in 1996 dollars, and 57 months hence, $8.70 won't be worth $8.70. If you sell or refinance in less than six years, you leave money on the table. This inevitable point-versus-rate relationship is one of Wall Street's great self-fulfilling prophecies. In the 60 years since the FHA created the first 30-year loans, the average loan life has always been about six years. If the average loan lasts six years, the Street wants fee compensation for six years of deficient interest. Always try for the lowest fee package at a given rate, clear down to “zero plus zero,” if you can find it. You see, in the mortgage business, the highest virtue is pointlessness. |
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