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Welcome to Phoenix Realty, Inc. - Real Estate News
Serving the triangle area which includes Wake County, Orange County, Durham County, and Chatham County. Specific cities are Raleigh, Durham, Chapel Hill, Cary, Apex, Morrisville, Holly Springs, Fuquay Varina, Pittsboro, Hillsborough.
Mid-Year Economic Update
The Economy
- GDP growth was slightly negative in the first quarter but will pick up in the second half. For the year as whole, GDP will expand at 2.1 percent. Not bad but not great. A slow hum.
- Consumer spending will open up because of lower gasoline prices. Personal consumption expenditure grew at 2.1 percent rate in the first quarter. Look for 3 percent growth rate in the second half.
- Auto sales dropped a bit in the first quarter because of heavy snow, but will ramp up nicely in the second half.
- Spending for household furnishing and equipment has been solid, growing 6 percent in the first quarter after clocking 6 percent in the prior. Recovering housing sector is the big reason for the nice numbers.
- Spending at restaurants was flat. That is why retail vacancy rates are not notching down.
- Online shopping is up solidly. That is why industrial and warehouse vacancy rates are coming down.
- Spending for health care grew at 5 percent in the first quarter, marking two consecutive quarters of fast growth. The Affordable Care Act has expanded health care demand. The important question for the future is will the supply of new doctors and nurses expand to meet this rising demand or will it lead to medical care shortage?
- Business spending was flat in the first quarter but will surely rise because of large cash holdings and high profits.
- Spending for business equipment rose by 3 percent in the first quarter. Positive and good, but nothing to shout about.
- Spending for business structures (building of office and retail shops, for example) fell by 18 percent. The freezing first-quarter weather halted some construction. This just means pent-up construction activity in the second half.
- In the past small business start-ups spent and invested. It was not uncommon to experience double-digit growth rates for 3 years running for business equipment. Not happening now. But business spending will inevitably grow because of much improved business financial conditions of lower debt and more profits and rising GDP.
- What has been missing is the "animal spirit" of entrepreneurship. The number of small business start-ups remains surprisingly low at this phase of economic expansion.
- Residential construction spending increased 6 percent in the first quarter. Housing starts are rising and therefore this component will pick up even at a faster pace in the second half.
- Government spending fell by 1 percent. At the federal level, non-defense spending grew by 2 percent, while national defense spending fell by 1 percent. At the state and local level, spending fell by 1 percent.
- The federal government is still running a deficit. Even though it is spending more than what it takes in from tax revenue, the overall deficit level has been falling to a sustainable level. It would be ideal to run a surplus, but a falling deficit nonetheless does provide the possibility of less severe sequestration.
- U.S. government finances are ugly. Interestingly though, they are less ugly than other countries. That is why the U.S. dollar has been strengthening against most other major currencies. It's like finding the least dirty shirt from a laundry basket.
- Imports have been rising while exports have been falling. The strong dollar makes it so. Imports grew by 7 percent while exports fell by 6 percent. The net exports (at minus $548 billion) were the worst in seven years. Fortunately, with the West Coast longshoremen back at work, the foreign trade situation will not worsen, which means it will help GDP growth.
- All in all, GDP will grow by 2.5 to 3 percent in the second half. That translates into jobs. A total of 2.5 million net new jobs are likely to be created this year.
- Unemployment insurance filings have been rising in oil-producing states of Texas and North Dakota.
- Unemployment insurance filings for the country as a whole have been falling, which implies a lower level of fresh layoffs and factory closings. That assures continuing solid job growth in the second half of the year.
- We have to acknowledge that not all is fine with the labor market. The part-time jobs remain elevated and wage growth remains sluggish with only 2 percent annual growth. There are signs of tightening labor supply and the bidding up of wages. Wages are to rise by 3 percent by early next year. The total income of the country and the total number of jobs are on the rise.
The Housing Market
- Existing-home sales in May hit the highest mark since 2009, when there had been a homebuyer tax credit … remember, buy a home and get $8,000 from Uncle Sam. This tax credit is no longer available but the improving economy is providing the necessary incentive and financial capacity to buy. Meanwhile new home sales hit a seven-year high and housing permits to build new homes hit an eight-year high. Pending contracts to buy existing homes hit a nine-year high.
- Buyers are coming back in force. One factor for the recent surge could have been due to the rising mortgage rates. As nearly always happens, the initial phase of rising rates nudges people to make decision now rather than wait later when the rates could be higher still.
- The first-time buyers are scooping up properties with 32 percent of all buyers being as such compared to only 27 percent one year ago. A lower fee on FHA mortgages is helping.
- Investors are slowly stepping out. The high home prices are making the rate of return numbers less attractive.
- Buyers are back. What about sellers? Inventory remains low by historical standards in most markets. In places like Denver and Seattle, where a very strong job growth is the norm, the inventory condition is unreal – less than one month supply.
- The principal reason for the inventory shortage is the cumulative impact of homebuilders not being in the market for well over five years. Homebuilders typically put up 1.5 million new homes annually. Here's what they did from 2009 to 2014:
- 2009: 550,000
- 2010: 590,000
- 2011: 610,000
- 2012: 780,000
- 2013: 930,000
- 2014: 1.0 million
- Where is 1.5 million? Maybe by 2017.
- Building activity for apartments has largely come back to normal. The cumulative shortage is on the ownership side.
- Builders will construct more homes. By 1.1 million in 2015 and 1.4 million in 2016. New home sales will follow this trend. This rising trend will steadily relieve housing shortage.
- There is no massive shadow inventory that can disrupt the market. The number of distressed home sales has been steadily falling – now accounting for only 10 percent of all transactions. It will fall further in the upcoming months. There is simply far fewer mortgages in the serious delinquent stage (of not being current for 3 or more months). In fact, if one specializes in foreclosure or short sales, it is time to change the business model.
- In the meantime, there is still a housing shortage. The consequence is a stronger than normal home price growth. Home price gains are beating wage-income growths by at least three or four times in most markets. Few things in the world could be more frustrating and demoralizing than for renters to start a savings program but only to witness home prices and down payment requirements blowing by past them.
- Housing affordability is falling. Home prices rising too fast are one reason. The other reason is due to rising mortgage rates. Cash-buys have been coming down so rates will count for more in the future.
- The Federal Reserve will be raising short-term rates soon. September is a maybe, but it's more likely to be in October. The Fed will also signal the continual raising of rates over the next two years. This sentiment has already pushed up mortgage rates. They are bound to rise further, particularly if inflation surprises on the upside.
- Inflation is likely to surprise on the upside. The influence of low gasoline prices has been bringing down the overall consumer price inflation to essentially zero in recent months will be short-lasting. By November, the influence of low gasoline prices will no longer be there because it was in November of last year when the oil prices began their plunge. That is, by November, the year-over-year change in gasoline price will be neutral (and no longer a big negative). Other items will then make their mark on inflation. Watch the rents. It's already rising at near 8-year high with a 3.5 percent growth rate. The overall CPI inflation could cross the red line of above 3 percent by early next year. The bond market will not like it and the yields on all long-term borrowing will rise.
- Mortgage rates at 4.3% to 4.5% by the year end and easily surpassing 5% by the year end of 2016.
- The rising mortgage rates initially rush buyers to decide but a sustained rise will choke off as to who can qualify for a mortgage. Fortunately, there are few compensating factors to rising rates.
- Credit scores are not properly aligned with expected default rate. New scoring methodology is being tested and will be implemented. In short, credit scores will get boosted for many individuals after the new change.
- FHA mortgage premium has come down a notch thereby saving money for consumers. By the end of the year, FHA program will show healthier finances. That means, there could be additional reduction to premiums in 2016. Not certain, but plausible.
- Fannie and Freddie are owned by the taxpayers. And they are raking-in huge profits as mortgages have not been defaulting over the past several years. The very high profit is partly reflecting too-tight credit with no risk taking. There is a possibility to back a greater number of lower down payment mortgages to credit worthy borrowers without taking on much risk. In short, mortgage approvals should modestly improve next year.
- Portfolio lending and private mortgage-backed securities are slowly reviving. Why not? Mortgages are not defaulting and there is fat cash reserves held by financial institutions. Less conventional mortgages will therefore be more widely available.
- Improving credit available at a time of likely rising interest rates is highly welcome. Many would-be first-time buyers who have been more focused about getting a mortgage (even at a higher rate) than with low rates.
- All in all, existing and new home sales will be rising. Combined, there will be 5.8 million home sales in 2015, up 7 percent from last year. Note the sales total will still be 25 percent below the decade ago level during the bubble year. Home prices will be rising at 7 percent. For the industry, the business revenue will be rising by 14 percent in 2015. The revenue growth in 2016 will be additional 7 to 10 percent.
Source: realtors.org Economists' Outlook Blog By Lawrence Yun
Why Residential Investment Property is the Ultimate Hedge Against Inflation
How much money does it cost to go to a movie today?
How much did it cost 10 years ago?
How much it cost 20 years ago?
Much less than today, right?
Ever notice cereal boxes containing less and less cereal over time for the same priced box?
A dollar today does not buy nearly as much as it did just a few years ago. This historic trend is called inflation.
The things that you need to buy go up in price and the money you have to buy them goes down in value.
Inflation is Quietly Threatening Your Financial Future
Inflation is one of the greatest enemies of your financial security. It quietly and insidiously attacks and depletes your family's wealth, savings and buying power, gradually diminishing the lifestyle you can afford to live.
As an intelligent investor, you don't just need to make money, and you don't just need to save money…You need to defend that wealth against inflation.
Just as you need to protect your money from someone stealing it or squandering it, you also need it protect it from getting eaten up by inflation.
Nominal Dollars vs. Real Dollars
To understand how this works, we first need to distinguish between "nominal dollars" (which are not adjusted for inflation) and "real dollars" (which are dollars adjusted for inflation).
If you put a chunk of money in a savings account or a CD let's say, and it returns you 2% interest, then over time you will be making money in nominal dollars (a 2% return in nominal dollars on the money you invested). However, if inflation is rising at more than 2% (as even the most conservative estimates suggest it is), then, in that scenario, you would actually be losing money in real dollars. If inflation is rising at 4% for example, and you are only getting a return of 2%, then inflation is outpacing your nominal dollar return on investment by 2%, which means you are actually losing 2% on your money in real dollars.
How Residential Investment Property Protects You From Inflation
Residential Investment Property is very unique as it is one of the only assets you can buy that is already hedged against inflation. Here is how it works:
- Just like movie prices, home prices increase over time too and rise with inflation. If you own the property, you benefit from increasing home prices.
- As inflation causes construction materials (wood, metal, glass) to increase in price, this drives up the "cost of construction" and the "replacement value" of properties, which in turn contributes to increasing home values.
- Rents rise with inflation too. Leases are typically renewed each year, and rents are typically increased each year to keep pace with inflation.
- If you take out a fixed rate mortgage, then you get to borrow the money in today's "real dollars" but pay the money back over 30 years in increasingly diminished "nominal dollars" that are worth less than the ones you borrowed. The 30- year mortgage enables you not just to hedge against inflation but actually to benefit from inflation. As an example, let's say you had taken out a $100,000 fixed rate mortgage in 1983 and made "interest only" payments for 30 years (without paying down any of the principle). In 2013 when it comes due, your loan balance would be the same ($100,000) in nominal dollars, but if we adjust for inflation over that period (using the official rate of inflation based on the consumer price index), you find that the balance you have to pay back in 2013 in real dollars is less than $43,000. What happened to the other $57,000 of real dollars? It was ostensibly paid down by inflation. In other words, the $100,000 of "2013-dollars" you owe are worth less than $43,000 of the "1983-dollars" that you borrowed. So, although you never paid down any of the loan balance innominal dollars, inflation helped you pay it down in real dollars. You win. Banks lose.
While there are a number of unique benefits to buying and holding residential investment property, the hedge against inflation is one of the least understood, one of the least talked about, and one of the most important wealth-building and wealth-protection benefits to this asset class.
Source: Maverick Investor Group Blog By Matthew Bowles
7 Astonishing Tax-Benefits for Buying and Holding Residential Investment Property
I always found accounting and taxes to be insanely boring, extremely complicated, super annoying, frustrating, daunting, and basically just a painfully un-interesting necessity of life which I begrudgingly had to be involved with once a year.
That all changed when I started investing in real estate. You should see how many tax strategy books are on my shelf now! I read blogs on tax strategy, follow the latest tax law updates, and get excited about talking to tax experts for advice and strategy.
Why such a massive shift?
One Shocking Reason: Residential Investment Property is the single most tax-advantaged asset class available in the U.S. today. It is the only asset class I know of where you can make income every month while LEGALLY paying no tax on it and even creating a paper "loss" that can potentially be taken against other income.
One Important Caveat: This is only the case if you are buying and holding your rental properties (not flipping them).
Here are some of the most profound tax advantages offered by the government as an incentive for you to buy and hold rental property:
- Write Off Your Operating Expenses Associated with the Property
Property taxes, insurance, property management fees, and repairs (not capital improvements) are all deductible.
- Write Off Your Mortgage Interest.
Mortgage interest is also deductible. If you make interest-only payments on your loan that means your entire mortgage payment is deductible.
- Depreciate the Value of Your Property Structure.
The government allows you to 'depreciate' your property, even if it is going up in value! They do not let you depreciate land though, so you need to break out the cost of the land and then you can depreciate the structure of your residential investment property on a 27.5 year straight-line schedule. Let's say you buy a new or completely renovated rental property for $170,000. And let's say you determine the land to be worth $30,000. Subtracting the cost of the land, you are left with $140,000 as the value of your structure, which you can depreciate over 27.5 years. So, if you divide 140,000 by 27.5, that comes out to just over $5,000 per year that you can take as a loss against your income from the property. This is often referred to as a "phantom loss" because, of course, you didn't actually lose anything.
Hold Up! Wait a Minute.
Let's check this out with an example to understand how crazy this is so far.
Sticking with our example above:
- Let's say you buy a 170K property
- Let's say your gross rent is $1,500/mo (original taxable income).
-You subtract your operating expenses (write off against taxable income)
-You subtract your mortgage interest (write off against taxable income)
-Let's say you are then left with $300/month net cash flow (new taxable income)
You have just reduced your taxable rental income from $1,500/mo down to $300/mo, which comes out to about $3,600/year.
But Wait. There's More.
Remember the depreciation 'loss' of over $5,000 per year? Take that $5,000 depreciation and write it off against your remaining $3,600 in net cash flow and now you are paying literally zero taxes (legally) on the rental income you generate with a $1,400 loss left over.
Actual Net Rental Income Going Into Your Pocket: $3,600/year
Taxable Rental Income = $0
Left Over Phantom Loss: $1,400
Now imagine if you scaled this and got 10 properties that were doing the same thing. Now your numbers would look like this:
Actual Net Rental Income Going Into Your Pocket: $36,000/year
Taxable Rental Income = $0
Left Over Phantom Loss: $14,000
Try doing that…mmmm….pretty much anywhere else.
Oh, but we are not done yet.
- Accelerate Depreciation on Certain Items with Cost Segregation.
While the basic structure of your property can be depreciated on a straight line over 27.5 years, there are a number of "personal property" items that can be broken out and depreciated on accelerated schedules. For example, let's say you have a brand new stove, microwave, HVAC, flooring, etc. in your rental property. These items can be depreciated over a much shorter period (7-15 years). By doing a cost segregation analysis of your property, you can actually accelerate some of your depreciation and legally take those benefits sooner so that your initial paper "losses" are even greater.
- Take Left Over Phantom Losses Against Other Forms of Income
The IRS says that you can take up to $25,000 per year of real estate losses against other forms of income (such as earned income from your job), but that is only if you make $100,000 per year or less. So, in our example above, you generated a $14,000 loss from your real estate (after writing off all your cash flow from your rental property). Continuing with this example, if you made $100,000 per year at your job, you would be allowed to write off that $14,000 against your earned income, reducing your taxable earned income from $100,000 down to $86,000. So, if you were in the 28% tax bracket that would be an annual tax savings of over $3,900!
In this example, your numbers would now look like this:
Actual Net Rental Income Going Into Your Pocket: $36,000/year
Taxable Rental Income = $0
Money in Your Pocket from Tax Savings on Other Income: $3,900/year
Your ability to take $25,000 of real estate losses against other forms of income phases out as your income rises from $100,000 to $150,000 and if you make over $150,000, you cannot take any of your real estate losses against your other forms of income….
UNLESS, you can qualify as a "Real Estate Professional" for tax purposes.
- The Highly Coveted "Real Estate Professional" Status: The Ultimate Tax Loophole for Real Estate Investors
Qualifying for the "Real Estate Professional" status for tax purposes is the holy grail of real estate tax benefits. The IRS is making it tougher to qualify, so make sure you are working with a qualified CPA to ensure you have proper documentation if you want to try. Here are the benefits:
- After you have written off all your rental income, if you have left over losses from your properties, you can take them against income you earn from other unrelated sources, including earned W2 income from a regular job.
- You can do this regardless of how much income you make or what tax bracket you are in.
- If you are married and filing jointly, only one spouse needs to qualify as a real estate professional and then the real estate 'losses' can be written off against income from both spouses.
The basic requirements are that one spouse spends at least 750 hours a year (15 hours a week) on qualifying real estate activity, and spends more time on real estate than any other job. But there are important "material participation" and other requirements that you must meet as well. It is important to always consult with a qualified CPA to ensure that you meet and document all the requirements properly.
What about Capital Gains Tax When You Sell Properties that Have Appreciated?
Normally, when you sell a property you would have to pay both capital gains tax on any net appreciation you received, and you would also have to recapture depreciation too. However, the tax law has again provided an extraordinary provision to indefinitely defer both.
- The Legendary 1031 Exchange.
Section 1031 of the U.S. federal tax code allows you to do a 'like kind exchange", where you put all of the proceeds from the sale of your property into buying another one or multiple "like-kind" properties of equal or greater value. The government allows you to "replace" or "exchange" properties in this manner without triggering the capital gains tax and depreciation recapture that would normally be due on sale. You can continue to exchange and exchange and exchange for your entire life and then at death, according to the "step up in basis" rule in the U.S. federal tax code, the deferred depreciation recapture and capital gains are both automatically wiped out and your heirs inherit the property with a brand new depreciable basis based on current market value! There are very specific formalities for executing a 1031 exchange (including the use of a Qualified Intermediary) and timeframes that you must adhere to, so always ensure you are working with a professional to execute the transaction properly.
When you combine all 7 of these tax benefits, you can start to see the full impact and understand why the asset class of residential investment property stands alone in terms of tax advantages for the individual investor.
Let us know in the comments about which of these tax advantages you have taken advantage of and how they have worked out for you.
DISCLAIMER: I am not a tax professional, this is not tax or legal advice, and tax laws are constantly being changed and revised and may change the day after you read this. So, this is for informational purposes only, and it is your duty to consult with your own tax professional about your individual situation and the most updated applicable laws before attempting to implement any of the content in this post.
Source: Maverick Investor Group Blog By Matthew Bowles
Home Owners Doing Record Number of Cash Deals
A record number of home owners are using the increased equity in their current homes to buy their next homes in cash and avoid the mortgage process altogether, Bloomberg reports.
About 29 percent of non-investment buyers used cash to fund their housing transactions in the first quarter of this year — the highest level on record, according to data compiled by Bloomberg.
Baby boomers make up a large bulk of these all-cash deals, says Lawrence Yun, chief economist for the National Association of REALTORS®.
"Cash purchases are on the rise because older home owners who have decades of home-equity accumulation don't want the hassle of a mortgage," Yun says. "With the economy improving and the stock market at record highs, boomers are the ones who are driving the market."
Meanwhile, the share of investors — who usually use cash — is dwindling, dropping in the first quarter to the lowest level since 2010.
"The whole investor class, the ones doing most of the cash purchasing until now, is stepping back," Yun says. "Baby boomers are taking their place."
Baby boomers have more equity than previous generations because they may have owned a home during a 30-year "housing bull market." In April, the median price of an existing-home was $201,700 compared to $67,800 in 1982, when many boomers had purchased their first properties, Bloomberg reports.
What's more, about 16.3 million Americans older than 60 owned their homes outright in 2012, up from 12.1 million in 2009, according to Census data.
Baby boomers are expected to remain a strong presence in the housing market much longer than previous generations, too.
They "will be buying and selling well into their 80s because they are going to be active and healthier for a lot longer than their parents," says John McIlwain, a senior fellow at the Urban Land Institute in Washington. "They are a rebellious generation, and they're not going to go along with the idea of traditional retirement."
Source: "Cash Property Deals Reach Record with U.S. Boomers Retiring," Bloomberg Businessweek (June 2, 2014)
Source: REALTOR Magazine
Triangle houses selling faster, at improved prices.
With the Triangle housing market in the midst of its peak summer season, the number of home sales recorded in June actually dropped slightly from home sales in May.
The market, however, maintained its continued improvement in housing prices and speed to sale, according to Triangle Multiple Listing Service data.
The Triangle housing market recorded a 2.5 percent drop in home sales in June with 3,020 sales compared to 3,099 home sales in May. June home sales were up 15 percent compared to the year prior.
The average sale price for a home in the Triangle increased 2.7 percent to $245,901 in June compared to the year prior.
The average days on market dropped to 95 days in June compared to 114 days on market until sale the year prior.
The Triangle housing market has historically peaked during the months of May, June and July, according to MLS data.
Source: Triangle BizBlog By Amanda Jones
Too Many Experts
It can be difficult to make an informed homebuying decision when confronted by advice from too many "experts." If you have just found the house you want to buy, you are probably feeling completely thrilled and confused at the same time. You trust the agent who helped you and feel that the advice you received is solid. But you also want to get opinions about the house from your best friend, your parents, and your Uncle Chuck, who has an inactive real estate license.
If you get input from too many sources, you could find yourself even more confused than you already are. Your best friend can provide moral support, but might not know the market in your area. Your parents may go into shock because they feel that they got so much more house for their money 30 years ago--and it cost them a fraction of the price you are going to pay.
Even though Uncle Chuck passed the real estate exam, his insights won't be as relevant as those of a professional who is currently working the market. It's not that you shouldn't consult your family and friends--just don't go overboard. Rely on the advice of professionals you trust--a structural inspector, loan officer, and a good real estate agent, so that you can feel comfortable about having made an informed decision.
Source: Four Seasons Realty
N.C. adds construction jobs in June
Triangle Business Journal by Lee Weisbecker, Staff Writer
North Carolina added construction jobs between May and June as the industry struggles for a comeback.
Employment in the sector jumped by 1,400 during June, compared with the prior month, bringing the total payroll to 170,100, according to the Associated General Contractors of America.
For the 12 months ending in June, however, the numbers showed the industry still hasn't shed the doldrums. Between June 2011 and June 2012, North Carolina shed 4,600 jobs, some 2.6 percent of the workforce.
Twenty-four other states also lost jobs during the same period.
"The latest state data show again how fragile and fragmentary the construction recovery is," says Ken Simonson, the association's chief economist. "Although private sector demand for structures has risen in most states, improvement in single-family homebuilding is spotty and public investment is shrinking."
Source: Triangle Business Journal
Durham, NC - Local Housing Data - Summary
Durham, NC - Recent New Home Sales Numbers Suggest Market Rise Slowing
Posted on: May 06, 2012 09:24:38 AM
The Durham, NC market saw an increase in sales of new homes in February year-over-year, but the increased on a percentage basis less sharlpy than January 2012, showing signs of market stabilization. New home sales increased by 7.3% in February 2012 from a year earlier, after sales saw a 31.4% rise in January from the year earlier.
A total of 1,347 new homes were sold during the 12 months that ended in February, up from 1,341 for the year that ended in January.
New home sales as a percentage of overall housing sales fell to 19.2% from 21.8% of sales a year earlier. For new and existing homes, sales jumped year-over-year in February after also increasing in January year-over-year.
Pricing and Mortgage Trends
For newly sold homes, the average price declined 12.8% year-over-year in February to $229,676 per unit. This drop follows a move from $246,167 per unit in January 2011 to $243,845 in January 2012.
For newly sold homes, the average mortgage size saw a decline year-over-year in contrast to new home prices. It fell 16.1% in February from a year earlier, reaching $185,332. In January 2012, average mortgage size on newly sold homes saw a 5.6% rise year-over-year from a year earlier. For new home sales, the percentage of the sale price that was being financed declined 3.2 percentage points year-over-year to 80.7% in February 2012. This came after a 5.3 percentage point rise in January from a year earlier.
Other Market Trends
As a share of new home sales, single-family home sales have climbed from last year while the share belonging to attached units has fallen. Single-family home sales gained from 89.0% of new sales in February 2011 to 95.5% of sales in February 2012. At the same time, the share of new home sales belonging to attached units slid to 4.5% of sales from 11.0% of sales.
For all new homes sold, the average unit size sank 11.8% year-over-year to 2,171 square feet in February 2012. In January, the average size of new homes sold went from 2,273 square feet a year earlier to 2,392 square feet.
Foreclosures and real estate owned (REO) sales stayed steady in February from a year earlier, but remained a burden on the market. Foreclosures and REO sales, taken together, represented 40.8% of existing sales, about the same as a year earlier. The percentage of existing home sales involving foreclosures rose to 26.2% in February from 15.6% a year earlier while REO sales as a percentage of existing home sales declined to 14.6% from 24.7% a year earlier.
Source: Housing Intelligence
Mortgage Rates Sink to Record Lows Again
Daily Real Estate News | Friday, December 16, 2011
Fixed mortgage rates dropped even more this week, continuing the trend in reaching new record lows this year, Freddie Mac reports in its weekly mortgage market survey. The 30-year fixed-rate mortgage averaged 3.94 percent this week while 15-year rates sank to 3.21 percent — both all-time lows from their previous record lows set on Oct. 6. The 5-year adjustable-rate mortgage also set a new record this week.
The Federal Reserve at a meeting this week reaffirmed its commitment from this summer that it would keep interest rates low for the next two years.
Here's a closer look at rates for the week ending Dec. 15.
- 30-year fixed-rate mortgages: averaged 3.94 percent — a new record low — with an average 0.8 point, dropping from last week's 3.99 percent average. A year ago, 30-year rates averaged 4.83 percent.
- 15-year fixed-rate mortgages: averaged 3.21 percent — also a new record low — with an average 0.8 points, a drop from last week's 3.27 percent average. Last year at this time, 15-year rates averaged 4.17 percent.
- 5-year adjustable-rate mortgages: averaged 2.86 percent this week, with an average 0.6 point, dropping from last week's 2.93 percent average. Last year at this time, 5-year ARMs averaged 3.77 percent.
- 1-year ARMs: averaged 2.81 percent with an average 0.6 point, inching up slightly from last week's 2.80 percent average. Last year at this time, 1-year ARMs averaged 3.35 percent.
Source: Freddie Ma
Time for Home Buyers to Go Long
By Quentin Fottrell
Though real estate prices are barely budging, experts say this may be a good time to buy a house. But only for those willing to stay put.
On the face of it, the latest news doesnt bode well for potential house buyers. House prices will steadily rise in 2012 but economists dont see prices outpacing inflation over the next three years, according to a new survey. Typically, home prices bounce back after a prolonged recession and even help fuel a broader economic recovery. Not this time, according to that survey. The growth in house prices wont even keep pace with that of a loaf of bread.
As real estate prices begin their slow crawl north, interest rates have only one way to go up. Whether youre a 35-year-old looking to get on the property ladder or a retiree wanting to downsize, its still a good time to buy, says Jay Tyner, president and founder of Semmax Financial Group in Greensboro, NC.
One caveat: Dont think of a home as a short-term investment. This is a good time to buy assuming you want to live in that home, says Sheldon Garon, a professor of history at Princeton University and author of Beyond Our Means: Why America Spends While the World Saves. But dont treat real estate as a get-rich-quick investment, as so many Americans did during the 1990s and 2000s, he says. In many areas of the country, developers seriously over-built, which will depress house prices for some time.
Current conditions are a win-win for both potential homeowners and long-term investors, others say. For households, the priority should be on meeting their shelter needs at the best price which may not entail ownership at all. and appreciation, if any, should be viewed as a bonus, says Patrick OKeefe,director of economic research at J.H. Cohn LLP in Roseland, N.J. For investors with longer-term staying power and property management capability, conditions are attractive but property specific.
Whats more, rents are also on the rise. Consumers are being hit by the rise in rents and the decrease in concessions being offered, according to a new survey by online apartment-lister Rent.com. Property managers predict that rents will rise between now and the third quarter of 2012 by 3%, above the 2.5% inflation rate between now and 2014 expected by most economists in a Wall Street Journal survey. Plus, the nations ratio of house prices to yearly rents is nearly back to its pre-bubble average.
6 must-haves for mortgage approval
Even trade-up buyers, owners of multiple properties hit roadblocks
By Dian Hymer, Monday, November 7, 2011.
Interest rates fell to new lows in September. Low interest rates increase affordability and should make it easier for buyers to qualify. Yet stories of buyers waiting months to gain loan approval and home purchase transactions not closing on time due to lender's strict underwriting are all too common.
Some buyers are turned down for illogical reasons. For instance, if you have investments -- even if they're performing well -- an underwriter might deny the mortgage because your portfolio doesn't fall into the underwriter's risk assessment model.
One couple was turned down because the husband had worked at his current job for less than a year -- even though he was making more money at the new job than he was before.
These buyers were well-qualified. The wife had worked several years for one employer and was able to qualify for the loan on her own. So, the transaction closed, although two months late.
Generally, it's more difficult to qualify now than it was a year ago. Most conventional lenders require a 20-25 percent down payment. For the lowest interest rates, your credit scores need to be in the 700 range. You need to have verifiable income and cash reserves in addition to your down payment and closing costs.
You could run into underwriting problems if you're self-employed, as W-2 income is much easier to verify. Other hurdles are lapses in employment and owning a lot of property. Some lenders won't lend to buyers who have more than three or four residential properties.
If you're buying a new home before selling your current home, you'll need to have 30 percent equity in your current home. This needs to be verified by the lender's appraiser. Also, the lender will want to see a copy of the cashed check from the tenant for the first month's rent to verify rental income if needed to qualify.
HOUSE HUNTING TIP: As soon as you're serious about buying a home, find the best mortgage broker or loan agent you can to assist you. Don't make your selection based on interest rates alone. A good track record counts for a lot.
Closing the deal should be your primary goal. If you have to pay 0.25 percent more to assure your transaction closes on time and that you're not turned down at the last minute, it's worth it.
Be candid with your loan professional about anything in your financial picture that might impact loan qualification. A good loan agent or broker will be able to assess your financial situation and anticipate what you'll need to do to satisfy the underwriter.
Be aware that appraisal issues can impact your loan approval. For example, if a previous owner added square footage without a building permit, the additional square footage probably won't be included as livable square feet.
If the appraisal comes in for less than the purchase price, the lender might not lend you enough to close the deal. Include an appraisal contingency in your contract.
As of Oct. 1, the conforming jumbo mortgage limit for expensive housing markets like New York City and San Francisco dropped from $729,750 to $625,500. In some cases, conforming jumbo lenders have moved into the market to pick up some slack. You can expect to pay about 0.25 percent more for a 30-year fixed-rate conventional jumbo loan, in some cases. However, today's lower interest rates will help boost affordability.
There are more jumbo financing options available now. Adjustable-rate mortgages that are fixed for 10 years and then revert to an adjustable have a starting rate about 0.25 percent less than a 30-year fixed jumbo. A five-year fixed starts about 0.5 percent to 0.75 percent lower, but is riskier.
THE CLOSING: Because of the risk factor, the lender may want you to have a large cash reserve. Your retirement account counts toward this.
Research: Bike paths demand higher home prices
With homes sales and prices taking a beating, there may be a way to developers thinking about building new neighborhoods to get past that - build bike paths around homes. In the recent past, research after research shows home prices in areas with bike paths have performed better than average. Realtors in North Carolina reportedly added $5,000 to the prices of 40 homes adjacent to the Shepherd's Vineyard Bikeway in Apex.
Source: bizjournals.com
Ensuring the best policy
Follow these tips to make sure you're getting the best deal on your insurance.
- "If you're shopping for a new home, consider the proximity to a fire station and fire hydrants," says Vickie Montney, agent for highly rated Artisan Insurance Group in Tampa, Fla. "If you're more than five miles from a fire station or more than 1,000 feet from a fire ydrant, you'll pay several hundred more dollars per year for your policy."
- "A security alarm can take 10 to 20 percent off the annual premium of your policy," says Joan Jochum, agent for highly rated Jochum Insurance in Cleveland. "You save more if the system links directly to emergency response teams rather than to a monitoring company. Deadbolts, fire extinguishers and smoke detectors can save you money as well."
- "You can save money by switching to a higher deductible policy," says Kevin Watkins, agent for highly rated State Farm Insurance in Santa Clarita, Calif.
- "Cut down dead trees and overhanging branches," Montney says. "If you're not maintaining the property, companies can cancel or not renew a policy."
- "If you're in a hurricane area, have storm shutters," says Daniel Juliani, owner of highly rated Juliani Insurance Services in Wellesley, Mass. "Insurance companies also look at electrical systems to make sure they have breakers and that furnaces have had a new burner within the last 25 years. These things don't necessarily save you money on a policy, but they can make you ineligible for coverage."
Source: angieslist.com
Mind that Mold - tips from angieslist.com
Mold in your home can cause anything from a stuffy nose to a serious infection. Here, some highly rated service companies let you know how to prevent it - or fight it:
- Watch the Water: "The key to preventing or controlling mold is moisture control," says Tom Schultz, who owns A-rated Certified Mold Inspection & Remediation Services in Minnetonka, Minn. "You can't avoid it in the bathroom, so you have to ventilate, and we find mold regularly in attics that don't have good ventilation. To control it, use a properly designed rain gutter system and landscape grading, which should slope away from the house.
- Keep it Clean: "Clean your gutters regularly, typically twice a year, and keep all your vegetation trimmed away from the siding," says Tyler Mittendorf, owner of highly rated First Choice Home Inspection in Bothell, Wash. "Otherwise, these things will trap moisture against your house and block your gutters, and it may cause excessive moisture around the foundation."
- Location, location, location: "If your home is situated near a wetland, you could run into some chronic problems with moisture intrusion," Schultz says. "You'll need to take additional measures, like adding drain tile and a sump pump system in your basement."
- Catch it Early: Mold tests are often separate from regular home inspections. Mittendorf says he finds mold in more than half the homes he inspects, but doesn't always do the mold tests. "I give [the client] the option to do additional testing," he says. "They may sign a waiver saying I offered it and they chose not to do it."
Source: angieslist.com
Save Taxes and Save Energy - tips from angieslist.com
When you're replacing appliances, making repairs or remodeling, you may be able to recoup part of the cost if your improvements are energy-efficient. A 30 percent tax credit is available, with a limit of $1,500 for all combined credits. Here are the details:
- The credit applies to material costs for windows, doors, insulation and roofs. It applies to material, labor, and installation costs for HVAC systems, non-solar water heaters and biomass stoves.
- The improvements must be installed in your primary residence between Jan. 1, 2009, and Dec. 31, 2010. New construction and second homes don't count.
- Save your receipts and manufacturer certification statements.
- The credit also applies to materials, installation and labor for geothermal heat pumps, solar water heaters, solar panels, fuel cells and small wind energy systems. However, they're not subject to the same limits. In those cases, the tax credit is 30 percent of the total cost, with no upper limit through 2016. This credit also applies to new construction, second homes and rentals.
- Some hybrid vehicles also qualify for a separate credit based on make and model, but this credit is being phased out as sales meet a certain threshold. Visit fueleconomy.gov for more information.
- The products must meet specific standards to qualify for the credit. Energy Star compliance isn't always enough. For a full list of specifications and qualified products, goto energystar.gov/taxcredits.
Source: angieslist.com
Caring for your Carpet - tips from angieslist.com
After installation of a new carpet, there are several things you can do to prevent premature wear and tear. Follow these tips from The Carpet and Rug Institute on how to keep your carpet looking clean and plush.
- Don't let that spill sit. Soak up liquids as soon as possible to prevent permanent stains. Before treating the stain with a cleaning product for the first time, be sure to test it on a hidden area of your carpet.
- Change your air filters regularly. Not only does changing air filters help with the air quality in your home, but it also picks up dust particles destined for your carpet.
- Vacuum frequently. Dirt wears down carpet fibers, making it look matted and worn. Vacuuming several times a week will help keep your carpet looking newer longer.
- Get it cleaned by a professional. The Carpet and Rug Institute recommends having your carpet cleaned every 12 o 18 months to remove any embedded dirt and grime.
- Take your shoes off. Shoes deposit dirt in the carpet and wear down the fibers. Walking around in your stocking feet makes for a clearner carpet.
Source: angieslist.com
Is Now a Good Time to Buy a Home?
See why others are saying yes:
CNN – Now Is a Good Time to Buy (11/19/09)
Wall Street Journal – Buying a Home in Time to Get Credit (11/15/09)
Time Magazine – Downsizing: Today's Homebuyers Are Thinking Small (9/28/09)
USA Today – Survey Shows Spike in First Time Home Buyers (11/19/09)
Real Estate News And News Impacting Our Triangle Area (Raleigh - Durham - Chapel Hill):
- 2009 American Recovery and Reinvestment Act
- New home Checklist
- 10 Skills All Homeowners Should Have
- Best place to live, start a business in Triangle? Durham, says Fortune Small Business
- The Best Strategies for Right Now
- Helping Your Client Succeed In Short Sell
2009 American Recovery and Reinvestment Act
A refundable first-time homebuyer tax credit of up to $8,000 is the centerpiece of four housing incentives found in the 2009 American Recovery and Reinvestment Act.
The new credit is designed to boost sales in the nation's sagging housing market.
Lawrence Yun, chief economist for the National Association of Realtors, predicts homebuyers will purchase an additional 300,000 homes in 2009 as a result of the tax credit.
"The impact will likely not be felt for at least three or four months, because it generally takes buyers that long to qualify for a mortgage and search for a home," says Yun.
The new credit improves on a first-time homebuyer credit passed in 2008, Yun says. That credit had to be paid back over a period of 15 years, making it more of a loan than a true credit.
"We think this year's tax credit will certainly have a much bigger impact because it is a true tax credit which is also refundable," Yun says. "For instance, if you owe $1,000 in taxes and qualify for the first-time homebuyers tax credit, you will receive a tax refund of $7,000."
Yun believes activity spurred by the new credit will help bring down housing inventory and stabilize prices.
Gibran Nicholas, chairman of the CMPS Institute (which certifies mortgage banker and brokers), says his group was in favor of a more generous tax credit.
However, he still believes the credit will have a positive impact on the housing market.
"This tax credit is more of a half-step, but at least it is in the right direction," says Nicholas.
Rules for 2009 first-time homebuyers tax credit
- Does not have to be repaid unless the home is sold within three years.
- Applies only to first-time homebuyers, defined as those who have not owned a home within the previous three tax years.
- Available only for homes purchased between Jan. 1, 2009, and Dec. 1, 2009.
- Restricted by income; phases out for individuals with an adjusted gross income of $75,000 or above and for married couples with a combined adjusted gross income of $150,000 or above.
- Tax credit is for up to 10 percent of the purchase price, up to a maximum of $8,000. For example, a buyer of a $150,000 home could receive a tax credit of a maximum of $8,000, while a first-time buyer of a $70,000 home would be eligible for a tax credit of $7,000.
- The credit can be taken on 2008 taxes even when the purchase is made in 2009.
Nicholas especially likes a provision allowing homebuyers to claim their credit immediately.
"The greatest part of this tax credit is that homebuyers can take the credit on their 2008 tax return even when they have purchased the home in 2009," says Nicholas. "This acts as an immediate stimulus for a lot of people."
Homebuyers can take advantage of this filing exception in one of three ways: closing on the home prior to April 15, 2009, getting an extension to file taxes later in the year or filing an amended return.
Some state housing programs are introducing programs that allow homebuyers to access the tax credit money at settlement.
Enhanced Tax Credit Provides Outstanding Opportunity for Home Buyers
In its efforts to stimulate the economy and revive the housing market, Congress has enacted legislation providing a tax credit of up to $8,000 for first-time home buyers.
But time is of the essence for buyers who want to take advantage of this opportunity. Only homes purchased on or after January 1, 2009 and before December 1, 2009 are eligible. Use the links below to find out more about the tax credit.
$8,000 Home Buyer Tax Credit at a Glance
- The tax credit is for first-time home buyers only.
- The tax credit does not have to be repaid.
- The tax credit is equal to 10 percent of the home's purchase price up to a maximum of $8,000.
- The credit is available for homes purchased on or after January 1, 2009 and before December 1, 2009.
- Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit.
Frequently Asked Questions About the Home Buyer Tax Credit
The American Recovery and Reinvestment Act of 2009 authorizes a tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009.
The following questions and answers provide basic information about the tax credit. If you have more specific questions, we strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.
- Who is eligible to claim the tax credit?
- What is the definition of a first-time home buyer?
- How is the amount of the tax credit determined?
- Are there any income limits for claiming the tax credit?
- What is "modified adjusted gross income"?
- If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
- Can you give me an example of how the partial tax credit is determined?
- How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008?
- How do I claim the tax credit? Do I need to complete a form or application?
- What types of homes will qualify for the tax credit?
- I read that the tax credit is "refundable." What does that mean?
- I purchased a home in early 2009 and have already filed to receive the $7,500 tax credit on my 2008 tax returns. How can I claim the new $8,000 tax credit instead?
- Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
- Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
- I live in the District of Columbia. Can I claim both the Washington, D.C. first-time home buyer credit and this new credit?
- I am not a U.S. citizen. Can I claim the tax credit?
- Is a tax credit the same as a tax deduction?
- I bought a home in 2008. Do I qualify for this credit?
- Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 tax return?
- If I'm qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
- For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?
- Who is eligible to claim the tax credit?
First-time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and before December 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner.
- What is the definition of a first-time home buyer?
The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse.
For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.
- How is the amount of the tax credit determined?
The tax credit is equal to 10 percent of the home's purchase price up to a maximum of $8,000.
- Are there any income limits for claiming the tax credit?
The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced to zero for taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.
- What is "modified adjusted gross income"?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine "adjusted gross income" or AGI. AGI is total income for a year minus certain deductions (known as "adjustments" or "above-the-line deductions"), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.
To determine modified adjusted gross income (MAGI), add to AGI certain amounts such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs.
- If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
Possibly. It depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose MAGI exceeds the phaseout limits.
- Can you give me an example of how the partial tax credit is determined?
Just as an example, assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000.
Here's another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer's income exceeds $75,000 by $13,000. Dividing $13,000 by $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $8,000 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,800.
Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.
- How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008?
The most significant difference is that this tax credit does not have to be repaid. Because it had to be repaid, the previous "credit" was essentially an interest-free loan. This tax incentive is a true tax credit. However, home buyers must use the residence as a principal residence for at least three years or face recapture of the tax credit amount. Certain exceptions apply.
- How do I claim the tax credit? Do I need to complete a form or application?
Participating in the tax credit program is easy. You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on Line 69 of their 1040 income tax return. No other applications or forms are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and first-time home buyer tests.
- What types of homes will qualify for the tax credit?
Any home that will be used as a principal residence will qualify for the credit. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.
- I read that the tax credit is "refundable." What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.
For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000 home buyer tax credit. As a result, the taxpayer would receive a check for $7,000 ($8,000 minus the $1,000 owed).
- I purchased a home in early 2009 and have already filed to receive the $7,500 tax credit on my 2008 tax returns. How can I claim the new $8,000 tax credit instead?
Home buyers in this situation may file an amended 2008 tax return with a 1040X form. You should consult with a tax advisor to ensure you file this return properly.
- Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been "purchased" on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after January 1, 2009 and before December 1, 2009.
In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date.
- Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
Yes. The tax credit can be combined with the MRB home buyer program. Note that first-time home buyers who purchased a home in 2008 may not claim the tax credit if they are participating in an MRB program.
- I live in the District of Columbia. Can I claim both the Washington, D.C. first-time home buyer credit and this new credit?
No. You can claim only one.
- I am not a U.S. citizen. Can I claim the tax credit?
Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of "nonresident alien" in IRS Publication 519.
- Is a tax credit the same as a tax deduction?
No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS.
A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $8,000 in income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer's tax liability would be reduced by $1,200 (15 percent of $8,000), or lowered from $8,000 to $6,800.
- I bought a home in 2008. Do I qualify for this credit?
No, but if you purchased your first home between April 9, 2008 and January 1, 2009, you may qualify for a different tax credit.
- Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 tax return?
Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment.
Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.
Further, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds. Some state housing finance agencies, such as the Missouri Housing Development Commission, have introduced programs that provide short-term credit acceleration loans that may be used to fund a downpayment. Prospective home buyers should inquire with their state housing finance agency to determine the availability of such a program in their community.
- If I'm qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
Yes. The law allows taxpayers to choose ("elect") to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.
Taxpayers buying a home who wish to claim it on their 2008 tax return, but who have already submitted their 2008 return to the IRS, may file an amended 2008 return claiming the tax credit. You should consult with a tax professional to determine how to arrange this.
- For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?
Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.
The Law's Other Provisions
In addition to the tax credit, the American Recovery and Reinvestment Act of 2009 has several other provisions that will benefit home buyers and the housing market. The legislation:
- Will help home buyers in high-cost markets by extending the FHA, Fannie Mae and Freddie Mac loan limit of $729,750 through the end of 2009.
- Allows state housing finance agencies to help buyers at closing by advancing the credit as a loan using proceeds from tax-exempt bonds.
- Extends the tax code section 25C credit for energy-efficient home improvements through the end of 2010; increases the credit rate from 10 percent to 30 percent; raises the lifetime cap from $500 to $1,500; expands the list of eligible improvements.
- For 2008 operations, expands the net operating loss carryback period from two years to five years for small businesses (businesses with average gross receipts of no more than $15 million over the previous three years).
- Temporarily allows exchange of Low-Income Housing Tax Credit allocating authority for tax-exempt grants and appropriates $2 billion in HOME funding for affordable housing projects.
- Provides a "patch" for the Alternative Minimum Tax for tax year 2009.
- Increases bonus depreciation and section 179 small business expensing for business investment in 2009.
- Increases New Markets Tax Credit allocating authority for 2008 and 2009.
- Delays for one year—from 2011 to 2012—the start of the three percent government contractor withholding requirement.
Source: This information is provided by the National Association of Home Builders - http://www.federalhousingtaxcredit.com/2009/home2.html
New home Checklist
8 things you should know about but regular inspection won't find
By Cristina Bolling, The Charlotte Observer
Home inspectors spend hours in the nooks and crannies of houses, crouching in crawl spaces and climbing into attics, for prospective buyers.
They inspect the home's structural integrity, the exterior, roofing, plumbing, electrical, heating, central air conditioning, built-in kitchen appliances, insulation and ventilation. The cost of a routine home inspection depends on a home's size, age and location, as well as the inspector's experience and qualifications. Fees can start as low as $200 for small condominiums and can cost more than $400 for larger and/or older homes, according to the N.C. Licensed Home Inspectors Association.
Even by minimum standards, inspectors make hundreds of observations during the course of a few hours in a home. But there is plenty they probably won't -- or officially can't -- tell you about the house you're about to buy.
"We're generalists. We have knowledge in all the different disciplines, but refer other possible problems to a specialist," said inspector Keven Kossler. Along with three other inspectors, he owns a franchise of National Property Inspection, which inspects commercial and residential property.
After talking to some inspectors, we've come up with a list of eight things you won't find on most inspection checklists, but that you might want to check out with a specialist. Costs on each of these will vary -- ranging from less than $100 to several hundred dollars -- depending on how thorough the tests and inspections run.
In North Carolina, lenders generally require a termite inspection, and anyone who performs structural pest control for the general public must be licensed by N.C. Department of Agriculture & Consumer Services. That said, a general home inspector might find clues that termites might be a problem and may recommend hiring a termite inspector to check it out.
"You'd be silly to buy a house in this climate without a termite inspection, especially if it's more than five years old," said Bob Boucek, owner of Beech Home Inspections and one of the founders of the N.C. Licensed Home Inspector Association.
Radon gas
Radon is a cancer-causing natural radioactive gas that comes from the natural decay of uranium found in nearly all soils. You can't see, smell or taste it, and it is the leading cause of lung cancer among nonsmokers. It's not tested for on the average home inspection, but some inspectors, like Johnny Kay of Fort Mill-based Arrow Home Inspection Service, will conduct a two-day short-term test.
Fireplaces & chimneys
If you're concerned about a home's chimney, hire an inspector or chimney sweep with a "chim cam," which is a camera at the end of a wand that allows a specialist to see every inch of a chimney. Kossler, the inspector and chimney sweep, says he often finds cracked caps on top of chimneys, which can cause water leakage and damage in the home.
Inspectors must visually check a home's roof either from the ground with binoculars or from a ladder perched at the end of a roof. Inspectors say most major problems can be spotted through these methods, but if a home is particularly large or has roof surfaces that are hard to see from those vantage points, it might be a good idea to have a roofer inspect.
Asbestos & lead paint
Asbestos is most dangerous in homes where renovations are taking place, because when asbestos fibers are disturbed, they get inhaled into the lungs and can cause health problems. Only homes built before 1978 are at a risk for having lead paint, which can be tested for with at-home kits or by a trained professional.
If you're worried it's a problem, hire a certified mold inspector. Some use thermal imaging and infrared scanning to find problems. Kossler says even some new homes are plagued with mold problems, because they're built with wood that is wet to start with and never gets a chance to dry.
Air & water quality
Home buyers with significant allergies or respiratory ailments may want to have the indoor air quality checked. Mold, mildew and other toxins and allergens might be present and require an air-duct cleaning. Water quality testing is always a good idea and is especially vital in homes with wells.
It's not included on most checklists, but some inspectors can use an infrared camera to look for missing insulation in a home's walls. It's particularly useful before the final walk-through in a new home's 11th month, when many of the builder's warranties are about to expire. Kossler says he's had clients who have required builders to remove large portions of drywall and install missing insulation after he used the infrared camera to test insulation.
10 Skills All Home Owners Should Have
By Allen Norwood
RISMEDIA, March 31, 2008-(MCT)-Here are 10 skills every homeowner should master. You don't need to run out and learn them all immediately, of course. But you'll appreciate them-and save yourself lots of money. You can tackle most with simple hand tools, either items you own or those you can buy for $10 or less. The only power tool here is a variable speed drill.
We'll start at the front door.
1. Replace a door lock. Especially if you buy an existing house, with lots of old keys floating around, you might want to replace the exterior locks. On the inside of the door, remove the two long bolts holding the front and back of the lock together; remove the front and back of the lock. On edge of door, remove screws holding latch in place, and pull latch out. To replace, just add new hardware in reverse order. Door hardware needs tightening and lubricating over the years, so understanding how it works will pay off in more than extra security.
Tips: Before buying new hardware, check the "backset," or the distance from the edge of door to center of the hole for the deadbolt or doorknob. Replacement hardware will need to match; some locksets are adjustable, and accommodate the two standard backsets. Also, the helpful guy at the home center or hardware store can key all locks alike.
2. Change furnace and air conditioning filters. Nothing difficult about this. Be sure you know where all the filters are-on air returns or at the air handler-and how to change them.
Tips: Make a note of filter sizes and keep the information handy. (You want to be sure you have the right size BEFORE you climb the tall stepladder.) Also, learn how to clear the pipe that carries condensation from the air handler during the cooling season. The pipes can get clogged with mold and algae-and the water usually backs up and starts dripping from your ceiling when you have a house full of company in July. If your air handler is in the attic or a utility room, it should have two drains: one from the unit, and the other from the safety pan under the unit.
3. Learn the location of the main water cutoff. It's probably in a utility room or closet, but could be at a water tank or near the meter. You don't want to go looking for it after a pipe bursts.
Tips: Familiarize yourself with other cutoffs, too: Don't forget the dishwasher and icemaker, for instance. And learn how to turn off the gas in an emergency: Gas valves, indoors or at the meter, are open when parallel to the line and closed when perpendicular.
4. Find a stud in wall. You'll want to locate studs any time you're hanging a heavy object, or installing molding or cabinets. Most homeowners know the tap-tap-tap routine; you'll get a hollow sound between studs, a solid thunk on the stud. (Most of the time.) The centers of the studs are 16 inches apart-so if you find one you can usually locate the others pretty easily.
Tips: Look for the heads of finishing nails near the top edge of the baseboard. Those nails will be in studs. Or, hold a flashlight against the wall, shining the light parallel to the wall. Turn the flashlight slowly to sweep the wall with light. You'll be able to spot the patches over drywall nail heads or screw heads that aren't visible otherwise.
5. For spaces between studs, you'll want to use hollow-wall anchors to mount towel bars, drapery rods and the like on walls. The most important rule is to match the anchor to the weight of the item you're mounting. From weakest to strongest, anchors include: plastic expansion anchors, threaded drywall anchors (Zip-It), winged plastic anchors, molly bolts or sleeve-type anchors, and toggle bolts. When installing anchors, you can make small holes in drywall with an awl or sharp nail, but you should use a drill for larger holes.
Tips: You'll be more accurate if you make small starter holes even for those anchors that screw in. And, if you're not going to mount something in the same spot, it's easier to patch over anchors such as mollys than it is to remove them. Here's how: Remove the bolt or screw; tap the anchor lightly with a hammer until it's below the face of the drywall; cover with spackling; sand.
6. Hang a ceiling fan. This is a popular upgrade and involves skills that you'll use to replace light fixtures and receptacles. The first step, any time you're dealing with electricity: Turn off the power at the breaker box. You must make sure a ceiling fan is anchored properly. If it's not, it can fall. If you can move the electrical box with one finger, it won't support a fan. It's best to anchor the fan directly to the ceiling joist. This can be a time-consuming job; give yourself a couple of hours. Assemble the fan, minus blades. Then attach the fan's ceiling bracket. Hang fan in the bracket. Connect wires-black to black and white to white-according to the directions. Attach blades. Fans work best if blades are at least 10 inches from the ceiling, and fans should be no lower than 7 feet from floor.
Tips: Your first electrical project is a good time to make sure the breakers are labeled clearly and correctly. (Don't assume that.) When hanging fans-or light fixtures or dimmer switches-make sure wires are securely fastened and avoid jamming wires into crowded boxes. If you try to force wires, you could pull them apart and create a dangerous short.
7. Sooner or later, you'll need to learn to drive drywall screws with a variable speed drill. You'll repair drywall nail pops that way, of course. Pull the nail, drive a screw into the stud or joist a few inches away from the nail hole. The screw head should "dimple" the surface, with the screw head just below the face of the drywall. Cover the screw head and nail hole with spackling, let dry and sand. With screws and drywall clips, you can make larger wall repairs. U.S. Gypsum, the maker of Sheetrock brand drywall, offers a handy explainer online: Go to www.usg.com, search for repair clips, click on "Install Guide." You use the same screw-driving skills to repair loose boards on your deck. Pull any loose nails and replace with decking screws. Be sure you use coated or galvanized screws in treated lumber.
Tips: Driving screws with a drill is like putting in golf: It's all feel. Practice on a scrap of 2-by-4. Also, buy extra No. 2 Phillips screw bits. You always want a spare. You'll tear them up, especially when working on decks.
8. You must master a caulking gun. Some say squeeze tubes are easier for do-it-yourselfers to master. We think they're wrong. A gun's trigger gives you more control. There are some tricks. Cut the tip of the tube at an angle, but with a smaller hole than you think you might need; you can always trim the tip again if the hole needs to be larger. Break the inner seal. Quit squeezing before you get to the end of the area you're caulking. The caulk will continue to come out. When you reach the end, lift the gun from the surface and immediately remove the tension on the push rod.
Tips: It's important to choose the right caulk for the job. Use mildew resistant bath and kitchen caulk for tub or shower; use paintable acrylic latex for that gap between wall and baseboard. Read labels carefully. Also, when smoothing caulk with your finger, resist the temptation to overwork it. Smooth it with two passes-because the third will make a mess.
9. Seal Stains. Here's another lesson from Homeowner 101: You can't paint over crayon, ball-point pen, grease splatters on the kitchen wall or water stains on the ceiling without the stains coming through. You must seal stains first. There are lots of good sealers and primers these days, but one old standby is pigmented shellac. A familiar brand is B-I-N from Zinsser, and the company's website is a good place to learn about the wide array of specialty primers. Visit www.zinsser.com.
Tips: Remember that you can tint primers to make them easier to cover with the finish paint. Ask your paint pro. Also, some primers-including pigmented shellac-seal in odors, too. You'll appreciate that if you live with a smoker or a cat.
10. Replace the flapper ball in a toilet. Every homeowner deals with a toilet that leaks water from the tank to the bowl (and mysteriously flushes in the middle of the night). The problem is usually a bad flapper ball, the valve that opens when you press the handle to flush. The cure is easy: Buy a replacement, read the directions on the back of the package, install it.
Tips: Be sure to pay attention to proper chain length. A chain that's too short or too long can interfere with proper operation. Also, clean the opening at the bottom of the tank thoroughly before installing the new flapper ball. Grit and minerals build up and keep the ball from seating properly.
3 Helpful Homeowner Books
Do-it-yourself books are like tools: Buy one when you need help with a specific chore and, if you choose properly, you'll use it for years to come. The most helpful books explain things with clear, complete pictures and illustrations. If you're considering a book, pick it up and flip through it to a chore you're familiar with. Could a novice follow the graphic instructions, based on your experience? If so, you'll probably be able to follow the advice for something new.
Here are three books we've found especially helpful:
"The Reader's Digest Complete Do-It-Yourself Manual." First published in 1973, it was last updated in 2005. A great all-around book. It sells for $35 new, but you can find used versions online.
"Home Depot's Home Improvement 1-2-3″ (Meredith Books, 2003, $34.95). Clear, helpful visuals, which is true of all the Home Depot how-to and home-improvement books.
"Home & Garden Television's Complete Fix-It" (Time Life, 2000, $29.95).
You'll find lots of guidance online. Lowe's offers tutorials in its how-to library (www.lowes.com) and the folks at "This Old House" (www.thisoldhouse.com) are always helpful.
Take a Class, Hire a Pro
If some of these chores seem too much for you:
Take a class. The short workshops offered by home centers provide basic skills for a wide variety of projects. There are projects for kids, too. Schedules are posted online: www.lowes.com or www.homedepot.com. Central Piedmont Community College offers classes in home repair and improvement: www1.cpcc.edu.
Hire someone. The best way to find a tradesperson is through a recommendation from a friend or neighbor. Or, check out the roster of the National Association of the Remodeling Industry, where contractors are posted by specialty: www.naricharlotte.com. Check out Angie's List at www.angieslist.com, or Home Owners Clubs of America at www.hocoa.com.
© 2008, The Charlotte Observer (Charlotte, N.C.).
Distributed by McClatchy-Tribune Information Services.
Best place to live, start a business in Triangle? Durham, says Fortune Small Business
RESEARCH TRIANGLE PARK, N.C. — Durham, often the overlooked stepchild when it comes to publicity about the Triangle area, emerges ahead of its rivals in a new survey out from Fortune Small Business.
In its ranking of the 100 "Best Places To Live and Launch," the magazine ranks Durham 12th.
Raleigh, meanwhile, stands 20th. Chapel Hill didn't even make the list. No mention of Cary, either.
Best place in the state, however, is Charlotte. The Queen City ranks eighth.
Noting accurately in its profile that Durham is "perceived as the underdog of the Triangle region," the magazine describes the "pros" of the Bull City thusly: "Thriving biotech and pharmaceutical industries, lots of local arts festivals and college sports."
As would be expected, Fortune Small Business is full of praise for Research Triangle Park, most of which is in Durham County. However, it also cites as a plus a project that's owned by Capitol Broadcasting (the parent of WRAL.com and WRAL Local Tech Wire):
"The creative class in the Triangle area (Chapel Hill, Durham, and Raleigh) has begun to set up shop in the unconventional workspaces that are available in downtown Durham's 'American Tobacco Historical District' and in recently renovated office towers."
Other kudos for Durham include the Nasher Museum of Art and a "lower cost of living," but it's marked down for crime. "[T]he city also records higher crime rates, which has dinged its reputation in the region."
Ironically, Bellevue, Wash., topped the list. That happens to be where Durham-based Motricity is moving its headquarters.
As one would guess, Raleigh is praised for its high-tech growth. The capital is also knocked for infrastructure – their reporter must have tried to drive on I-40 and the Beltline:
"Pros: Thriving tech industry, central location amid major research and business centers
"Con: Raleigh's infrastructure is struggling to keeping up with its population growth"
The Fortune Small Business survey focused on 296 metro areas for business friendliness, lifestyle offerings and reporting of its staff.
Other regional cities on the list: Buford, Ga., 3; Asheville, 41; Greensboro, 50; Winston-Salem, 56; Charleston, S.C., 81, and Savannah, Ga., 99.
Source: Copyright 2008 by WRAL.com. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
The Best Strategies for Right Now
By Gerri Willis Published: May 4, 2008
Whether you're a buyer or a seller, you need a competitive edge to get ahead in real estate today. Here are some solid strategies to help you get the most out of the market.
Be an attractive risk. Your credit score determines the interest rate a bank will give you on a mortgage. The difference between decent and terrific credit can add tens of thousands of dollars over the life of the loan. To improve your rating, pay down your credit-card bills. Lenders want to see that your debt doesn't exceed 30% of your available credit. But don't close an account once you've paid it off—doing so actually will hurt your score.
Buy only what you can afford. Most banks now require a down payment of 20%, but if you're an attractive borrower, 10% may suffice. Still, the less you put down, the more you'll pay in fees and interest. Spend no more than a third of your total pre-tax income on housing costs: mortgage, homeowners' insurance, maintenance and property tax. Figure maintenance to be about 1% of the value of your house each year.
Choose your loan carefully. Many homeowners are in trouble because they took out adjustable mortgages with low interest rates that later spiked. A 30-year, fixed-rate mortgage is your best bet—adjustable mortgages don't offer the rate breaks they did during the boom. Use the Internet to do your research. You'll find articles, statistics and general resources that will help you determine which banks offer the best rates in your area and around the country.
Lowball 'em. Bidding wars over a house are uncommon in today's climate. Sellers anticipate having to drop their asking price, so don't bite at the listing price. Bid low and see if the seller will come down.
Think twice before you sell. This is a bad time to expect big returns. If you don't have to sell now, don't. Make inexpensive improvements and wait until market factors are more in your favor.
Find the best broker. A year ago, you could have asked agents to cut their commissions because houses sold themselves. Now you're better off paying the full 6% to ensure you'll get the best service. Local agents are best. They know the selling points of your community—and your house—and can be present to show it to buyers at a moment's notice. Look for pros with at least eight years' experience. If they worked in the business before the boom, they'll do more than just weigh the best offers.
Make sure the price is right. A good agent will know what numbers get the best response from consumers. Studies show that buyers react to break points, or psychological limits. For example, a buyer with a budget of $250,000 may be willing to pay $249,000 but not $251,000. If your home is valued at $310,000, consider listing it at $300,000 or even $299,000 to maximize its sales potential.
Know which way the wind is blowing. Pricing in a free-falling market is dicey. Brad Inman, publisher of a real-estate trade publication, recently helped his parents sell their condo in Las Vegas. Pricing it at a market value of $185,000 to $195,000, he says, would have been a disaster. "We had to anticipate how much prices would fall in the time it would take to close [30 to 60 days]." So they listed the condo at $179,000 and accepted an offer of $175,000 while comparable condos lingered on the market until owners cut prices by $10,000 to $20,000. "You want to avoid time on the market to stay ahead of the falling knife," says Inman.
Gerri Willis is the author of "Home Rich" (Ballantine, 2008) and anchor of CNN's real-estate show "Open House."
Helping Your Client Succeed In Short Sell
Sold up short - How to Succeed at Short Sales
Unfortunately, short sales are a reality for home owners who owe more than their property is worth. If you have patience, persistence, and a knack for problem-solving, this niche could be for you.
You're so happy you got the listing — at least until the sellers inform you the price you're suggesting based on your careful CMA just isn't enough. Why? They owe more than that on their mortgage and home equity loans. Welcome to the world of short sales.
Flat or falling home prices, home-equity credit lines, 100-percent financing that sucked out equity, and spiking interest rates on adjustable mortgages are converging to create a regrettable, but expanding, niche for real estate practitioners: the short sale.
To help you gain a better understanding of short sales and what it takes to specialize in this growing area, we took a look at some of the most common questions on this topic that you and your customers likely will face today. Armed with this information, you can decide whether short sales are an avenue worth exploring for your business.
What is a short sale?
A short sale occurs when the net proceeds from the sale of a home are not enough to cover the sellers' mortgage obligations and closing costs, such as property taxes, transfer taxes, and the real estate practitioner's commission. The seller is unwilling or unable to cover the difference.
Some — although by no means all — short sellers may also be in default on their mortgage loans and be headed for foreclosure. However, home owners who bought at the top of the market or who took out large amounts of equity with a refinance and who now need to sell because of divorce or job transfer may also find themselves upside down, owing more than the home is currently worth when closing costs are factored in.
Tip: Losing your home can be very emotional and most people don't want to face up to the reality until foreclosure sets in. "You have to have to have a very soft sell approach, but still keep sellers focused on getting forms and paperwork complete," says Sheryl Thomson, associate broker, Exit Island and Beach Realty, Merritt Island, Fla.
Other sellers simply don't understand that if they have assets, such as stocks or a high-salaried job, a lender is not going to let them just walk away from a short sale without signing a note to repay what they owe, says Steve White, broker with Keller Williams VIP Properties, Santa Clarita, Calif.
How do I know it's short?
A CMA will be your first indicator, but you also need to ask the seller what their outstanding debt is and calculate the cost associated with a sale — from transfer taxes to your commission. This will give you an estimate of the net proceeds that will be realized, often called the net sheet. This information can then be entered into a HUD-1 Settlement Statement to calculate out the final, negative result at closing. Some lenders also have their own forms.
Check with the title company and the lender to get exact figures on closing costs and loan balances and to find out what procedures they have in place. If they can afford it, sellers should also consider getting a home inspection to determine what repairs are needed on a home and how this might affect its value, says White.
Tip: Get the seller to send a brief letter to all mortgage holders, giving them permission to speak with you. Otherwise, privacy laws will prevent them from talking to you about the loans, says Larry Hollingsworth, associate with HomeCity Realty, Dallas/Frisco, Texas, and a short-sale course instructor. It's also critical to build a relationship with the seller's lender. Once you have credibility, the entire process becomes easier, he says.
Who do I and the seller need to talk to about the problem?
If there are a first and second mortgage or a home equity line of credit, you may have to talk to more than one lender to get approval for a short sale. In addition, you may also need approval from the entity that holds the pool of loans if the mortgage has been securitized.
"The presence of two lenders makes a short sale more complicated since it's often the lender holding the second, or junior, mortgage that has to absorb most of the loss," says White, who with Gina Covello, e-Pro®, broker associate at Keller Williams Realty, Studio City, Calif., teaches a course called "The Anatomy of the Short Sale."
Opinions differ, but most experts suggest that you let the lender involved know as soon as possible of the potential short sale. Others say you should wait until you have an offer because you'll get no action until then. "Without a viable purchase offer, your deal won't be considered by mortgagees," says Margot Cole-Murphy, broker with RE/MAX Equity Group, Portland, Ore.
Tip: Be sure you contact the bank's loss mitigation department, which will be the group to decide whether to accept a short sale, rather than the collection or customer service department, which is only interested in recouping past due loan payments. "Finding the decision maker is often one of the biggest initial challenges in a short sales," says Thomson.
What information will the bank need to decide whether to accept a short sale?
The sellers' submission package should include W-2 forms from employers (or a letter explaining the seller is unemployed), bank statements, two years of tax returns, and other financial documents outlining income and debt obligations. The bank will also need comps or a broker's price opinion showing your estimate of value.
In addition, the sellers should submit a "hardship letter," explaining the circumstances that make it impossible for them to pay the full amount of the loan. The seller needs to be able to show true financial hardship. Someone with the assets or the income to pay is unlikely to be considered, say most interviewees.
Tip: In preparing the package, be careful about discrepancies between the seller's income and the income used to obtain the loan, cautions Lance Churchill, an attorney and instructor on short sales and REOs with FrontLine Seminars. A big gap may indicate mortgage fraud, unless employment circumstances have drastically changed.
What are the options besides a short sale?
Thanks to programs such as those proposed by Fannie Mae and Freddie Mac to assist subprime borrowers, many lenders are more willing to offer loan modification options. This option can extend the term of the loan, add on delinquent payments to the loan principal, and/or reduce the interest rate to make the loan more manageable for the home owner.
Another option is a repayment plan that requires home owners to increase their monthly payments until the loan is current, says Loni Parmelly, a real estate practitioner and consultant who specializes in short sales. Parmelly also is author of Success in Short Sales (2004), a book she sells on her Web site. It may be possible to refinance an adjustable rate loan with a Federal Housing Authority or conventional fixed loan. Note that lenders will not postpone a foreclosure just because a property is listed, although they may postpone if you have a reasonable offer in the works.
Tip: The ideal candidate for a short sale is still making loan payments and has a credit rating worth preserving. Otherwise, it may not be worth going through the complicated process, says Steve Pierce, broker and operating principal of Keller Williams Benchmark Properties, Fremont, Calif.
How should I price a short sale property?
In general, most short sale experts say to price the property at or near fair market value, although a few will begin with the total payoff amount owned by the seller. How frequently prices are dropped will depend in part on whether the property is in preforeclosure. Most banks have a formula for what percentage under market value they will accept, say interviewees. Figures cited vary from 8 percent under to almost 20 percent under.
"I always price the property 10 percent lower than comparable to peak buyer interest and initiate buyer activity," says Cole-Murphy, who's also founder and curriculum developer for Real Estate Pro Guides, a line of educational books for practitioners. However, it's important for buyers to understand that the bank will not give away the property, she says.
Tip: Most lenders will want to get a broker's price opinion or even an appraisal to see what the property is worth before you and seller set a list price. One way to help ensure that the bank's estimate of value is realistic is to offer comps of recent sales — both traditional and REO, says Churchill, who is also the author of The Foreclosure Specialist: A Real Estate Agent's Complete Guide on Working in the Foreclosure Market (Valco Press, 2007).
"Practitioners who do BPOs are rated in part on how close their estimates are to the final sale price, so they usually welcome information on legitimate comps," he says.
What and how should I disclose about the short-sale property to prospective buyers?
Opinions vary on this topic, although most experts favor disclosing that a property is a short sale in the comments section of the MLS listing. Others suggest waiting to disclose the need for lender approval of the sale until a buyer is ready to make an offer. Debra Allen, ABR®, e-Pro®, with Prudential Arizona Properties, Gilbert, Ariz., uses a disclosure form prepared by her brokerage just for short sales. She also had a special sign rider for the yard sign made indicating a property is a short sale.
Tip: Watch out for unethical investors who will try to convice an owner facing foreclosure to sign a quit-claim deed for the property, and then lease the property, warns Jim Cacioppo, broker/owner of Grand Realty Group. Grayslake, Ill. In such cases, the former owners will still be liable for the mortgage payments, even though they no longer own the house.
How long does it take to complete a short sale?
Although response times vary from lender to lender, it can take two weeks or as long as 60 days to receive an approval of a short sale from a lender. That's why it's critical that buyers and their representative understand and accept that time frame before they make an offer.
An addendum to the California Association of REALTORS® purchase contract includes a provision allowing either party to cancel a short-sale contract within a set period if the seller hasn't gotten the deal approved, says White. Properties with securitized loans (which are the majority these days) may require a longer time to get an approval of a short sale because of the possible need for approval from the entity holding the pool of securities, says Churchill.
Tip: Keep in mind that the purchase contract on a short-sale property is a legally binding agreement once the earnest money has been deposited. Without language in the contract stating that the lenders must approve the offer and release all liens on the property, the seller may face a legal problem for failing to execute the contract if the short sale is not approved, says Hollingsworth.
What can the seller and I do to make a short sale more attractive to a lender?
Getting a lender to approve a short sale is primarily a question of economics. You have to provide hard numbers to show that the amount of money a bank will realize on the short sale is better than the amount it may recoup from foreclosing on the property and selling the property as an REO, says Todd Ruckle, ABR, RE/MAX Associates Inc., Newark, Del.
A 2002 study by Craig Focardi of the Tower Group estimated that the entire cost of a foreclosure was $58,759 and took 18 months. Other factors that can influence a bank's decision include the liability risk it assumes by owning the property after foreclosures, the money tied up during the holding period for a foreclosure and REO resale, additional costs associated with an REO such as attorneys' fees, and the additional reserves it will need if REOs rise in the bank's portfolio.
Tip: A buyer that is willing to close in 30 days and who can make a substantial down payment may make the deal more attractive than a buyer who wants 95 percent financing, notes Michael Termine, GRI, CRB, associate broker, Prudential Rand Realty, New York City. All buyers should be preapproved for a mortgage before submitting the offer.
However, to avoid unnecessary costs, buyers should wait on having a home inspection and an appraisal for the loan until after the bank has accepted the short sale proposition, say Cole-Murphy. Genuine hardship, such as a lost job or high medical bills from an illness may also have an influence, says Covello.
What are the seller's options if a short sale is rejected by the lender?
There are a variety of reasons a bank will reject a short sale — from too low a price to too many files on the loss mitigator's desk. You can look for another buyer or even try resubmitting the same contract. "Banks don't want to take properties back in foreclosure, so they are going to do everything they can to make it work," says Pierce. You also need to prepare your seller in advance for the possibility of foreclosure if a short sale fails, says Parmelly.
Tip: A short sale might be rejected if the loan is less than a year old. In such cases, the servicer that's bought the loan can often require the original lender to buy it back, says Hollingsworth.
What financial or credit liabilities will a seller have as a result of a short sale?
Many lenders ask sellers to sign a promissory note for all or part of the difference between the proceeds of the short sale and the debt obligation as a condition to a short sale. In such cases, the note gives lenders the right to sue a seller and attach other assets if the note is not paid when due.
It's particularly important to understand this distinction if you work in states such as California that have a nonrecourse mortgage, says Churchill. In such states, the lender cannot pursue a deficiency judgment against a seller for any deficiencies after a property is foreclosed. Because of this distinction, sellers who are already in default on a mortgage and do not have the resources to pay off a separate promissory note after a short sale might be better off letting the lender foreclose, he says. If you are working in a state in which mortgage loans are nonrecourse, be sure and alert your seller-clients to this distinction.
Tip: Having a portion of a loan forgiven may have an adverse affect on the seller's credit. Encourage your client to try and sign a lease on an apartment before credit is further damaged, suggests Roberta Murphy, an associate broker with Windermere Exclusive Properties, San Diego.
What tax iabilities will a seller have as a result of a short sale?
One often overlooked aspect of short sales is that a seller must count any amount forgiven by the lender as income and pay taxes on that income, even if no actual money was received. The IRS requires lenders to submit a Form 1099 stating the forgiven amount. Sellers who meet the Internal Revenue Service definition of insolvency (either in bankruptcy or with debts exceeding assets) will not have to pay taxes on the forgiven amount.
Tip: The U.S. House of Representatives has introduced the Mortgage Cancellation Tax Relief Act (H.R. 1876), which would eliminate taxes on any debt forgiven on a principal residence through either short sale or foreclosure. The NATIONAL ASSOCIATION OF REALTORS® has been working to support this bill.
What compensation will I receive as the real estate salesperson or broker in a short sale?
Banks are going to want you to discount your commission. "It's the first place they'll look to save on closing costs," says Ruckle. Rates offered can vary, but are typically 1 percent to 2 percent below averages in the market, say interviewees. However, says Hollingsworth, more lenders now seem willing to pay a full commission on sales.
Tip: When you offer cooperative compensation through the MLS, be sure you also advise potential cooperating brokers that the gross commission established in your listing agreement is subject to court or lender approval and could potentially be reduced. You might also indicate in the remarks or comments field how you'll share the compensation you receive with the successful cooperating broker in the event the gross commission is reduced, instead of locking yourself to a specific percentage of compensation to the cooperating broker, says White.
Where can I find clients if I'm interested in specializing in short sales?
Word of mouth remains the biggest source of new business, experts say, but you can also promote your services to individuals attending credit counseling classes (now required prior to filing bankruptcy), to people who receive state notices of loan defaults, and to home owners named on lists of ARMs that will be resetting in the next few months. To find buyer clients, creativity is a plus. For example, Thomson is developing a monthly "Short Sale Hot Sheet" she e-mails to investors.
Tip: FSBOs are another good source since many upside-down sellers think they can't afford to pay a commission and so try to sell on their own. Many don't realize that in a short sale, the lender pays the broker's commissions, says Churchill.
Are short sales for me?
With many more adjustable rate mortgages ready to reset to higher loan amounts in the next couple of years, short sales represent a growing sector of the market. However, because sales are time consuming, they aren't for everyone. "I always say that if you're going to succeed in short sales, you need the 3 Ps — patience, persistence, and problem solving," says Cacioppo.
Published June 2007, REALTOR® Magazine Online