Selling and Buying Real Estate
Moving UP or DOWN
Staying at home in 2020 caused of lot of owners to think about how nice it would be to have a larger home to accommodate the additional activities that come along with isolating. Particularly for people with children at home or possibly, the potential of either adult children or parents coming to live with them.
There are other owners who are trying to weigh the pros and cons of selling their larger home and downsizing. For entirely different reasons, the advantages could be very appealing to an owner. A smaller home is easier to maintain and usually, has lower utilities, insurance, and property taxes.
Some people might be considering the convenience and ease of mobility of a single level home. It may be finding a location with proximity to the activities they are now interested in. A newer home might have less maintenance and be more energy efficient.
Married taxpayers who have owned and occupied a principal residence for two years can exclude up to $500,000 of capital gain while a single taxpayer can exclude up to $250,000. Liquidating the equity in their home without a tax liability could have multiple benefits.
Some people might choose to pay cash for the replacement home. Others might put 20% down to avoid mortgage insurance and possibly, even get a 15-year loan to get the lowest rate. The balance of the equity could be invested at a rate higher than the interest on their new mortgage. Still, others might want to have some reserve funds available for whatever the next unanticipated crisis might be.
It could be a way to fund a longtime goal like children’s or grandchildren’s education, or wedding, or a once-in-a-lifetime trip. Maybe part of the equity could be used to start a business or make a grant to a worthwhile charity.
Selling a home and purchasing another will have expenses involved that have to be taken into consideration. Purchase costs could be 1.5 to 3% while sales expenses could be easily be 2.5 times that much.
Regardless of whether it is moving to a larger home or a smaller one, now is a good time to make the move. Due to the low inventory in most markets, homes are selling quickly, many times, in less than three weeks. Normally, the winter months have less activity which means less competition also.
And then, there are the mortgage rates. As of 1/21/21, the 30-year fixed rate was at 2.77% and the 15-year at 2.21%.
Like any other big change in life, it is recommended that you take your time to consider the possible alternatives and outcomes. Your real estate professional can provide information that can be valuable in the discernment process such as what your home is worth, what you will net from a sale as well as, alternative properties for your next stage in life.
Real Estate Investments-Rental Homes
Rental Home Investments
Rental homes whether they be single-family detached properties, condos, two, three or four-unit properties share many of the same benefits. Most people instinctively understand many of the working parts because they are the same as their home. They have a basic understanding of value and how to maintain the property. The service providers for a home would be the same for a rental home.
These properties allow an investor to obtain a large loan-to-value mortgage at fixed interest rates for up to thirty years. They appreciate in value, currently exceeding many other assets; have defined tax advantages and allow an investor more control than many alternative investments.
Most lenders require 20-25% down payment and will finance the balance at rates close to owner-occupied homes. Buyer closing costs will add another three to four percent to the amount of cash needed to close. It is also prudent to have available funds for repairs and maintenance.
There are successful real estate investors in every price range and part of town. If your ultimate goal is to have the rent handle the holding costs and to sell the appreciated property at the end of a seven to ten year holding period, it might be advantageous to stay in predominantly owner-occupied neighborhood. They usually appreciate faster and will appeal to a buyer who wants it for their home. Chances are, this type of buyer will pay a higher price than an investor who may not be willing to pay as high a price.
By staying in an average price range, or possibly, slightly lower, you’ll be able to appeal to the broadest group of not only buyers but also tenants while you are renting the property. Even during the mid-80’s when FHA interest rate was 18.5%, buyers were still purchasing homes. Whereas the higher priced homes have a tendency to slow down during trying economic times.
Ask your real estate professional what price ranges sell the best, rent the best and have mortgage money available.
Some investors manage their properties themselves and others don’t want to be involved. Professional property management has advantages like expertise, established contacts, operating statements and economies of scale. The main disadvantage is the cost factor but if they can rent it for a higher price and keep expenses lower than you can, it could minimize the difference.
A possible consideration might be to have a real estate professional place the tenant, check the credit and write the lease. There would be a one-time fee for this, but the owner/investor could then, manage the property, saving the expense of a monthly fee.
Understanding the landlord tenant laws would be particularly important to an investor managing their own property but regardless, the investor needs to have a basic familiarity of the law. There can be civil as well as criminal aspects. Examples might be that a landlord is required to change the locks on a property for a new tenant; the number of days before a landlord must return a deposit and what to do if there are damages causing all or part of it to be withheld.
Another tool that can be very helpful for investors is an investment analysis that will assist them in selecting a property that is likely to provide a satisfactory rate of return. Ask your real estate professional if they can provide this for you. They should be more familiar with rents and expenses to be able to determine the cash flow and what kind of yield you may be able to expect over your intended holding period.
For more detailed information, download our Rental Income Properties and contact me to schedule a meeting to talk about the possibilities.
The value of an Inspection before Listing your Home
Imagine what happens when there is not a pre-listing inspection. The buyer contracts for the home with a provision for professional home inspection. When it is made, there could be things that the buyer didn’t expect or even, anticipate. If it doesn’t trigger an action to terminate the contract, the buyer will inevitably, ask the seller to make all the repairs.
When presented with the buyer’s request, the seller may take the opposite position of not wanting to do any of the repairs. The buyer could accept the property in its “as is” condition or negotiate the repairs or a reduced price with the seller.
Any experienced agent can tell you that sometimes a mutually agreed negotiation is reached and other times, an impasse is met that cannot be resolved. The contract is terminated, and the house has to go back on the market but this time, a disclosure has to be made to all parties looking at the home which may deter showings.
Taking a pro-active approach, by obtaining a pre-listing inspection, the seller can find out about things that will probably show up in a buyer’s inspection. They can get them repaired before the home is shown and it will help the buyer feel more confident with the home. Another option would be to disclose them as not working and make a price adjustment, either way, the seller is in control and is taking a position of transparency with potential buyers.
In some cases, the pre-listing inspection may show things in working order that the buyer’s inspection indicates as needing repair. With two disinterested parties having opposing opinions, negotiations have a more likely chance for a mutual agreement.
Disclosing things that are not in working order can reduce liability in the future. Some deficiencies with the home are not discovered prior to the closing and the surprise issues could lead to liability. The pre-listing inspection by a professional combined with the seller disclosing it properly can reduce potential liability.
For the small investment in the pre-listing inspection, the benefits are well worth the expense. For example, it can provide opportunities to take care of potential issues on your own time with control over who does the work at a certain cost. For a qualified do-it-yourself type homeowner, some items may lend to offering you to perform the work before a buyer puts the house in contract. This can save a lot of money and time without needing the work of a contractor, although it can be risky to take on the liability if repairs are not performed correctly and to code.
You and potential buyers will also have a better idea of the condition of your property and know what to expect. You can present the property in a transparent way that will build confidence with the buyer. You’ll avoid unpleasant surprises as well as possible delays or terminations. Starting over as a seller can be a very challenging hurdle to overcome depending on the market conditions. Pre-listing inspections can lead to faster sales and satisfaction for everyone involved.
For more information, download the Sellers Guide.
Debt to Income Ratios
Debt-to-Income Ratio Affects Approval & the Interest Rate
Debt-to-Income ratio is a tool that lenders use to qualify buyers for a mortgage and is an important factor in determining loan approval. It provides an indication of the amount of debt that a potential borrower is obligated to in relation to how much income they have.
Total monthly debts are determined by adding the normal and recurring monthly debt payments such as monthly housing costs, car payments, minimum credit card payments, personal loan payments, student loans, child support, alimony, and other things.
By dividing the monthly income into the monthly debt, you arrive at a percentage of the monthly income. Lenders actually look at two different ratios commonly called the front-end and the back-end.
The front-end ratio is the proposed total house payment including principal, interest, taxes, insurance, mortgage insurance if required, and homeowner association fees. Lenders generally don’t want these expenses to be more than 28% of the monthly gross income.
The back-end ratio includes the same items that are in the front-end ratio plus any other monthly obligations like the ones mentioned earlier. Lenders prefer to see this ratio not to exceed 36% of monthly gross income but some lenders may extend that to 43%. Borrowers obtaining an FHA mortgage might also be allowed an even higher back-end ratio.
If a borrower had $8,000 monthly gross income, their proposed house payment should not exceed $2,240 or 28% of their monthly gross income. Then, their house payment and monthly debt should ideally not exceed $2,880 or 36% of their monthly gross income.
For the sake of an example, let’s say that their monthly debt was $900. That would only leave $1,980 for the maximum house payment. The monthly debt became a limiting factor affecting the house payment.
In addition to determining whether the buyer qualifies for the mortgage, it could affect the interest rate. Having good credit and having the proper ratios can result in being approved for a mortgage. On the other hand, if the debt is on the upper side of an acceptable range, the lender may charge a higher interest rate for the addition risk of a marginal borrower.
While the math is not difficult to come up with your ratios, it is not necessarily a do-it-yourself project. A trusted lending professional can assess your situation and give you an accurate picture of what price home you can afford and the rate you can expect to pay.
Both things are important to know before you start looking at homes and especially before you contract for one. All lenders are not the same. Call me to get a recommendation of a trusted mortgage professional who specializes in the type of mortgage you want. Download this FREE Buyers Guide.
Buyer’s Closing Costs
Buyer’s Closing Costs
Ideally, each party will pay their own closing costs associated with the purchase and the sale of a home, but they can be negotiable based on lender requirements and market conditions.
The fees are usually paid at the settlement and will be itemized on the closing statement. Buyers should be aware of them before contracting for a home. If a mortgage is involved, the lender will want to verify that the borrower has ample funds available at closing to pay for them.
Buyer’s closing costs can range between two to five percent of the sales price. The real estate agents should be able to give you an estimate of what a buyer can expect. The most accurate estimate will come from the lender at the time the loan application is made. They may or may not include other fees that will be charged to buyers by the title or escrow company.
Buyers are required to be provided a standard Closing Disclosure form at least three business days before the loan closing date. This document will include the loan terms, estimated monthly payments, loan fees and other charges. This can be compared to the loan estimate provided by the lender when the application was made.
Fees connected to a mortgage
Loan origination fee … This is the lender’s fee for processing the mortgage application. It can vary in amount but typically, it can be one percent of the mortgage amount. It may be possible to negotiate this fee into the rate of the mortgage.
VA funding fee … This is a fee charged to the veteran for closing the loan. It can be paid in cash or rolled into mortgage. The amount is based on the status of the veteran, their down payment and whether they have had a VA loan before.
Appraisal … This is a fee paid for a licensed appraiser to determine the value of the property. It validates that the mortgage will not exceed the purchase price and that the buyer has enough down payment based on the type of mortgage applied for.
Attorney fee … This fee is charged to ensure that the legal documents are drawn properly so the lender will have an enforceable mortgage. It is not for legal representation of the buyer.
Discount points … A point is one percent of the mortgage. These fees are considered prepaid interest and can be used to adjust the interest rate on the mortgage.
Lender’s title insurance … This coverage insures that the lender has an enforceable lien from title claims on the property. This policy is usually issued in connection with an owner’s title policy and is priced separately.
Mortgage insurance … Most loans made in excess of 80% of loan to value require mortgage insurance to protect the lender from loss if the property must be foreclosed on. There is no mortgage insurance requirement on VA loans. FHA mortgage insurance premium has two parts. There is an up-front charge of 1.75% of loan amount and then, a monthly amount which is added to the payment. Conventional loans usually collect the first month’s premium in advance and subsequent amounts are rolled into the mortgage payment.
Recording fees … These are fees that are for filing the legal documents with the municipal or county recorders. The documents would include the mortgage and the deed.
Survey fees … This fee is necessary, based on requirements of the lender, to verify property lines, shared fences and driveways and to identify any other encumbrances.
Underwriting fee … This is a separate fee that covers the research and determination that the entire loan package meets the lender’s requirements.
Fees required by mortgage for escrow account
Property taxes … Lenders can require two to three months taxes to be held in escrow so that there will be enough to pay them in full 60 to 90 days before they are due.
Property insurance … Insurance is paid in advance and the annual premium will be due at closing. The lender further requires one additional month’s amount so that one month prior to the anniversary date, the premium can be paid for the renewal.
Flood insurance … The lender may require flood insurance on the property based on their assessment of the location in a flood zone or proximity to a flood zone.
Fees connected to purchase of a home
Settlement fee … This is the buyer’s portion of the fee paid to the title or escrow company, or attorney who handles the closing of the sale.
HOA Fee … Home Owner Association fees are usually paid in advance by the owner. They are prorated at closing for the amount paid that the seller does not benefit from.
Owner’s Title insurance … This coverage insures that the buyer, the new owner, received clear and marketable title from the seller. It will protect the new owners’ interests should they be challenged. Even though it may not be required, it is recommended.
Pest inspection … A pest inspection by a licensed exterminator can be required by a buyer to determine if there are active termites or termite damage, dry rot or another pest infestation.
Property inspection … A home inspection conducted by a professional can be required to determine structural integrity of the property as well as all the systems in the home. It can include but not be limited to plumbing, electrical, roof, heating and air conditioning, appliances and other things.
Title search … Sometimes, title companies waive this fee when an owner’s title policy is issued. It can be customary that a separate fee is charged in addition to the premium for the title insurance.
Transfer taxes … When government taxes are required, these fees must be collected.
The Consumer Financial Protection Bureau is a U.S. government agency that makes sure banks, lenders and other financial companies treat the public fairly. You can download a Closing Disclosure Explainer from their website.