Real Estate Market review October 2014 Pensacola, Gulf Breeze, Navarre

Save Interest, Build Equity & Shorten the Term

If you invest in a savings account, you’ll make less than 1% and would have to pay income tax on the earnings. On the other hand, contribute something extra to your house payment and you’ll earn at the mortgage interest rate which is certain to be more than you are earning in the bank.

Making additional principal contributions on your mortgage will save interest, build equity and shorten the term. An extra $100 a month in the example shown will save thousands in interest and shorten the term of the mortgage as well.

Reducing your cost of housing is another way to improve the investment in your home. Becoming debt free is a worthy goal that is achieved with discipline and good decisions. Suggestions like this are part of my commitment to help people be better homeowners when they buy, sell and all the years in between.

Check out what would happen if you were to make additional payments on your mortgage.

Crafting an Acceptable Offer

An agent was presenting a contract to a single, senior woman who was moving into a retirement home.  It was a full price offer with reasonable terms and timelines but the seller wouldn’t accept it.  When the agent probed deeper, she discovered that the seller was concerned with her dining room table.

It had been the first piece of nice furniture that she and her husband had purchased and they had literally spent a lifetime celebrating and making decisions at that table.  It troubled the owner to think that the table would go to strangers who might not appreciate it as much as her family had.

The agent told the elderly seller that she knew of a church nearby that had a community room filled with lovely tables like hers.  If she liked the idea, the agent would call the church to see if they’d like to have it.  Once a new home for the table was found, the sale of the home went smoothly.

Lower inventory and increased demand in certain price ranges have increased the frequency of multiple offers on the same home.  Sellers are frequently faced with a decision dilemma on which offer to accept and the price may not be the most important factor.

Sellers generally need the equity from the sale of their home to purchase another one but they also don’t want to have to temporarily move if they’re not able to get into the home they’re purchasing.  Flexible buyers have discovered the value in coordinating the sale and possession of the homes.

Sellers want to know when they make a decision on an offer, that the buyers will be able to perform as the contract is written.  The more contingencies that can be eliminated or minimized, the more comfortable a seller will feel about the certainty that it will close according to schedule.

The buyer should be pre-approved with all verifications and credit reports having been done.  Simply having a loan officer’s opinion is definitely not the same thing as a pre-approval.

There is a unique dynamic to every transaction because the parties are individuals with infinite priorities and values.  The art of the deal takes place when these unique variables are considered to define a mutually acceptable offer involving price, terms and conditions. The role and experience of the agents contribute to the successful outcome.

How's Your Memory?

How old is your bedroom furniture and what did you pay for it?  Don’t know?  That’s okay, let’s try an easier question.  When did you buy the TV in your family room and is it a plasma, LCD or a LED?

Whether you are the victim of a burglary, a fire or a tornado, most people are comforted they have insurance to cover the losses.  However, unless you’ve filed a claim, you may not be familiar with the procedures.

The adjustor will want to know the date and how the loss occurred.  Assuming you have contents coverage, the claim for personal belongings is separate from damage to the home.

You’ll be asked to provide proof of purchase, like receipts or cancelled checks, or a current inventory.  If they’re not available, you can reconstruct an inventory from memory.  The challenge is trying to remember things you may not have used for years and may not miss for years more.

Relying on memory can be a very expensive alternative.  A prudent homeowner will create a home inventory with pictures or videos while all of their belongings are in the home and they can see them.

Download a home inventory to make your project a little easier.

The Reason They're Called Benefits

The Veterans Administration guarantees home loans for eligible veterans.  It is considered an attractive loan because the veteran can purchase the home with no down payment up to specific loan limits and no mortgage insurance. This makes the monthly payment considerably lower.

Let’s assume a buyer wants to purchase a $200,000 home and can get a 4.5% interest mortgage for 30 years.

A FHA loan would require a $7,000 down payment plus $3,377.50 in up-front MIP which can be rolled into the mortgage. The monthly mortgage insurance premium would be $221 per month for a total payment of $1,215.94.

The VA loan doesn’t require a down payment. There is a 2.15% VA funding fee that can be rolled into the mortgage which would make the principal and interest payment on $204,300 much less at $1,035.16.

The revised loan limits for 2014 are published by VA and can change each year especially based on high-cost areas. However, a lender can allow a home purchase in excess of these amounts with a 25% down payment on the amount above the limit.

If a purchaser wants to buy a $600,000 home in an area where the VA limit is $417,000, the lender could require a $45,750 down payment and make a $554,250 mortgage. In this example, the purchaser is able to get in for less than 10% down payment and no mortgage insurance.

Veterans with the available funds for a down payment should compare all loan products to consider which will provide the lowest cost of housing. A skilled real estate professional and a trusted mortgage advisor can be valuable resources.

Fifteen Will Get You Three

Freddie Mac chief economist, Frank Nothaft, says that affordability, stability and flexibility are the three reasons homebuyers overwhelmingly choose a 30 year term.  However, for those who can afford a higher payment, there are three additional reasons to choose a 15 year term: save interest, build equity and retire the debt sooner.

First-time buyers have a higher tendency to use a minimum down payment and are very concerned with affordable payments.  It is understandable that the majority of these buyers select 30 year, fixed-rate mortgages.

Consider a $200,000 mortgage at 30 year and 15 year terms with recent mortgage rates at 4.2% and 3.31% respectively. The payment is $433.15 less on the 30 year term but the interest rate being charged is higher.  The total interest paid by the borrower if each of the loans was retired would be almost three times more for the 30 year term.

Another interesting thing about the 15 years mortgage is that more of the payment is going to principal than interest from the very first payment.  It would take over 13 years on the 30 year mortgage for the principal to exceed the interest allocation.

Some people might suggest getting a 30 year loan and making the payments as if they were on a 15 year loan.  That would certainly accelerate amortization and save interest. The real challenge is the discipline to actually make the payments on a consistent basis if you don’t have to.  Many experts cite that one of the benefits of homeownership is a forced savings that occurs due to the amortization that is not necessarily done by renters.

What is a Seller's Market?

It is generally considered a seller’s market when the conditions favor the seller.  This condition exists when demand is high and supply is low without any significant adverse economic conditions taking place.

Demand is determined by ready, willing and able buyers.  Low interest rates with indications that they will begin to rise fuels part of this demand. Rising prices also creates a sense of urgency to avoid higher housing costs.

Inventory is currently below what is considered balanced in most areas. In some areas and price ranges, homes are selling very quickly, with multiple offers and sometimes at above the listing price.  When too many buyers are chasing too few properties, things get competitive and the seller is the beneficiary.

Even when buyers and sellers come to an agreement on price and terms, a challenge can occur if the appraisal doesn’t meet the sales price.  Either the purchaser has to come up with the additional cash or the purchase price has to be renegotiated.

A typical seller wants the most money possible for their home in the shortest time frame with the fewest inconveniences.  A Seller’s Market provides the most likely environment for this to happen.

Record Improvements Now

There is a significant difference in how the money you spend on your home is treated for income tax purposes.  Repairs to maintain your home’s condition are not deductible unlike rental property owners who can deduct repairs as an operating expense.

On the other hand, capital improvements to a home will increase the basis and affect the gain when you sell which may save taxes.

Additions to a home or other improvements that have a useful life of more than one year may be considered an increase to basis or cost of the home.  Other increases to basis may include special assessments for local improvements like sidewalks or streets and amounts spent after a casualty loss to restore damage that was not covered by insurance.

Unlike repairs, improvements add to the value of a home, prolong its useful life or adapt it to new uses.

You can read more about improvements and see examples beginning on the bottom of page 8 of IRS Publication 523.  For a form to keep track of money you spend, print this Improvement Register.

Consideration could be the key to your new home

Consideration associated with a contract is generally thought to be the price and terms but being sympathetic and courteous towards the seller could make a difference in getting the home you want.

Business people, like store owners, expect to deal with customers and even come to expect behavior that might not be accepted in a purely social atmosphere. Homeowners, on the other hand, may not be aware of what to expect.  They are opening the sanctity of their home to the public for review and criticism.  Buyers may be detached from emotional feelings while the sellers might react unfavorably to comments that are taken personally. 

1. Be on time for appointments; cancel if necessary.  The sellers may be rearranging their schedules and making an additional effort to make it convenient for you to see the property.
2. Be a good guest and respect the seller’s privacy.  Look at the home and avoid looking at the seller’s personal items; there is no reason to look in refrigerators or furniture drawers.
3. Don’t sweat the small stuff.  Try to focus on critical items of a home like location, floor plan, layout, size and not dwell on cosmetic items that are easily and inexpensively changed.
4. It’s not a good negotiating technique to list the defects.  Most people become defensive when presented with a list which could have the opposite effect of helping you get a better deal.
5. Limit your visits until you actually own the home.  It’s natural to be excited and making plans to move into your new home but it is still the seller’s until closing and they’re making plans to move too.
6. Negotiations are generally finished when a contract is completed.  It can be frustrating to continually be asked for “one more thing.” Make a deal with the seller and live with it.  If there’s something you’re not sure about, specify it in writing in the contract.

Some things are obvious: the seller wants the most for their home and the buyer wants to pay the least possible.  Showing consideration to the seller about things that don’t have anything directly to do with price can actually benefit the buyer.

An Exchange Means More to Reinvest

Section 1031 exchange for rental and investment real estate is a tool that allows investors to move the gain from one property to another without immediate income tax consequences. 

An instant benefit is to postpone the tax due which gives the investor a larger amount of proceeds to invest.  In the example shown, the investor has 21% more proceeds to invest and grow over time than if he had paid the taxes due instead of exchanging.

A legitimate long-term goal might be to make qualified exchanges from one property to another until the investor dies.  The heirs would then receive a stepped-up basis on the property based on the market value at the time of the decedent’s death and possibly avoiding taxes altogether.

There are specific requirements to be met in order for the exchange to qualify. For more information on exchanges, see IRS publication 544.  In addition to enlisting the services of a real estate professional familiar with investment property, seek the help of Qualified Intermediary to facilitate the intricacies of the exchange.  Your real estate agent can help you locate one.