Monday, September 30, 2019

Price It Right the First Time


The Internet has empowered all buyers with information and home buyers are no exception.    The amount of information available to public includes details on size, condition, sales history, current inventory, recent sales, photographs, videos, school info, drive-times, entertainment and much more.

When a seller realizes that buyers are educated with facts, it becomes unlikely that they will pay more than a home is worth.  

If a home is priced too high in the beginning, it may stay on the market longer than normal which could adversely affect the ultimate sales price.  It is a natural reaction from people, personally or professionally, to assume that something must be wrong with a home that doesn't sell in a reasonable time for that market.

The seller is entitled to maximize the equity in their home and pricing it properly in the beginning is the best way to achieve that.  Overpricing can reduce buyers activity because they assume that the best homes are purchased soon after they are offered for sale and if one has been on the market longer than normal, there must be a problem with it.  Similarly, sales associates may come to the same conclusion.

After buyers have seen a few homes in a certain price range, they begin to expect similar amenities in each home they look at.  If a home is overpriced, it will not compare favorably with the other homes that are being viewed.  Sometimes, the buyer may even think that another home could be a bargain because it offers much more for the same price as the overpriced listing.

Shopping the market means looking at the homes that meet a buyers' wants and needs and selecting the one that gives them the most, whether it is in price or amenities.  The overpriced listing doesn't compete well, and it extends the market time.  There is a documented study that shows that the longer a home stays on the market, the lower the price will be.

It is essential that a seller receive factual information to price their home to compete favorably in the current market.  Some of the obstacles can include:

  • Failure to objectively compare the current and sold homes with theirs
  • Neighbors who mislead the seller as to how much they got for their home
  • Fear of making a mistake and thinking they can start high and always lower the price
  • Loss of perspective because the seller is emotionally involved
  • Expecting the home to sell for more than fair market value because they need the money
  • Agents who will accept a listing at any price in order to tie up the property until the seller realizes the price is too high

What a seller paid for the home or the cost to rebuild it today do not affect market value.  Neither does the amount spent by sellers on certain improvements that were made for their own pleasure and enjoyment.

It is unrealistic to expect a buyer to pay more than market value for a home.  The seller sets the price of a home but the buyer determines the value.  If the home is priced properly in the beginning, it is more likely to sell for a higher price, in a shorter period and with less problems.


Tuesday, September 17, 2019

Tips when buying land





                                                                                        

    Top Tips When Buying Vacant Land

Building a new home from scratch can be a dream come true. The idea of designing the perfect property with morning sun in the kitchen and evening breezes on the deck can be exhilarating; the first step to a successful project is finding the right piece of land on which to build. This can present challenges if not approached correctly.

       

        Top Tips When Buying Vacant Land

  •   Hire Experience More than most real estate transactions, it's critical to hire an agent who specializes in vacant land purchases and can guide you through the steps.

  •   Expect to Pay Cash Finding a lender for vacant land can be very difficult. Those who will finance land typically require a 50% or higher down payment and above average interest rates and terms.

  •   Get the Neighborhood Comps Do not neglect to understand home values in the community so you do not over, or under, build your home.

  •   Do Your Due Diligence It is critical to research the property thoroughly. Just a few considerations much include.

    o Site Surveys and Environmental Testing o Easements and Zoning Restrictions
    o Lot Survey and Boundaries
    o Utilities and Water Rights

    Once you've completed these preliminary reviews, it's time to consult with an architect and General Contractor who will then begin to develop concept drawings to consider. Even at this stage, you might find that the home you want is not appropriate for the land you've chosen. Staying flexible is a key component to searching for land; remember that by following a few tips, you can ensure you find the right lot for your dream home. 

Sunday, September 15, 2019

Want to be a Landlord?


Real estate has consistently been one of the highest rated investments available to individuals.  TV shows certainly make rentals look easy and you may even know someone who has made a lot of money with them.  Possibly, the thought has crossed your mind that if they can do it, you can too.

Before you contract for your first investment, ask yourself some questions that could save you time and energy.  Not all people have the time, the inclination or even the skill to manage property.  Landlords need to be good business people who can maximize revenue and minimize expenses.  If investors don't have the skills and talent to handle some of the repairs, they at least need to know reputable and reasonable service professionals.

Another important element is to be familiar with the state and local landlord tenant laws.  You'll need to know what are allowable security deposits and where the money can be held.  Knowing how long you have to return it to a tenant is important and what to do if you plan to keep all or part of it for damages done.  It is important to know about the eviction process and how fair housing applies.

If you decide that you may not be cut out for being a landlord, it won't eliminate investing in rentals.  It does mean that you will need to engage a property management company who is capable of dealing with all aspects of the process.  The peace of mind and convenience will cost you a fee, usually a percentage of the rent collected.  They can handle finding a tenant, doing the background check and writing the lease but there will be an additional fee for that service.

Even though your expenses will be higher with a property manager, with their experience, they should be able to help you lease the property for more money than you can get and will probably have service providers to do the work needed for less.

Occasionally, rental property requires out of pocket expenses for repairs and improvements which is like making another capital contribution.  As equity builds in a rental property due to appreciation and principal reduction, the owner does have the option to take cash out of the investment either to pay additional expenses or to use any way the owner wants.  Pulling equity out of a rental doesn't even trigger a taxable event.

Single-family homes and up to four-unit buildings offer an investor the opportunity to get a high loan-to-value mortgage at a fixed interest rate for 30 years on appreciating assets with tax advantages and reasonable control compared to other alternative investments.

Many investors like the fact that you can borrow to purchase a rental investment where many other investments require cash.  The use of borrowed funds can create an advantage called leverage.  Assume you paid cash for a $100,000 home that generated $7,000 income after the rent was collected and expenses were paid.  Divide the value of the home into the income and it would earn 7%.

If you decided to put an $80,000 mortgage on it at 5% interest, the interest expense would be $4,000 leaving only $3,000 income.  However, at that point, you'd only have $20,000 invested in the property.  Divide the cash invested into the income and the rate of return would increase to 15%.

This is a simple example of leverage showing that borrowed funds can increase an investor's yield on a property.

Rental property can be an excellent investment when it is treated like the business that it is.  Knowledge of the investment will reduce the risk and enhance the opportunity to make a profit.  Some investors consider their rental income as "mailbox money" because each month, they go to their mailbox and they have money being sent to them by their tenants.  The benefits of rental property can easily outweigh risk involved.

Contact me for more information on rental properties and the option to be the landlord or to delegate it to a property manager. 

Monday, September 9, 2019

Money You Saved for a Down Payment



Occasionally, buyers who can qualify to purchase a home decide to "take a break" and wait to purchase a home.  When the focus of buying a home is relaxed, other uses for the money that was going to be used for the home are considered. 

Maybe they think how much fun it would be to have a Sea-Doo or a motorcycle or a new car.  It is amazing how many people would like to buy a home but either don't have the down payment, the income or the good credit to make it possible.

Instead of spending the money, consider investing the money for two years until the time is right to buy a home.  Let's look at putting the money in a certificate of deposit that earns 2% or in the stock market that could average a 5% return.

Assume you were purchasing a $295,000 home on a FHA loan with 3.5% down payment.  The $10,325 would grow to $10,742 in the CD which isn't a big increase but at least it is safe and secure, and it will be available when you're ready.

If the same amount were invested in a safe stock or mutual fund that earned 5%, it would grow to $11,383 in the same two-year period.  It earns more but there is more risk involved.

Your Best Investment

 

CD

Stock Market

Home

Cash to Invest

$10,325

$10,325

$10,325

Wealth Position

$10,742

$11,383

$38,871

Profit Taxed as

Ordinary Income

Long-term capital gains

§121 exclusion applies

 

Alternatively, if you invest the same amount in purchasing a home that appreciates at 3% a year, the equity would be $38,871 two years from now.  The dramatic increase is due to leverage, being able to control a large asset with a small amount of cash.  The appreciation is based on the purchase price not the down payment.

Another factor is that there is principal reduction with each payment that is made.

Make your own projections with Your Best Investment.

Tuesday, August 6, 2019

Determining Property Type



The Internal Revenue Service considers four different types of real estate.  Specific types of properties have benefits based on their classification.  The determination does not depend on the property itself as much as it depends on how the property is used and what the owner's intentions are.

Principal Residence ... a principal residence is the place a person lives or expects to return if they are temporarily away from it.  It could be a single family, detached home or condominium or a duplex, tri-plex or four-unit.  The owner(s) can deduct the qualified mortgage interest and property taxes on the schedule A of their tax return.  There is a capital gains exclusion on profit of up to $250,000 for a single taxpayer and up to $500,000 for a married taxpayer.  

Income Property - is improved property that is rented or leased to tenants as opposed to using it personally.  It can include houses and condos, apartment buildings, office complexes, shopping centers, warehouses and other commercial buildings.  Depreciation is allowed on the improvements.  For property held more than one year, the profits are taxed at long-term capital gains rates.  This type of property is eligible for a tax deferred exchange.

Investment Property ... can be raw land or improved property that is not rented or leased.  This property is not subject to depreciation.  If the property is held for more than one year, the profits are taxed at long-term capital gains rates.  It is also eligible for a tax deferred exchange.  

Dealer Property ... this type of property is primarily considered inventory because the intention is to sell it without intentionally holding it for more than a year.  It could be new construction such as a home builder.  It could be an investor who buys a property and expects to sell it for more.  There is not a requirement to make improvements.  The profits on dealer property are taxed as ordinary, "sweat of the brow" income.  Dealer properties cannot be exchanged.

second home is like a principal residence in that you can deduct the interest and property taxes on your Schedule A, up to the limits.  A second home, as well as a principal residence, can be rented out up to 14-days a year without threatening the status of the property.  Seconds homes are not eligible for exchange because personal use properties are not allowed.  A second home is not a principal residence and profits are taxed like an investment property.  If you own it for more than a year, it is taxed at long-term capital gains rates.

Vacation homes are rented for more than 14 days a year and are like income property but with some additional rules that apply.  If your personal use is 14 days or less or 10% of the time it is rented, your expenses can be deducted in excess of income.  If you use it for more than 14 days or more than 10% of the number of days it is rented, it is considered personal use and your expenses are limited to the amount of income collected with no losses being deductible.

Taxpayers can strategically change the property type based on their intentions.  A principal residence can be converted to income property.  Dealer property could become a principal residence.  A rental property could become a principal residence.

Professional tax advice is always recommended to be able to understand the information and how it applies to your specific situation. 

Tuesday, July 23, 2019

Delaying usual cost you more


Two things can happen when the mortgage rates go up before you've found a home or locked-in your mortgage.  You'll either pay the current mortgage rate which means a higher payment, or you'll have to increase your down payment to keep the monthly payment at the same level.

If the rate were to go up by ½%, the payment on a $275,000 mortgage would increase by $82.87 per month for the entire 30-year term.  That would increase the cost of the home by $29,835.

Some people are purchasing the maximum home that they can qualify for.  In that case, they cannot qualify for a higher payment and the only way to buy the same price home is to put more money down which may not be a possibility.  The other alternative is to buy a lower price home which may not be in the same area or size which will involve some compromises.

The rate is not the only dynamic that affects buyers waiting to purchase.  The home they want could sell to someone else.  Prices could increase as new homes come on the market.  The question that many buyers ask themselves when they become a victim of the consequences of delay is "What could we have spent the money on if we didn't have to make a higher payment?"

Mortgage rates are very attractive currently and within ½% of the all time low of 3.35% in December 2012.  The highest rate was 18.45% in October 1981.  Whether you're purchasing or refinancing, it may not be this low again.

To see how it will affect the payment, plug your numbers into this Cost of Waiting to Buy calculator or call me at (785) 650-4370 and I'll help you with it.




    


Monday, July 1, 2019

Building Equity

Owning a home is the first step to building equity.  Tenants build equity but not for themselves; they build it for the owners.

Equity is the difference in the value of the home and what is owed on the home.  There are two dynamics that cause this to grow: appreciation and principal reduction.

As the home increases in value, it is said to appreciate.  Various authorities will annualize an appreciation rate based on average sales prices from one year to the next.  Since appreciation is based on supply and demand as well as economic conditions, it will not be the same year after year.  

If you looked at a ten to twelve-year period, some would be higher than others and there may even be some individual years that it is flat or even declined.  For the most part, values tend to appreciate over time.

Most mortgages are amortized which means that a portion of the payment each month is applied to the principal in order to pay off the loan by the end of the term.  A $300,000 mortgage at 4.5% for 30 years has $395.06 applied to the principal with the first payment.  A slightly larger amount is applied to the principal each following month until the loan is paid with the 360th payment.

If additional principal payments are made, it will save interest, build equity faster and shorten the term of the mortgage.  Using the previous example, if an additional $250.00 principal contribution was made with each payment, it would only take 270 payments to retire the loan instead of 360.  It would save $69,305 in interest and shorten the mortgage by 7.5 years. 

To see the dynamics of equity due to appreciation and principal reduction, look at the Rent vs. Own.  To see the effect of making additional principal contributions on your equity, look at the Equity Accelerator.