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Vacation Home Sales Up 44%

Vacation home sales are up 44% year-over-year according to the National Association of REALTORS® based on sales during the July to September period.  Not only are the number of units up, but they are also selling faster than in previous years.

On a national basis, 72% of existing vacation homes closed in October were on the market for less than one month.

The increased desirability and affordability of vacation homes, according to the National Association of Realtors, seems to be influenced by the pandemic and low mortgage rates.  The ability to work from home seems to be contributing to this increase.

Freddie Mac reports the average commitment rate for a 30-year, conventional, fixed-rate mortgage decreased to 2.83% in October compared to the aver commitment rate for all of 2019 which was 3.94%.

There may also be a safety factor involved with these decisions to purchase vacation or second homes.  Contagious diseases flourish more in highly populated areas like big cities and suburbs. The locations of the vacation or second homes are generally in areas with less residents.

The slower pace from the city may also add to the appeal of considering second homes.  Proximity to the mountains or water, whether it be the ocean, rivers or lakes, have become a lure to people who realize that if where they work doesn’t matter, they can select a place where they want to be.

Historically, Americans on the east coast left the cities during the 1793 yellow fever epidemic.  The same migration took place in the mid-19th century during three waves of Cholera and Scarlet fever.

Trends have yet to determine whether some of these new vacation home buyers may consider moving permanently or may reconsider the decision after the pandemic.  Currently, it does have broad-based appeal and offers a lot of flexibility to owners who can afford it.

Home Inspections

A home inspector is another key professional involved in a real estate transaction.  Many times, the sales contract will have a provision that allows the purchaser to have inspections made to discover issues that are not readily apparent or have not been disclosed by the seller.

It is important to have a qualified individual perform the inspection.  Regardless of whether a license is required, buyers should ask about the inspector’s experience, training, years in business and if they are familiar with the area and type of property involved.

Membership in professional associations can indicate an inspector’s commitment to education and training.  References from both customers and agents are helpful and may be more meaningful.  You are encouraged to call the references, especially, if you are concerned about any specific areas.

Errors and Omission insurance is intended to cover mistakes made during an inspection.  It would be good to find out if the inspector has this type of insurance and how mistakes are handled or if omissions are made.

Find out exactly what is included in the inspection and what will trigger the inspector to recommend that you get an opinion by a specialist.  They should be able to provide you with a sample report so you can see the detail with which the items will be explained.  Ask if items that need attention will also be documented with pictures.

Some inspectors will allow you to accompany them during the inspection.  They will be able to point out their concerns and answer any questions you may have about different things.  An inspection can take two to three hours depending on the size of the property.

Generally, there is a time allotted in the sales contract for the inspections to be made and not completing them in a timely fashion could waive your right to use the contingency.  Your real estate professional will be able to guide you through this process.

First Things First

If you are making a particular meal for the first time, it is essential to have a recipe so that it turns out the way it should.  Knowing the ingredients and preparation can guide you through the process.

Buying a home is really no different than making a new recipe.  There are certain things that need to be done, many of which should occur in a particular order to save time, money, effort and disappointment.

Your first inclination may be to start searching the Internet for homes and schedule some showings or possibly visit open houses.  Even though this is very gratifying, it shouldn’t be done until you have gone through the preliminaries.

Buying a home for the first-time implies you haven’t been through the process before and even though, you may have a rough idea of what needs to be done, selecting the right agent in the beginning will give you the benefit of years of personal and professional experience that can help you avoid some of the common mistakes made when buying a home.

This agent can direct you to find the other team members that are required like the lender, title company, inspectors and others.  Each member of the team has an important role to play that if not done correctly, could cause delays and possibly, jeopardize the transaction.

An important step is getting pre-approved so that you’ll know exactly what price mortgage and home you’ll qualify for.  This may even allow you to lock-in a mortgage rate before you contract for a home.  The pre-approval could also prove very helpful in negotiating with the seller by removing some of the doubt in their mind regarding an unknown buyer.  Another advantage to pre-approval is that if you are competing with multiple offers, you have the advantage of being more of a known commodity.

You’ll need to assemble some documents for the lender including pay stubs from the past two months, W-2’s from last year, proof of additional income, tax returns for the past two years, bank statements for the last three months, list of all open credit accounts and balances, copy of driver’s license and history of residence for past two years.

Buying a home is one of the most important decisions in your life and it should be done with care and research.  When all the things are done in the right order, finding the “right” home is just like following a recipe.  For more information, download this Buyers Guide that includes great information to help you through the process.

Cutting Your Housing Costs in Half

Cutting the price will generally bring buyers of anything out of the woodwork that were not serious before.  Some renters could easily lower their monthly cost of housing by half or more by purchasing a home with all the financial benefits that come with it.

The most obvious thing in today’s market is that the mortgage payment could be less than the rent the tenants are paying.  With mortgage rates hovering around 3%, this is a major factor of the savings.

The two other major contributing factors are appreciation and amortization of the mortgage, neither of which benefit tenants continuing to pay rent.  According to the FHFA House Price Index, home prices rose 5.4% from July 2019 to July 2020.  There were 400,000 less homes on the market during the summer of 2020 than the previous summer which is influencing appreciation.

With each payment a homeowner makes on their mortgage, a portion is used to reduce the principal amount owed.  This is like a savings account for the owner because it lowers their unpaid balance and increases their equity.

The equity becomes an asset that can be accessed by doing a cash-out refinance or a home equity line of credit once the equity has reached 80% loan-to-value.

A $300,000 home purchased with an FHA loan at 3% for 30 years would have a payment of approximately $2,013 including principal and interest, taxes, insurance, and mortgage insurance premium.  If the tenant were paying $2,400 in rent, this would be a savings of almost $400 a month.

The monthly principal reduction would average $500 a month for the first year which would lower the net cost of housing.  The other major item to consider would be the appreciation.  Assuming, in this example, the home was appreciating at 3% annually, the monthly appreciation in the first year would be $750 which would further lower the cost of housing.

Rent

$2,400

Total House Payment

$2,013

Less Monthly Principal Reduction

$513

Less Monthly Appreciation

$750

Plus Estimated Monthly Maintenance

$200

Net Cost of Housing

$950

 

In this example, it would cost over $1,400 per month more to rent than to own.

A different approach to this would be that the equity in this home in seven years would be $121,579 based on appreciation and principal reduction.  If the same person continues to rent, there would be no equity build-up.

If you’re curious as to how much you could cut your housing cost, go to the Rent vs. Own or contact your real estate professional.

Some Mortgage Interest May Not be Deductible

Banks are concerned about making loans that will be repaid not about making loans that are tax deductible for homeowners.  It is good business for the bank but how is the homeowner supposed to know?

Most homeowners and potential homeowners are aware there are tax benefits associated with ownership.  For instance, mortgage interest and property taxes have been deductible expenses from federal income tax since it was enacted in 1913.

The current law provides that homeowners can deduct the interest on Acquisition Debt which is the amount of debt incurred to buy, build or improve a first or second home up to $750,000.  The amount of acquisition debt decreases as payments are made and it cannot be increased unless the additional funds borrowed are used for capital improvements.

It is not uncommon for a homeowner to refinance their home for any number of reasons.  It could be to get a lower interest rate that would lower the payments or remove mortgage insurance.  However, when additional funds are borrowed for reasons beyond “buy, build or improve”, the excess is considered personal debt and the interest is not deductible according to IRS.

Maybe this is not important if the owner is taking the standard deduction because it is higher than the total of the property taxes, qualified mortgage interest and charitable deductions made by the taxpayer.  Currently, it is estimated that 90% of homeowners are electing to use the increased standard deduction implemented with the 2017 Tax Cuts and Jobs Act.

A confusing issue that occurs at the end of the year is when the lender reports to the borrower the amount of interest that was paid.  While that amount is most probably accurate, the bank doesn’t know if it is qualified mortgage interest for the borrower.

It is the responsibility of the taxpayer to keep track of outstanding acquisition debt and whether part of the balance is considered personal debt.

Another area where it could become important is if the property was lost due to foreclosure, deed in lieu of foreclosure or a short sale.  The provisions of the Mortgage Forgiveness Act have been extended through 12/31/20 which exempts the forgiven debt from being considered income and therefore taxable.  However, it only applies to acquisition debt.  Any part of a mortgage refinance that is considered personal debt could be taxable in that situation.

As an example, let’s say that homeowners originally borrowed $300,000 to purchase a home that they owned for 15 years.  During that time, the home appreciated significantly, and they refinanced it twice.  Once, they made some improvements and took out cash to pay off personal loans and the second time, it was only a cash out.

Original acquisition debt

$300,000

Remaining acquisition debt including improvements

225,000

Unpaid balance on current mortgage

$550,000

Personal debt

325,000

 

In the example above, the personal debt of $325,000 would be considered income on foreclosure and recognizable as income on that year’s income tax return.

If you have never refinanced your home or have refinanced it but never taken any money out of it except to make capital improvements, your unpaid balance in most likely acquisition debt.  However, it you have refinanced your home and pulled money out of it for purposes other than capital improvements, those funds may be considered personal debt.

This article is for information purposes.  If you are unclear about the current acquisition debt on your home or need advice for your individual situation, contact your tax professional.  Additional information can be found in IRS Publication 936, Home Mortgage Interest Deduction.

Four Things Sellers Should Do Before the Sign Goes in the Yard

Just like buyers should be pre-approved before they begin to look at houses, Sellers should have their home pre-approved.  The reasons are similar: appeal to the “right” buyers, discover issues with the home early, improve marketability, increase negotiations position and close quicker.

For the seller, there are few things that need to be done before the sign goes in the yard and definitely before prospective buyers see the home.  The first is to understand that once you decide to sell the home that it needs to appeal to the broadest base of buyers and that means depersonalizing your home.

Once the home is sold, you will need to pack your things for the new home.  Think of this as starting the process early.  Get moving boxes and make decisions on what you intend to give away or discard in each room and closet.  Identify and pack those items before the home goes on the market. This will be the first wave of making your home more marketable.

When your home hits the market, it needs to be a neutral commodity and not “your” home.  A good rule of thumb is to remove items that involve religion, hunting and sports.  That means removing personal items like family photos or collections displayed in the room.

Next, in round two, go through every room to remove the items that make too large of a statement or take up too much room.  Pool tables may be appropriate in a game room, but they are not in a dining room or a living room.

Personal collections may have taken you years to accumulate and you’re proud of them but the people who come to see your home will either not appreciate them or they will become distracted by looking at them instead of the home.  The livability of your home needs to be the focal point.  The buyers need to visualize themselves living in the property that will become “their” home.

The four most important rooms to address are the primary bedroom, kitchen, living room and dining room.  These rooms have a major influence on buyers when determining whether “it is the right home.”   Bright colors, possibly used as accent walls, should be neutralized.

After you have depersonalized the home and removed non-essential items that could make the rooms or closets look small, you might want to consider another technique referred to as staging.  Rearranging furniture so the room shows to its best advantage is simple and doesn’t cost a thing.  You might decide that a coffee table or statement piece would be nice and your REALTOR® or stager can suggest a place to rent it rather than buying it.

Once the home is depersonalized and staged, you are ready to have a professional photographer take the pictures that visually describe your home to potential buyers long before they ever look at the home physically.  These will be used on websites, portal sites, MLS, and social media.  Anyone with a point and shoot camera thinks they are a photographer but a pro with the correct wide angle lens, who understands lighting and has an “eye” for what makes a great picture is worth every dime you’ll spend.

One more consideration should be to have the home inspected before it goes on the market.  It won’t replace the buyer’s inspections but it will discover any items that need repair and they should be done before the home goes on the market.  This will probably save you money because it might cost less to repair them than they’ll want in second round of negotiations when their inspector finds it.

Another benefit is that if their inspector identifies a problem area that your inspector did not, you have a basis for legitimate disagreement that could just be personal opinion instead of a “fact.”

While the process of depersonalizing should take part before you put the home on the market, you’ll want you have the benefit of your real estate agent’s experience to help you with the process.  At age 18, a person can expect to move nine more times but by age 45, they may only expect to move another 2.7 times.  Your REALTOR®’s experience can be valuable not only in saving your time and money but actually, make the difference in a successful sale.

Selling or Buying Smart Homes

More and more homeowners are employing smart home technology within their homes.  It may start with a video doorbell or lights and progress to other devices.  The smart-home device market is rapidly growing and Forbes research expects it to grow from $55 billion in 2016 to $174 billion in 2025.

The popularity of these high-tech features will require a few additional steps to consider when selling a home.  The seller should determine which items will and will not stay with the sale of the home and identify them in the listing agreement.

Confusion can arise when a home’s marketing mentions its smart-home technology and is unclear if a piece like the hub, which is easily considered personal property but is integral to the working of the system.  Some might consider it an accessory and others a component.

A smart home can contain multiple technology devices connected to the Internet that allow them to be controlled or accessed from computers, tablets or most commonly, on mobile apps.  Many of the devices can also be accessed through a hub like an Amazon Echo or Google Home.

Thermostats and lights may have been some of the first such devices but the video doorbells added a new level of WOW factor by being able to see and talk to the person at your door and even get a video recording.  Porch pirates are now seeing their images on social media caught in the act thanks to these devices.

Homeowners sometimes start with one item like a smart sprinkler system control.  When they find out how cool it is and that it actually saves them money not to mention how convenient it is, they starting planning their next smart-home device purchase.  Some of these items absolutely are permanent and become real property and others, border between personal and real property.

If the seller is including smart devices with the sale of the home, they should have administrative access and any personal information removed and return the devices to the default settings.  The seller should also review the privacy settings and delete the permissions for their personal mobile devices.  For the benefit of the buyer, any manuals or warranties should be left for the new owner.

Equally as important, the buyer should verify that the smart devices have been returned to their factory settings and no longer coupled with the seller’s mobile devices.  The buyers can create their own account to register the devices in their name.  Then, as security updates are available, they will be notified.  At the same time, the buyer will want to create new access codes and preferences.

Alternative Investments

In a recent article, The Wall Street Journal reported that investors have rarely been this flush with cash.  The economic uncertainty due to the pandemic and the volatility of the stock market has caused assets in money-market funds to increase to approximately $4.6 trillion, the highest level on record according to Refinitv Lipper.

The question becomes should an investor be “out of the market” until things settle down or should they seek to find alternative investments to produce satisfactory results.  Even in the middle of this uncertainty, residential rental property has been a stable performer.

Rents are continuing to increase along with values.  Investor mortgages are available at 80% loan-to-value at fixed interest rates for 30-year terms.  Most other investments must be purchased for cash or at best, are limited to low loan-to-value loans, at floating interest rates for relatively short time frames.

The use of borrowed funds, especially at today’s low interest rates, contribute to the rate of return and in some cases, increase it.  This characteristic is known as leverage.

Income properties enjoy specific tax advantages like long-term capital gains rates lower than ordinary income rates, standard depreciation, which is a non-cash deduction, as well as expensing many big-ticket items in the year purchased.

Tax deferred exchanges are available for investors wanting to avoid the tax due on sale and defer the profit into the replacement property.

One of the most cited reasons people invest in rental homes is that they feel they are more in control.  They understand a rental home because it is the same type of property and requires the same maintenance as the home they live in.  They can make the decisions to improve it, repair it, what rent to charge and when to sell it.  For most owners, a home represents their largest financial asset.  That familiarity becomes a natural bridge to decide to invest in rental property rather than something they are less familiar.

If you’d like to know more about the benefits, download the Rental Income Properties guide and call me at (971) 337-9396 to discuss what kind of opportunities are available.

Smart Sprinkler Controller

It seems like most homes have sprinkler systems and if they do, they have some form of controller to automatically turn the water on and off for the time and days you feel necessary.  It seems like basic functionality and if it isn’t broken, you may not feel the need to replace it.

Today, there are so many smart home devices that are not only convenient, but they’ll end up saving you enough money to pay for the upgrade.  There are different manufacturers, but you should at least consider the Rachio if for no other reason than the easy installation procedure.

The process is simple.  Unplug the old controller and disconnect the wires being sure to label which wires went to which stations.  Using the Rachio template, mark three spots on the wall, drill holes in the drywall, insert the anchors into the holes and screw the new controller to the wall.

This model has convenient wire connectors that do not require crimping a wire around a screw.  It is quick and easy to put the numbered wires in the corresponding slot.  The directions are simple and easy to follow.  When complete, connect the power source and plug it into a wall socket.

Now, install the Rachio app to your phone and continue following the instructions to connect the controller to the Wi-Fi.    In minutes, you’ll be sitting in a lawn chair making adjustments and seeing what it will do.

Some of the features you’ll find very convenient are the multiple schedules that can be created and easily switched from one to another.  As you set up each zone, you can take a picture of the area and be able to identify with a glance which area you want when individually selecting one.

Another thing you might like is that when you’re trying to track down a broken head or just need to adjust it, you can turn on a zone from your phone while looking at the yard.  When you identify which head is the culprit, turn the water off from your phone, make the adjustment or repair and turn the water back on to test it without having to go back and forth to wherever your controller is located.

Rachio will even monitor the weather to skip a scheduled cycle in case of rain, high wind or freezing temperatures.  You could literally be anywhere in the world where you have an Internet connection and you’ll be able to adjust your watering cycle.  This device really does save time and money while being fun to operate.

How Does It Measure Up?

People are always looking for a “down and dirty” way to determine the value of a home and square footage seems to be one of the most common things used by people whether they are buyers, sellers or real estate agents.  While it seems straight forward, there are several variances that can lead to inaccurate determinations.

The market data approach to value uses similar properties in size, location, condition and amenities to compare with the subject to arrive at a price.  Differences in any of these things can affect the price per square foot.  Appraisers are trained and licensed to make these adjustments but the differences are not necessarily objective and that is where opinions start to influence the value.

Even if a person were to make accurate adjustments, they would be based on the assumption that the square footage of the comparable properties is correct.  That leads to the next area of concern: how was the subject property measured.

It is commonly accepted to the measure the outside of the dwelling on detached housing.  Is it customary in this area to include porches and patios under roof and if so, do they get full value or only partial value?  Is there any value given to the garage since it isn’t living area?  What about other areas that do not have HVAC coverage?

Some areas don’t give consideration to basement square footage at all.  Others might give some value if it is finished or has access directly to the outside like a walk-out basement.  Similarly, attic space could be finished and under HVAC but if the ceiling height is not standard for the home, it may not receive value.

The problems become exacerbated when different comparables are not treated consistently and yet the common denominator ends up being an average of the square foot price of each.   This is calculated by taking the sales price and dividing it by the number of square feet being quoted.

The source of the square footage should be listed to help determine the accuracy.  It could be what the builder said it was to the original purchaser.  If there is a set a plans available, that might seem credible but it is not uncommon for the builder to make changes while the home is being built which could increase or decrease the square footage.

Another source is the tax assessor.  In many cases, they don’t actually measure the home but take the word of the builders or appraisers for it.  If permits were obtained to add on to the home since it was built, it should be reflected in the square footage.  However, sometimes permits are not secured properly.

After reading this, you may think that more doubts have been introduced than solutions and you are correct.  It takes diligence on the part of all parties to determine the correct amount.  The most highly trained person will be the appraiser and they should be measuring the home in its “as is” condition but understand that even a competent person can inadvertently make a mistake.