It takes a team of professionals to buy a home like the lender, the appraiser, the inspector, the property insurance agent, the title officer, and others but the real estate professional may play the most critical role.
Baking bread seems so simple. There are only four ingredients: flour, salt, yeast, and water; yet, there are steps that should be followed as well as a certain sequence to get the proper results. Some people mix all of the dry ingredients before adding the hot water to activate the yeast. Other people will activate the yeast in the warm water first to allow it to “bloom.”
Both methods can achieve satisfactory results but one knowledgeable person needs to be in charge of the bread instead of having multiple people to be concerned with just their one ingredient or contribution like mixing, kneading, fermentation, benching, shaping, proofing or baking.
Similarly, in a home purchase, the buyer’s agent can be the one who puts things in the proper order and sees that no steps are missed. The buyer’s agent coordinates between the other professionals with the common goal of getting the home closed on time according to the terms agreed in the sales contract.
Even if a buyer has been through the process before and possibly, multiple times, the buyer’s agent will most likely have far more experience because it is their job. They perform their job on a daily basis and are not personally or emotionally involved like a buyer is.
Your agent understands what and when the various steps should be done and by whom. They have worked with enough of the other professionals to know who is good at their job and can offer recommendations. They have seen the things that make a transaction go smoothly and what can derail one.
Experience is a great teacher, but the lesson does not have to be learned by going through it by yourself. Take the luxury of using your real estate professional’s experience acquired through years of study and practice. Allow your agent to advise you and coordinate the efforts to achieve the results you are expecting and deserve.
Learn more about the process and different steps by downloading the Buyers Guide
Homeowners receive a generous exclusion on the gain of their principal residence up to $250,000 for single taxpayers and $500,000 for married taxpayers filing jointly. Most people probably consider the gain or profit in a home to be the difference between the purchase price and the sales price.
IRS allows a taxpayer to lower the sales price by the selling expenses before calculating gain. Normal expenses like real estate commission, title policy, attorney fees, and other sales expenses may be included if they are normal and customary.
Another significant adjustment is that capital improvements made during the holding period can be added to the cost basis. Normal maintenance like repairs are not considered improvements. IRS says that if the expenditure materially adds value (features) to the property, or appreciably prolongs the useful life of the property, or adapts a portion of the property to a new use, it can be considered a capital improvement.
Examples could include replacing a heating or air conditioning system, storm windows, new permanent landscaping like trees or shrubs or completing an unfinished basement. They don’t necessarily have to be high-ticket items but can include things like adding dead bolts, ceiling fans, video doorbell and other items. For more information, see IRS Publication 523.
The total amount of the money that is spent on capital improvements increase the cost basis of the home which in turn will reduce the amount of gain when sold. With the average person staying in a home for 10 … 12 years, the total improvements could be significant.
As an example, let’s say a single taxpayer sold their home for $350,000 more than they paid for it. If their selling expenses were $25,000 and they had made $75,000 of capital improvements during the holding period, the gain would be $250,000 and within the limits for a single taxpayer to exclude all of it instead of having a $100,000 gain.
It is necessary to be able to prove the amount spent and for that reason, a routine should be established to keep the receipts and cancelled checks for all expenditures on their principal residence. Even if the owner is not sure whether they qualify as an improvement, by having the receipt available at the time of sale, a tax professional can help a homeowner with the determination.
In addition to receipts and cancelled checks, a contemporaneous register listing the date, description and amount spent will provide accurate information for calculations and serve as evidence should it be needed in the future.
There is more information in the Homeowners Tax Guide that is available for download.
The last two months of the new normal stay at home has led many homeowners to rethink the way they live in their home. It has now become an office for working at home; a school for children; a gym to stay in shape; and a place for recreation.
The repurposing has people evaluating whether their home still meets their needs or if some changes are necessary. In some cases, adult children have moved back home, and, in others, there are parents who have moved in for the first time.
Staying at home and sheltering in place is necessary but how much togetherness can one family take and how long is it going to last? Temporary is stretching into longer than expected and even when vaccines and treatments are discovered, will things really go back to the way they were?
A home is a place to call your own; to raise your family, share with your friends and to feel safe and secure. Covid-19 has changed the scope of feeling safe and secure at home and may now be considered a sanctuary of safety more than ever before.
Many of the chief economists in the country feel that real estate will likely lead the country out of this recession. The housing market is experiencing low inventory and has for almost a decade. Building has not kept up with demand and prices of existing homes have continued to go up; 8% over last year.
With 30-year mortgage rates at close to 3.25% and prices expected to continue to rise, an investment in a home can fit your needs and show returns in satisfaction, comfort, enjoyment, and monetary value.
If you are going to be spending more time in your home for all the reasons mentioned, maybe now is the time to consider finding a home that better suits your needs. It can be done in a responsible and safe manner using an online meeting with your real estate professional. Find out what is available and what the process entails to protect you and your family.
During the mortgage meltdown that caused the Great Recession a decade ago, some homeowners lost their homes to foreclosure or constructed a short sale to get out from under the debt. In most of the cases, the lenders forgave all or part of the debt owed them.
Similarly, in the early 90’s after the failure of the Savings & Loans in the U.S., thousands of homeowners lost their homes in the same way but back then, the policy of the IRS was to consider the forgiven debt as income. Today, it is still considered income which means that a homeowner could lose their home because they could not afford to pay for it and to make matters worse, they would owe income tax on the debt relieved.
The good news is that in 2007, Congress passed the Mortgage Forgiveness Act and it has continued to be extended with its current expiration of 12/31/20.
The amount forgiven for income tax purposes may not be the same amount owed to the lender. Mortgage forgiveness has a limited exclusion for discharged home mortgage debt for a principal residence only; it does not include second homes or investment properties. Only the amount of mortgage debt that can be treated as acquisition indebtedness in included.
In the example below, a homeowner purchased a home and refinanced the home five years later at 80% of the market value. The new loan proceeds were used to payoff the original mortgage and make $30,000 of new capital improvements. The revised acquisition debt is the acquisition debt at the time of refinance plus the capital improvements made with the loan proceeds.
The new $400,000 loan produced $39,417 of home equity debt which is not considered acquisition debt. Home equity debt is money borrowed on a home and can be used for any purpose, but it may not be tax deductible or considered acquisition debt. Acquisition debt is money borrowed to buy, build or improve a principal residence subject to a $750,000 limit.
Assume that the borrower never made a payment on the new loan. If the new loan went through foreclosure while the Mortgage Forgiveness Relief Act is in effect, the forgiveness would be limited to the acquisition debt of $360,583 and the remaining amount of $39,417 would be considered income and subject to tax.
This article is meant to inform homeowners of liabilities associated with foreclosures and possible remedies that may be available. This example is meant to illustrate the portion of a loan that could be forgiven. Taxpayers should always consult their tax professional regarding their specific situation and the way the law would apply to their situation. For more information, see IRS Publication 4681.
|Purchase Price … 5 years ago||
|Mortgage at time of purchase … Acquisition Debt||
|Fair Market Value … Today, 5 years later||
|Refinanced 80% – Loan to Value||
|Replaced unpaid balance – current acquisition debt||
|Capital improvements made with loan proceeds||
|Revised acquisition debt||
|Home equity debt … difference in refinanced amount and acquisition debt||
The convenience of selling your home without the hassle of getting it ready, putting it on the market, showings, open houses, negotiations and repairs comes at a cost … a significant part of your equity.
The companies, referred to as iBuyers, that buy homes from sellers are for-profit organizations. They expect to make a profit from sellers who are willing to discount the proceeds they’ll realize as an alternative to the conventional method of selling a home for people who need a quick sale.
The promotions for these companies generally state that you can receive a cash offer in a few minutes after putting your address online. The discount can be between 10 to 18% compared to normal selling costs from 6 to 9%. The cost to a person with a $100,000 equity could be as much as ten thousand dollars.
Even after you have accepted an offer, there can be contingencies in the contract that allow the company to inspect the home to discover the condition and reassess the offer to possibly make even more deductions. If the seller isn’t willing to accept them, the buyer can withdraw from the sale without penalty.
This appears on the surface to be a friendly, accommodating service but it can be an adversarial situation. The seller wants to maximize their proceeds and the buyer wants to buy it as cheap as possible.
Compare this to working directly with a real estate professional acting as your agent. They have to put your interests above their own. They have a fiduciary duty of care, integrity, honesty and loyalty in their dealings with you. Other duties include confidentiality, disclosure, obedience and accounting to the seller.
In this traditional model, your agent will provide you with the facts of what homes have sold for in the area and their opinion and recommendations on what the most likely sales price will be. Your agent will provide you an estimate of the sales expenses based on different sales possibilities.
They can advise you on work to be done prior to putting the home on the market, staging so your home will show at its best and estimate the time it will be on the market. Based on low inventories in some price ranges, it could be surprisingly short.
As an owner, you made an investment in your home in cash and maintenance. You are entitled to maximize your proceeds based on the risk taken to purchase a home instead of renting. The convenience of a quick offer has a cost to it. You need to compare the two alternatives to see which one benefits you the most based on your individual situation.
For more information, download the Sellers Guide.
The deadline for challenging your property tax assessment this year may be later than normal due to the stay at home orders but when you are notified, you’ll want to be ready to decide whether you can save some money on property taxes this year.
There are two elements that determine the amount of property taxes you’ll pay for the year: the assessment of value and the property tax rate. Both determinations occur long before the property tax statement is sent.
Property owners are notified in writing what their assessed value is for the year. It is estimated that most owners don’t challenge that value even though it could lower their tax bill. Not all appeals are successful, but many homeowners believe that it is worth the effort to try. Procedures for challenging the assessment are generally included with the letter and a deadline for filing the challenge.
An initial step is to determine the accuracy of the information on your property’s record such as market value and square footage. If the record shows a higher square footage than actual, it can cause the value to be higher than it should be. Even though it may not be required, an appraisal could be proof of actual square footage that shows the square footage and value by an independent party.
Recent comparable sales are used by assessors to determine market value of a property but are usually not identified in the property record. Property owners can research comparable sales that indicate a lower value and submit them to the assessor’s office either informally or in a challenge hearing.
It is important that the properties proposed to establish the value of the subject property are recent, comparable in size, condition, amenities and in the same area.
There are companies who will represent the owner to lower their assessment. The fee charged is usually a percentage of the taxes that are saved. It is not a complicated procedure and can be very gratifying to make the effort.
Your real estate professional can be a valuable source of information and experience to guide you through the process. Call me at (971) 337-9396 for more information and a list of comparable sales.
The most frequently cited reasons for refinancing are to lower the payment, eliminate the private mortgage insurance, combine mortgages, consolidate debt, convert an ARM to a fixed rate mortgage, remove a person from the loan or to take cash out for another reason.
The option of using your equity to deal with unexpected living expenses or potential lost wages in the future could be a good reason for doing a cash-out refinance. It is important to consider that it could increase your monthly payment instead of lowering it which would result in higher expenses during uncertain economic times.
Some lenders have recently raised the minimum credit score requirement but borrowers with good credit and the ability to repay should be able to refinance. Lenders are reporting that during the Covid-19 crisis their processing time is taking longer but they have implemented procedures to safely facilitate the application as well as the appraisals.
While homeowners with an FHA loan are available for a streamline process because FHA is already insuring the mortgage to be refinanced, the cash-out is limited to $500. Even though the owner may not be able to pull funds out of their FHA equity, refinancing may lower their payment and therefore, lower their expenses.
Unlike conventional loans that require income through a job or other sources, refinancing an existing FHA loan does not require income verification or an appraisal. The borrower cannot be delinquent on their current FHA loan and it must be at least six months old. The refinance must reduce the current interest rate or term or both.
Another alternative for homeowners is a HELOC, home equity line of credit, where you do not incur interest expense unless you actually draw on the line of credit. It will be a variable rate home equity loan similar to a credit card letting you borrow up to a specific limit when you want and repay it slowly over time.
Refinancing a home incurs closing costs which can be paid in cash or added to the financed amount. The breakeven point to recapture the cost of refinancing is determined by dividing the monthly savings into the cost of refinancing. If you stay in the home less than that time, refinancing could be an unnecessary expense.
Everyone knows someone it has happened to or has heard a tragic story. It could have been a fire, a flood, a burglary or some other disaster but to file a claim on their insurance, they need the receipts or a list for what is being claimed.
Since you’re at home anyway and may even have kids at home who need something to do, now is a great time to get a current home inventory done. One of the easiest ways to accomplish this seemingly, daunting task is to put together a collection of pictures of every room in your home.
The more valuable, the more important it is to take a close-up picture. It will be necessary to open the drawers and closets and, in some cases, to pull things out in order to show everything in the picture. That’s why having someone to help you makes it faster and easier.
Not to get distracted from the job at hand, you may discover things that you had forgotten you had which is why you should do an inventory rather than trying to reconstruct it after the loss. In some cases, it may be years after you’ve filed a claim when you remember you forgot some things.
Having photos or videos of the different rooms in your house combined with a list of the items can serve as the proof you need for your claim.
There are other benefits to doing a home inventory also. You’ll know the “right” amount of insurance to have on your personal belongings by assigning replacement costs to them. It will simplify filing a claim if you ever need to.
To organize your photos and even provide a detailed list of higher value items, you can download a Home Inventory in an interactive PDF that you can complete. You can put it together on your computer and store it online to make it available if the computer is stolen or damaged.