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First Love, Second Wife or Third REALTOR

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There is a story of a real estate agent’s prayer: “Dear Lord, if I can’t be someone’s first love, or second wife, at least, please let me be their third REALTOR®.” In a normal market with a balanced supply of sellers and buyers, this describes the preference that it might be better to be the third listing agent to help the seller after they became more realistic about their list price.

In today’s market, it might have more to do with buyers because of the increased competition, their chance of having an accepted offer is greatly reduced and it is only after they have lost several that they become more aggressive in the negotiations.

Competition for homes being sold has greatly increased over the previous two years, according to a recent REALTORS® Confidence Index Survey from NAR. In April of 2021, there were nearly five offers for every home sold which increased from two offers in 2019 and 2020.

Utah reported the highest number of offers per home sold with seven while Arizona, Georgia, New Hampshire, and Washington had six. California, Colorado, Tennessee, and Texas each had five offers per home sold.

To make their offers appear more attractive, more buyers are making cash offers to eliminate financing contingencies and reduce the chance of rejection. Cash offers represented 25% of offers in April and 21% in the first quarter of 2021 compared to 18% in 2020.

Buyers who are not able to make cash offers are increasing their down payment. Nearly half of homebuyers are putting 20% or more down during the first quarter of 2021. Even first-time buyers are using an 80% mortgage to make their offers more attractive to sellers.

The median days on the market for listings was 17, down from 21 days a year ago. 31% of residential sales were made to first-time homebuyers which is down from 32% in March 2021 and down from 36% one year ago.

While nearly ¾ of homes closed on time, 5% were terminated and 22% were delayed but eventually went into settlement. Appraisal and financing issues were the major contributors to the delayed transactions. The two major factors for the terminated transactions were also appraisals and inspections issues.

Today’s environment requires a strong, sensitive agent who understands your goals as well as the intricacies of the market to be able to devise a plan to make it happen. Your agent and their recommendations for the other professionals involved are the boots on the ground necessary whether you are a buyer or a seller.

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Simple Rates of Return

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Looking for a simple way to determine if a rental property will give you the rate of return you want? This modified annual property operating data may be just what you’ve been looking for.

There are many different rates of return that investor’s consider to determine whether a property will generate the yield that they expect. Sometimes the simplest of calculations can tell you whether you want it or not and if you get the other things like tax advantages and appreciation, it just makes it that much better.

The first yield we will look at is commonly called the Cash-on-Cash rate of return. It is calculated by dividing the initial investment, usually down payment and closing costs, into the Cash Flow Before Tax.

To arrive at Net Operating Income, it is simply taking the gross scheduled income, less vacancy allowance and all operating expenses. From that is deducted the annual debt service which is the principal and interest payment times twelve. The remaining amount is referred to as Cash Flow Before Tax.

In this example , the initial investment of the down payment and closing costs, $66,000 was divided into the Cash Flow Before Taxes of $5,468 to get an 8.28% Cash-on-Cash rate of return.

The second yield to be considered is called Equity Build-up. Each payment made on an amortizing mortgage pays a portion toward the principal balance to retire the loan. It is calculated by dividing the initial investment into the principal contribution for the year.

Continuing with the example, $66,000 is divided into the principal reduction for year one of $4,606 to get a 6.98% Equity Build-up rate of return.

This approach is easy to understand because you are not considering depreciation, anticipated appreciation, holding period, recapture of depreciation or long-term capital gains. Simply rent the property, pay the bills and if there is money left over, it pays a return on the initial investment.

The same goes for the Equity Build-up. When you make the payment on the mortgage, the loan is reduced and while you don’t have access to the money like cash flow, it is definitely your equity and tangible.

To determine whether an ROI on a rental is good, compare it to what your initial investment is earning currently. Ten-year treasuries are earning less than 2%. Certificates of deposit are earning less than 1%.

For more information, download the Rental Income Properties guide and schedule an appointment with your real estate professional.

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Is a Home Inventory Necessary?

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Most homeowners have insurance on their home that additionally, gives them coverage on their personal property. That is the first level of peace of mind to know that it is available to you if there is an unfortunate need for it from a burglary, fire, or some other insured circumstance.

Personal property is handled slightly different than real property. The claims adjustor could start by asking you for a list of the things lost. You are allowed to reconstruct it but there is a distinct possibility that you’ll forget things, sometimes for months or years after the claim was settled.

An interesting exercise would be for you to visualize two rooms, possibly, the kitchen and main living area. Without being in the room, create a list of all the personal items in plain sight and those in the closets and cabinets. When you’re through with the list, go into each room to check to see what kind of things were not on your list and what the value of those items amounted to. It could be substantial.

Remember, you are entitled to claim them regardless of how long it has been since you used them or if you do not intend on replacing them again.

When filing a claim, the more “proof” you have to substantiate it, the better off you are. Receipts are great but chances are, you may only have them for the big-ticket items. Photographs or video of the different rooms are great records that the items were in your home.

An itemized list of each room with a description of the content, cost and date of purchase, supported by pictures would be ideal. This type of documentation will make filing and settling a claim much easier. The more documentation you have, the more likely you are to have a favorable settlement.

The more expensive the item, the better it would be for you to have receipts, serial numbers and photographs. A simple count of some items like clothing will suffice like four pairs of jeans, 24 dress shirts, etc. More valuable items of clothing like a cashmere jacket or a silk dress should be listed individually.

Depending on the frequency that you purchase new items for the home or possessions, you’ll need to consider updating the list and photographs. Moving creates opportunities to get rid of things that haven’t been used for years and to acquire things for the new home. It is always a good idea to complete a home inventory after you’ve moved and settled into your new space.

If you would like to have more tips and a form to itemize your possessions, download the Home Inventory. This will even allow you to include pictures and store it in digital format for safe keeping.

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Deciding on Whether to Move

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Some homeowners feel like they may as well throw a dart against the wall to decide whether to move or not. Other people might invoke a process attributed to Benjamin Franklin. Supposedly, to evaluate the options and bring clarity to the choice, this American founding father would list all the reasons for and against the decision on a sheet of paper. After reducing it to writing, the choice would appear either by obvious majority or practicality.

Buying a home is an emotional decision but selling a home can be also. Separating the rationale from the emotion can make decisions seem obvious but they may still not be crystal clear.

There is an inventory shortage that caused prices to rise and market time to shorten. In many active markets there is less than 30-days’ supply of homes for sale which is half of what was available a year ago. This will make it easier to sell and maximize the proceeds from your current home.

69% of economists who participated in the first quarter 2021 Zillow Home Price Expectations survey believe home inventory will begin to grow in the second half of this year or the first half of 2022.

Mortgage rates are near record lows which will keep payments at a minimum. With the inflation rate in the United States expected to be between 2-3%, many borrowers consider that it balances with the mortgage rate to be an effective zero percent.

“Consumers are facing much higher home prices, rising mortgage rates, and falling affordability, however, buyers are still actively in the market,” said Lawrence Yun, NAR’s chief economist. “At least half of the adult population has received a COVID-19 vaccination, according to reports, and recent housing starts and job creation data show encouraging dynamics of more supply and strong demand in the housing sector.”

The pandemic has allowed many buyers have the flexibility to work from home for now and in some situations, permanently. That opens new location possibilities options that would not have existed if they had to commute to work daily. Economists believe that the increased preference to work remotely will be a permanent shift even if it is only a part of the work week.

This provides opportunities for homeowners to relocate in an area that doesn’t have the high demand that their current area does and could benefit from more affordable housing for the replacement while possibly, maximizing the sales price of their current home.

Good information specific to your needs is essential to making good decisions. Explore the possibilities with your real estate agent. They can provide facts about the sale and purchase of another home. Once you have the facts, you may use the Ben Franklin Balance Sheet to help you with your decision.

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“Mise en Place” for Homebuying

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In cooking, “mise en place” describes having all your ingredients measured, cut, peeled, sliced, grated, as well as bowls, utensils and pans ready to use before you begin cooking. The advantage is to inventory the ingredients and recognize if you have everything you need. You are less likely to leave out an ingredient or step because it is “set up” and ready to use.

The same technique works well in the homebuying process, especially in today’s highly competitive environment where multiple offers are normal and bidding wars are commonplace.

Check your credit … not only does credit determine if you will get a mortgage, but it will also determine the interest rate you’ll pay. The best rates are for the borrowers with the best credit; lower credit scores mean higher rates because of additional risk to the lender. Free copies are available from all three major credit bureaus at www.AnnualCreditReport.com.

Determine your budget … knowing your income and immediate living expenses will give you a feel for what you can afford but you also need to know what big-ticket expenses are in the future and how much you should be saving for them. Lenders use debt to income ratios to qualify borrowers, but it may be more than the buyers feel comfortable with. This is good information to discuss with your mortgage professional.

Meet with a mortgage banker … their job is to get borrowers approved and instead of using calculators on a website, a trusted, experienced mortgage professional can look at your credit, make suggestions if it can be improved, run verifications on income, assets and liabilities and suggest loan programs to benefit your specific situation. They can even provide a pre-approval letter and phone verification that may be the tipping point to negotiating a successful contract with a seller.

Initial investment … The down payment and closing costs are related to the type of mortgage, which is generally, dependent of how much of the buyer’s savings is available. The down payment can range between zero and 20%. Mortgage insurance is necessary on most loans if the down payment is less than 20%. Buyer’s normal closing costs range between two to five percent of the mortgage.

Costs of homeownership – Most mortgage payments include the principal and interest plus 1/12 the annual property taxes and insurance plus mortgage insurance if required. Other expenses that will be incurred by the homeowner include maintenance, HOA dues, utilities, upkeep and replacement of equipment and appliances.

Process and timeline … people tend to feel more comfortable when they understand the process of buying a home and the length of time it takes for the different steps. Your real estate agent will be able to provide this information to you based on the type of mortgage and local market conditions.

Know the numbers … being familiar with the basic statistics makes planning and even, negotiation easier to predict. Important data, relative to the type of property you are buying, includes the current supply of homes for sale, days on market, sales price to list price ratio, and percent of cash sales in your price range. This is another area that your real estate professional can be very helpful.

Must-have features … the concept of a “dream home” is more myth than reality. People rarely get everything they want even when they are building a home. Especially, in a highly competitive market with rapidly increasing prices, buyers should create a list of their “must have” and “nice to have” features and amenities. This can be helpful when you are determining whether to write a contract on a home.

Build your team … buying a home is like an athletic team. By selecting the best “players” for each position, you will have a much better chance for a successful sale and a satisfactory transaction. Your real estate agent is in a unique position to guide you through the entire process and recommend trusted professionals for each job that needs to be done.

An excellent meal includes fresh, good food, the right ingredients, superb preparation, and execution. Whether you are following a recipe or doing it from memory, each step is important and affects the outcome. The same is true for buying a home. Get everything together before you start looking at homes.

For more information on buying a home, download our Buyers Guide.

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It’s Not too Late to Refinance

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With mortgage rates below 4% since May 2019, you would think that most people would have already refinanced but according to a recent Lending Tree survey, 49% of homeowners say they are considering a mortgage refinance in the next year. The report estimated that over a third of homeowners are have mortgages above 4% and 11% didn’t know what their rate was.

Slightly more than a third of the people surveyed regretted missing the opportunity to refinance in 2020 when rates did hit their historical low. Homeowners should not beat themselves up on this issue because the only way to know to tell that it hit bottom is after it has started going up again.

The current rates are very favorable to borrowers and some economists believe that when inflation is factored in, the rates are close to zero effectively.

While there are nine specific reasons people choose to refinance their homes, two are among the most prevalent: to lower the payment or take cash out of the equity. Most reasons include:

  1. Lower the payment
  2. Lower the rate to pay less interest
  3. Shorten the term to pay off the loan sooner
  4. Take cash out of equity to pay off higher cost debt
  5. Take cash out of equity to improve their liquidity
  6. To remove a person from the loan as in a divorce
  7. To combine a first and second mortgage
  8. To replace an adjustable-rate mortgage
  9. To consolidate debt

There are some commonly held myths about refinancing among homeowners such as:

  • You can only refinance your home once.
  • You must refinance through your current lender.
  • There should be two-percent difference in the rate to justify it
  • You need 20% equity to refinance
  • Applications require a lot of documents
  • You need cash to cover closing costs
  • You won’t save that much by refinancing
  • It’s free to refinance

If your current mortgage is a FHA, there is limited borrower credit documentation and underwriting program. The mortgage must be current and not delinquent, and the refinance must result in a net tangible benefit to the borrower such as a lower rate, lower payment or better terms. For more information, see Streamline or contact an FHA approved lender.

VA has a similar program if your existing mortgage is a VA-backed home loan. The purpose is for a borrower to reduce their payments or make their payment more stable. They must certify they are currently living in or did live in the home covered by the loan. The Interest Rate Reduction Refinance Loan, IRRRL, may be available.

USDA also has a program for current USDA direct and guaranteed rural homebuyers who have been current on their payments for 12 months prior to requesting the loan refinance. No appraisal or credit review is required. There must be a minimum of 40% net reduction to the PITI payment. More information is available.

Before refinancing your home, determine how long you plan to keep the home. If the reason for refinancing is to save interest by getting a lower rate, you may accomplish that immediately. However, if you plan on selling soon, you may not be able to recapture the cost of refinancing.

There are costs associated with refinancing regardless of whether you pay for them in cash, or they are rolled into the cost of the mortgage. These costs can range from two to five percent of the mortgage.

Check out the Refinance Analysis to determine your breakeven point and savings. Call if you have questions or want the recommendation of a trusted mortgage professional.

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Writing a Successful Offer in a Low Inventory Market

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With at least 40% less homes on the market currently than there were a year ago, serious buyers have probably experienced the disappointment of losing a home they wanted to buy from increased competition. Today’s buyers are looking for ways to improve their odds of being the best contract without having to use the purchase price as their only tool.

Buyers should reconsider, rethink, and re-evaluate their “must have” features and amenities. It is probably unrealistic in a normal market to think you can have the perfect home at the price you want but in today’s market it is less possible. List the things you must have and the things you would like to have and prioritize them. Try to identify the critical from the convenient.

The next step is to put together your “home” team. You are the captain of this process, but it is essential to have a strong first officer and that is your real estate agent. This professional will oversee the process, advise you on current market conditions and normal procedures. Your agent will even help you assemble the rest of the team like mortgage officer, title, insurance, warranty, inspectors and can recommend service providers.

Your agent can advocate your cause personally to the listing agent by personally delivering the offer and expounding on your strong points to lobby your position. Obviously, your agent will not share anything that you do not expressly give them permission to.

Even before you write the offer, your agent can inquire with the listing agent about any preferences of the seller not mentioned in the listing agreement as well as to use the proper contract forms and addendums.

The following list of suggestions are provided for your consideration realizing that some may not be appropriate for your individual financial situation or comfort level.

  • Get pre-approved from a local lender and include documentation with offer to purchase.
  • Have lender phone and email listing agent to expound on pre-approval.
  • Increase the amount of earnest money.
  • Acknowledge flexibility on closing and occupancy dates.
  • Eliminate unnecessary contingencies.
  • Waive the appraisal and have proof of funds to meet the difference in the purchase price.
  • Avoid concessions like asking the seller to pay the buyer’s closing costs or points.
  • Avoid including personal property to go with the sale unless specified in listing agreement.
  • Purchase “as is” with right of quick inspection to cancel contract if condition is unacceptable.
  • Shorten time frames on necessary contingencies.
  • Attach proof of funds for down payment or full purchase price if cash.
  • Arrange bridge financing to be able to pay cash.
  • Buyer should pay their own normal closing costs.
  • Write a personal note to the seller explaining why you like and want their home. Some listing agents are advising sellers to not accept them due to potential discrimination liability.
  • Escalation clause … offer to pay $X,000 more than highest acceptable offer up to a limit.
  • If you physically sign the offer, use a contrasting color ink to add a personal touch. If using a digital contract, change the font and color to distinguish the signature.
  • Make your best offer first because they may not make a counteroffer.

When a new listing hits the market, it is commonplace for there to be a rush of interested buyers that result in multiple offers. It is prudent for you to research and consider which of these ideas you can implement before you find the home; it is much better to have more time to make these decisions, especially, if it involves a mortgage officer or an attorney.

Your real estate professional will be able to tell you if these suggestions are viable and may be able to offer additional recommendations. If you do not have an agent, contact me at (704) 644-1467 or brokerto discuss a plan to craft your offer in the most favorable way possible.

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How long do I have to keep this stuff?

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“How long do I have to keep this stuff?” is the usual question you ask yourself when feeling that you are running out of room for all this “paper” that may never be needed.

The paper receipt you get from your fast-food lunch may go directly into the trash. The prudent consumer may keep it to reconcile it with their monthly statement and then, trash it. The natural hierarchy with receipts and documents associated with purchases is that as the price or value goes up, the more important it is to keep them. The question becomes “but for how long?”

The following table will give you an indication on how long certain documents related to your home need to be kept according to best practices of tax professionals. IRS recommends that records are kept for three years from the date the taxpayer files their original return or two years from the date the tax was paid, whichever is later. There is no time limit in the case of fraud or failure to file a tax return.

Document Length of time to keep
Home Purchase/Sale Documents
Home purchase documents Duration of ownership + 3 years
Closing documents & statements Duration of ownership + 3 years
Deed to property Duration of ownership
Home warranty or service contract Until expiration
Community/Condo Association Covenants Duration of ownership
Receipts for capital improvements Duration of ownership + 3 years
Mortgage Payoff statements or Release of Lien Forever, in case proof is needed
Annual Tax Deductions
Property tax statement & cancelled check 3 years after IRS due date for return
Year-end mortgage statements 3 years after IRS due date for return
Federal tax returns 3 years after filing return or
2 years after paying tax, whichever is later
Insurance and Warranties
Home Inventory Keep current
Homeowners insurance policy Until the replacement is received
Service contracts and warranties Until warranty/service contract expiration
Home repair receipts Until warranty/service contract expiration

Going digital with your records can make them easy to keep as well as to find when you need them. Create a folder on your computer that automatically backs up to the cloud like Dropbox, Google Docs or OneDrive so that if something happens to your computer, you have them safely tucked away.

The main folder could be the address of your home with subfolders for purchase documents, capital improvements, warranties, etc.

When you receive statements that are already in digital format, simply move them to the correct folder and subfolder. If it is a paper format, scan it and save it in the proper folder so you will have it when you need it.

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Rent your home tax free

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There is a little-known provision in the tax code that allows homeowners to rent their principal residence or second home for up to 14 days a year without having to recognize the income. In this situation, the taxpayer does not deduct the rental expenses associated with the income.

There is no restriction on how much you earn. If your first or second home is in a desirable area where people are looking for short-term rentals, it could provide a windfall to the homeowner.

In cities where any big sports championships are played, there could be a market for a temporary rental of a home. Events like PGA tournaments, college basketball tournaments, Bowl games, NFL playoffs and others can create a demand for this type of rental.

For instance, there are people in Augusta, Georgia who rent their homes during the Master’s Golf Tournament each year. There are not a lot of hotel rooms in the area relative to the number of people who usually attend in non-pandemic years and the homes can fetch a nice daily rate.

There can be confusion about the different types of properties and what constitutes a home. The intended use coupled with actual experience will usually determine the type of property.

There are four types of property. A principal residence is the home you live in. There is income property that you rent and do not live in. There is investment property that is primarily held for an increase in value. And, there is inventory, which is related to your business like homes that are built or purchased to be flipped.

A second home is one that is used for the primary enjoyment of the owner in addition to their principal residence. Taxpayers are allowed to deduct the mortgage interest and property taxes on a first and second home up to specific limits. A vacation home could be another name for a second home but more accurately, it is a rental property that has more than 14 days of personal use during the year. It becomes a hybrid.

You might want to check with your insurance agent to see if your current policy covers temporary rentals, including liability in case of an accident involving personal injury. This could affect your decision as to whether you want to consider the rental.

For more information, see IRS facts about renting out a residential property or consult your tax professional.

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Before you pay cash for a home

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Before you pay cash for a home, ask yourself if there is a possibility, at some point in the future, you might put a mortgage on the home and would want to deduct the mortgage interest on your federal tax return.

Current federal tax law allows homeowners to deduct the interest on up to $750,000 in acquisition debt used to buy, build or improve a property. When a person pays cash for a home, the acquisition debt is zero. The only way to increase the acquisition debt is to make and finance the improvements to the home.

As with many IRS regulations, there are exceptions to this rule. If a mortgage is secured on the first or second home within 90 days of the purchase closing, the debt is considered acquisition debt. The interest on the funds used to purchase the home can be deducted on up to $750,000 of the mortgage balance.

Assuming a borrower has good credit, the ability to repay the loan and the home justifies the loan, lenders are willing to make mortgages for homeowners. It does not mean that the interest on the mortgage will be deductible.

Additional information can be found in Publication 936, Home Mortgage Interest Deduction, of the Internal Revenue Service at IRS.gov.

To deduct home mortgage interest, you must file Form 1040 or 1040-SR and itemize deductions on Schedule A. The mortgage must be secured debt on a qualified home in which you have an ownership interest. Interest on home equity loans is only deductible if the borrowed funds are used to buy, build or substantially improve the taxpayer’s home that secures the loan.

If you answered yes or even maybe to the question first posed in this article, contact your tax professional to determine the best way to approach your individual situation. For more information, download the Homeowners Tax Guide.

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