Homeownership

Why would any article discuss how to sell a home in winter? Besides some surprising strategic rationale (which we’ll discuss in a moment), the reasons are simple:

• Your home is likely the most significant piece of your investment portfolio
• You will eventually purchase and sell your home several times
• You should be knowledgeable about selling your home at any time of year

But believe it or not, research shows that listing your home during the winter season might be the smart thing to do for both the seller and buyer.

Conventional “wisdom” would argue that the winter season is the absolute worst time to list and house hunt. Spring may still be peak home-shopping season, since most families want to move when the kids are out of school, but it actually pays to list in the winter, when buyers tend to have more urgency.

A study by online brokerage Redfin found that average sellers net more above asking price during the months of December, January, February, and March than they do from June through November, even in cold-weather cities like Boston and Chicago. And homes listed in winter sold faster than those posted in spring.

In other words, according to the Redfin study, if you’re waiting until spring to put your home on the market, you’re going to want to take a look at the numbers. Redfin analyzed homes listed from March 22, 2011 through March 21, 2013. The study discovered that those listed in winter have a “9 percentage point greater likelihood of selling, sell a week faster, and sell for 1.2 percentage points more relative to list price than homes listed in any other season.”

Buyers, too, can benefit from house hunting in winter, as this Yahoo writer notes. The pace and competition for a home tends to be less during this time period. In addition, it's easier in the winter months to assess the quality of insulation and heating, or to tell if the basement gets wet or if the home doesn't get enough light. And, of course, the buyer could well find the perfect home in winter even if there are fewer homes on the market.

In addition, a buyer can benefit from a winter search because, more often than not, the seller is eager to make a deal, as noted by Debbie DiMaggio, a Realtor and author in Piedmont, California, whom Yahoo interviewed: "Typically, when homes are listed between Thanksgiving and the New Year, it signals that the seller needs to sell, and thus the buyer may have more leverage.”

Sam Heskel, the president of an appraisal firm in Brooklyn, Nadlan Valuation, notes that buyers tend to be more serious in the winter: "Sellers typically find that off-season buyers may be more focused and ready to buy a home," he says.

In conclusion, research and market studies seem to support the observation that there are many opportunities in the real estate market throughout the year including the winter months.

When a real estate investor or consumer puts money in the residence where he or she will live, that investment is often among the most expensive that he or she will make. This article will shed light on some of the more significant considerations that need to be made by the investor or consumer as he or she assesses and answers the ultimate question: should I purchase a home to live in or rent a home to live in?

Frankly, this topic begs the question for many: what happened to the great American dream? When I was growing up I was assured that if I worked hard at my job, while saving enough money to buy a home (i.e. “palace”), I would eventually live happily ever after with my family in a home I owned. There was never any question about whether or not I was going to buy a home and live happily ever after with my family. This vision of life, which became such a powerful staple of American culture, was so common and normal that people took it for granted.

Then a new reality seemed to take over. This reality seems to have thrown a myriad of financial questions and uncertainties into the mix, and it put the more traditional buy-a-home approach into doubt. It was no longer an obvious conclusion, and for some of us that route didn’t make sense anymore.

As we will see, there are legitimate questions to answer, and these answers will make a person wonder whether renting a home to live in is arguably more sensible than buying a home to live in.

Advantages of Renting

Let’s start with examining some of the data about renting. As explained by Mortgage Calculator, research has shown the following advantages of renting:

• The initial investment to rent a home or apartment is very small. Typically, buyers need to have anywhere between five to 10 times to move into a home than to rent an apartment.
• The funds that would normally be used toward a down payment or higher mortgage payments can be invested into savings accounts that give higher returns.
• The renter has limited responsibility because they do not have to take care of repairs. As a homeowner, the owner is responsible for all repair costs.
• Rent is an amount that is fixed and may even include utilities in the rental amount. A fixed amount can allow the renter to set a budget easier because the renting cost is set.
• As noted by Investopedia, the renter has more mobility and flexibility to move since leases tend to be short-term. When you rent, you know exactly how much you’re going to spend on housing each month. You’ll never have to pay to replace your roof when you rent.
• Insurance costs are lower for renters because the renter only needs to insure the contents of the rental property and not the structure itself.

OurFamilyPlace.com concludes this section for us with these three excellent points:

• You’re not gaining equity when you rent, but you’re not not losing it either.
• When the lease is up, you can just move.
• There is generally less work in maintaining a home or apartment.

Disadvantages of Renting

While the above points might sound great, there are pro’s and con’s to everything. As noted here, there are three significant disadvantages to renting:

• No matter what happens with the value of the home, you will never gain equity.
• Limited--or no--ability to personalize your living quarters.
• No tax advantage to renting. Your landlord gets any and all tax breaks that are available.

Disadvantages of Buying

For the other side of it--buying a home--we’ll get the disadvantages out of the way first and end with the advantages. This includes five disadvantages:

• Equity may go up, down, or stay stagnant.
• If you want to move, home generally must be sold.
  Note that a homeowner runs the risk of not making any profit through resale. This is often caused by economic factors such as a recession or high interest rates, or simply through a particular location becoming less desirable.
• Work needs to be done by you--or paid for by you.
• Generally requires a larger initial investment--the down payment.
• As noted by Property24, a homeowner has less mobility when it comes to being able to move from their home than a tenant who rents on a short-term basis. A tenant can leave a property after fulfilling the notice period, which is usually one month. However, a homeowner is likely to be dependent on selling their home before being able to buy a new one, and therefore it might take longer to be able to move homes once the decision has been made to do so.

Advantages From Buying

Finally, there are distinct advantages to purchasing home. Depending on your needs, these advantages, as noted by Our Family Place, might be enough to make purchasing a home worth it for you:

• Over time, the mortgage balance decreases and equity builds, even if the value of the home does not increase.
• The ability to remodel and redecorate the home to match your needs and desires
• There can be tax advantages attached to home ownership.

Conclusion

The foregoing is a summarized version of some of the pro’s and con’s of buying and renting a home. Hopefully, this information will provide a well-informed perspective as you navigate a financial path that has become less cut and dry in today’s economic environment.

In the real estate lending world there is typically something called a “Pre-Approval” letter or a “Pre-Qualification” letter. The purpose of these letters is to communicate to the parties in the transaction that the borrower (whoever is trying to get financing), based on preliminary information supplied to the lender, will successfully obtain funding of the mortgage for which the borrower has applied.

In some lending markets there is no difference between an approval letter and a qualification letter and they are considered to be identical animals with different names. However, depending on the real estate lending market in question, there can be a meaningful distinction between the two. For the sake of discussion, we’ll just ignore the distinctions and assume that we are in one of the markets that operates using only a “pre-approval letter.”

What makes things interesting is that there is a time lag between when the pre-approval letter was issued and when the loan hopefully funds. A lot can happen between these two points in time that would negatively affect the risk complexion of the borrower and other factors that would cause the lender to back out of the transaction. Thus, the pre-approval letter is not a guarantee that the desired loan will fund.

As noted here, a pre-approval is conditioned upon the assumption that your financial circumstances will remain the same between the time you apply and the time you close your loan. If you lose your job, if you take on other significant credit, or if you default on another loan, you may be denied a mortgage despite your pre-approval.

Here are examples of some specific ways to avoid losing your mortgage after pre-approval, as explained by Yahoo:

• Watch your spending
• Don't Borrow From Your Credit Card for the Escrow Deposit
• Don't Change Jobs & Maybe Even Stall a Promotion
• Avoid Getting Another Loan
• Stay Married

As already noted, getting pre-approved for a mortgage is a smart step for any homebuyer. When you apply for pre-approval, the bank checks your credit and asks for all your financial documents. The pre-approval letter gives you confidence that the bank wants to lend to you, and it will also tell you the limit on what you can borrow. It sets a helpful parameter and expectation for you as you search for a new home. However, a pre-approval letter does not guarantee that you will end up with a mortgage from that lender, who may ultimately decide to deny your loan request.

In our May 2015 newsletter article “Understanding Reverse Mortgages,” we presented an overview of what reverse mortgages are all about. We described briefly some of the features of a reverse mortgage: how a reverse mortgage works, how borrower eligibility works (and what it takes to qualify for a reverse mortgage), and we touched on some of the benefits afforded to a prospective borrower by a reverse mortgage. The purpose of this article is to provide further detail on reverse mortgages and how they aid a borrower in reaching their financial goals.

Many of you have probably seen the television advertisement featuring the “Happy Days” star Fonzie and his presentation of the benefits that come with using a reverse mortgage. Anything endorsed by the Fonz has got to be good, right? Well, welcome to the real world: that is not necessarily true.

As the May 2015 publication points out, a reverse mortgage is geared for homeowners who are the age of retirement or older. Essentially, the mortgage holder gets cash installments sent to them based on the equity in their home. A reverse mortgage allows retirement age homeowners to stay in their houses while simultaneously using their built-up equity for any purpose such as fixing up the house, catching up with property taxes, or even just paying bills and living expenses. Furthermore, according to Reverse Mortgage Adviser: “borrowers must be at least 62 years old and must own their home. Eligible homes in this case include single detached homes as well as HUD-approved condominiums and dwellings. Trailer homes do not qualify.”

In addition, the federal government has quoted these disadvantages and pitfalls of reverse mortgages, as noted by the article quoted above:

• Reverse mortgages can affect your eligibility for another type of loan. 
• This might affect the inheritance of the borrower’s heirs.
• The borrower could lose his or her eligibility for Medicaid and Supplementary Security Income (SSI).

In addition, what most people do not know is that Medicaid and SSI see loan advances as cash assets or “liquid assets” when they are kept beyond the month that a recipient receives them. Borrowers with reverse mortgages may suddenly find themselves ineligible for those state benefit programs.

In my opinion, one of the more significant drawbacks is the potential inability of the borrower to leave their home to his or her heirs. A reverse mortgage can interfere in ways the borrower might not foresee without doing some research. For example, upon the borrower’s death or upon having to give up residency in their home in favor of taking up residence in a nursing care facility, the loan will usually have to be paid off immediately. This typically requires the sale of the home in order to raise the funds required to pay off the loan. Note, however, that the borrower is not necessarily the party who has to have the financial resources to pay off the loan. The home can be “salvaged” for the heirs by literally anyone who can pay off the loan.

Also, as the Motley Fool points out, the reality is that when you get a reverse mortgage, it won't be for the total value of your home. It will be for a portion of that, and your loan balance will rise over time as interest costs are added to it--that is, capitalized. When the mortgage ends and the loan needs to be repaid, you won't be on the hook for more than the balance of your home.

It’s rather interesting to note that panelists attending the San Francisco Seventh Annual Conference on Elder Abuse spoke on the subject of the “risks and dangers” of reverse mortgages. The following points were made on the topic at the conference:

• The Elder Might Need a Care Home in the Future

What if the elder has to move out of the home into assisted living or a nursing home?  The elder then has to somehow pay off the mortgage which has come due, in addition to the high cost of the assisted living or nursing home care. It can leave an elder homeless!!!

• It Can Affect Any Dependent in the Home

If the elder who needs care in a facility has non-borrowing family members in that home, the loan is still due. Anyone left in the home must move out, go to a care facility, or be taken in by someone else.  

• It Can Go Into Default

If an elder with a reverse mortgage fails to pay property taxes to keep up insurance on the home, or fails to maintain the home, he or she is in default. The lender can then foreclose.

In conclusion, it’s fair to say that there is much to be considered when taking out a reverse mortgage. Although there certainly are benefits, it’s not just “peaches and cream,” as the Fonz may have tried to convince the television audience.

If you’re like me, then this is probably not the first time you’ve ever heard of rent-to-own as an alternative to more traditional methods of home purchase. Rent-to-own is frequently advertised as an option for those folks who are precluded from buying a home because of credit issues or the inability to come up with the cash for a down-payment.

The more traditional model of home purchase goes something like this:

• The sale takes place shortly after the offer has been accepted.

• Since most buyers don’t have the money to pay cash, a mortgage is usually used to finance the purchase. To qualify for a mortgage, however, potential buyers need to have a good credit score and cash for a down payment. Without the cash to make a down payment or a good credit score, purchasing a home in the traditional way may not be an option.

A rent-to-own agreement is an alternative to the traditional model that could provide individuals who are unable to otherwise purchase a home the opportunity to do so.

A rent-to-own agreement is commonly viewed as having two components to it:

1. A lease agreement component

2. An option to purchase component

As noted by NOLO.com, rent-to-own agreements are lease agreements that also give the tenant an option to purchase the rental property, usually a single-family house, sometime after the beginning of the tenancy. The title to the house remains with the landlord until the tenant exercises his or her option and purchases the property. In other words, tenancy is the starting point of this kind of an arrangement, not a purchase transaction.

As usual, the devil is in the details of any agreement, and the rent-to-own agreement is no exception.

Key Lease Agreement Terms

The following are some of the recommended terms, as listed by NOLO.com, to be included within the lease agreement component:

1. Signed by all tenants. This makes each tenant legally responsible for all terms, including the full amount of the rent and the proper use of the property.

2. Limits on occupancy. This gives you grounds to evict a tenant who moves in a friend or relative, or sublets the unit, without your permission.

3. Term of the tenancy. Should state whether it is a month-to-month rental agreement or a fixed-term lease.

4. Rent. Specify the amount of rent, when it is due, and how it's to be paid.

5. Deposits and fees. To avoid confusion and legal hassles, your lease or rental agreement should be clear on the limit, use and return of deposits.

6. Repairs and maintenance. Set out your and the tenant's responsibilities for repair and maintenance in your lease or rental agreement.

7. Entry to rental property. Your lease or rental agreement should clarify your legal right of access to the property -- for example, to make repairs.

8. Restrictions on tenant illegal activity. Limit your exposure to lawsuits from residents and neighbors, by including an explicit clause prohibiting disruptive behavior, such as excessive noise, and illegal activity, such as drug dealing.

9. Pets. Be sure your lease or rental agreement is clear on the subject. Identify any special restrictions.

10. Other Restrictions. Be sure your lease or rental agreement complies with all relevant laws including rent control ordinances, health and safety codes, occupancy rules, and antidiscrimination laws.

Key Option Agreement Terms

The following are some of the essential recommended terms to be included within the option agreement component of the rent to own agreement. An option to purchase must:

1. State the Option Fee.

   In order to be contractually enforceable, the option to purchase must be given in exchange for value. Depending on factors such as the price of the home, the option fee can range from several hundreds to several thousands of dollars. Option fees are typically nonrefundable. In other words, if the tenant decides not to exercise his or her option to purchase the house within the agreed-upon time frame, the tenant forfeits the option money.

1. Set the Duration of the Option Period.

   An option-to-purchase contract must conspicuously state the duration of the option period. Option periods can range from months to years.

1. Outline the Price For Which the Tenant Will Purchase the Property in the Future.

   As long as both parties are in agreement as to how the value of the house is to be determined, the option contract is enforceable.

1. Comply with Local and State Laws.

   Some state laws specifically protect tenants from entering contracts they do not understand. Check with your state department of real estate to find any applicable laws that may apply to your option to purchase contract.

In conclusion, a rent-to-own agreement gives potential buyers the ability to move into a house as they get back on their feet financially until they’re able to buy the home later. However, it can be risky since the potential buyers could lose money if they fail to buy the property when its lease expires.

Image courtesy of Ralf Kayser @ Flickr

Have you just closed on the purchase of your first home? If so, then a congratulations is in order! After years of dreaming and planning for what it would be like to finally have your very own home the dream has become a reality. You can now claim your own little piece of heaven!

You’ve tried to be very careful and diligent in the planning phase while trying to take all relevant factors into consideration so that there aren’t any bad surprises. You’ve worked the numbers over and over again (mortgage rates, property tax rates, depreciation, etc.) while doing your best to gain a realistic view of how much of a home you can afford.

The intent here is not to burst your bubble, however, hopefully we can shed some light on factors that have the potential of turning that home ownership process into a difficulty. When purchasing a home there are more expenses that need to be taken into account in the homeownership process than just the property costs. The bottom line is that your expectations should be as realistic as possible so as to minimize the extent of any hidden costs.

Whether expectations are realistic or not depends to a large extent on whether you purchased a new home or a used home/fixer upper. The category of your home will impose differing degrees of risk in regards to hidden costs.

New homes are essentially “hidden cost risk free” from the point of view that they are typically sold with a warranty. New home warranties are usually one year in duration. If you want to go the extra mile and really be protected then you might want to consider investing in an extended warranty program that will provide coverage beyond the standard one year term.     

Used homes and fixer-uppers are substantially more prone to costly hidden costs because of their age and wear and tear. Warranties are especially a good idea, a necessity many would argue, because of the effect of depreciation on almost all major systems in the home’s construction. A house inspection by a licensed inspector is imperative prior to making the purchase. It’s recommended that when house hunting you compare the age of the prospective dream home with the following chart of useful lives.

Here’s what the National Association of Home Builders estimates as the life span for various housing components.

As noted in Dallas News, the cost of repairing, replacing, and maintaining any of the following items could represent hidden costs of homeownership for used homes and fixer-uppers:

• Roof: Typically 20 to 30 years, depending on material, although slate, copper, clay or concrete roofs have an expected life span of more than 50 years.

• Flooring: Carpets last eight to 10 years, linoleum 25, vinyl up to 50; wood, marble, slate and granite can last 100 years.

• Decks: About 20 years “under ideal conditions.”

Consumer Reports, meanwhile, says to expect the following life spans:

• Oil furnace: 20 years.

• Gas furnace: 18 years.

• Electric furnace: 15 years.

• Central air conditioner: 15 years.

• Gas range: 15 years.

• Electric range: 13 years.

• Refrigerator: 13 years.

• Dryer: 13 years.

• Freezer: 11 years.

• Washing machine: 10 years.

• Dishwasher: 9 years.

When it comes to fixer-uppers, the homeowner is often enamored by the expectation that fixing the place up will be a fun family project that will yield the family more profit than would otherwise be had. This popular idea could easily lull the homeowner into the trap of believing that they can afford to buy a more expensive home in the first place because, so they think, they will be making more money by going the fixer-upper route. What is somewhat unrealistic about this approach is the fact that eventually the “fun family project” will turn into a drag. Rather than it being a labor of love it has become a chain wrapped around the homeowner’s neck. Eventually, the homeowner will get sick and tired of having to spend weekends and holidays working on their fixer upper project.  

A more realistic approach with the fixer-upper scenario is to plan to have someone else, a construction contractor for instance, do some or all of the work. While following this approach, budgets need to be kept up to date so that they reflect the cash flow assumptions that go along with having someone other than the homeowner do the work. The bottom line is this: the least expensive approach may be the one that requires a greater amount of cash out/debt incurred.

Image courtesy of ‘whologwhy’ @ flickr

Buying a home can be a complex issue in itself and that’s on top of just being able to afford it. Here are some tips to bring it closer to reality.

Think on a small scale.
A small home or even a loft or condo in an area where demand is high will help build equity quickly as this type of place usually increases in value.

Get a fixer-upper.
This can be a great way to get a home for less. But be sure it’s repairs you can handle as well as knowing the building codes and knowing how to navigate the inspection processes. You don’t want to find that you have to take all the money you saved and turn around and spend it on contractors because the tasks were above the level of a weekend warrior.

Skip the realtor.
Be a little nosey (within reason) and get a sense of when homes are about to be on the market. You may be able to buy direct from the owner without any competition.

Start at the bank.
Being pre-approved will help you get to making an offer quicker and be taken more seriously as a buyer.

Utilize loans for low down payments.
You can consider getting an FHA loan but the fees tend to be higher than others.

Leverage tax breaks.
Estimate your taxes including the advantages of the itemized tax deductions from home mortgage interest and property taxes. You can also tap into your traditional IRA and withdraw up to $10k without penalty when buying your first home—the withdrawal is still taxable income however.

Offer what you can afford.
It’s tempting to fall in love with a place and begin to make offers with the thought that you’ll find the money to make it work—although, you’re not in a position to truly handle financially. It can also get competitive with other buyers and the desire to win overtakes your ability to afford your bid. Also, if you’re going down a lengthy sales process and the seller and/or realtor starts presenting you with these “last minute” costs, you may be more willing to pay them because they’re almost negligible compared to the amount of your offer. Also, you may begin to feel you’ve invested so much in buying the house that you start to up your offer as competition grows because you don’t want to feel as you wasted all the time and energy. Whatever the case, you’ll have to live with that mortgage for many years to come so it’s best to stay logical and back out when the price crosses what you can afford.

Save money.
Yes, it’s a little old fashioned but it’s a sound strategy. Try saving ten percent for a down payment. The more you can put down the better.

Reverse Mortgages are usually marketed in an appealing way. This could lead to someone asking how is it possible to pay a mortgage in reverse?

A reverse mortgage (also known as HECM, Home Equity Conversion Mortgage) works much like a regular mortgage but instead of you making a payment each month to the lender, the lender sends you a payment.

This type of mortgage is available to homeowners who are the age of retirement and older. Essentially, the mortgage holder gets cash installments sent to them based on the equity in their home.

Retired people consider the HECM as a way to maintain a steady flow of cash throughout retirement. A reverse mortgage allows retirement age homeowners to stay in their houses simultaneously using their built-up equity for any purpose such as: fixing up the house, catching up with property taxes and even just paying bills.

Home Equity Conversion Mortgages are loans that rise in debt. This means that the interest owed is compounded to the balance of the principal loan on a monthly basis since it’s not paid on a current basis. That being the case, the total amount of interest one owes incrementally and quite significantly compounds with time as the interest increases. Additionally, reverse mortgages may use up a large portion of, or even all, of the equity in your house.

There are costs that are also associated with the loans and the three types of loan plans, either insured by the FHA, insured by the lender, or origin feeds that are uninsured. Note that the insured plans also require payment of  insurance premiums to secure the loan and a portion of lenders impose mortgage service charges.

Lastly, homeowners need to be aware that if they have to move soon after taking on the reverse mortgage, they'll almost certainly wind up with significantly less equity to live on than if they had simply sold the house in normal conditions. This is specifically true for loans that end in 5 years or less.