Our Loss: Short Sales and Mortgage Interest...

It seems to me that the public is not appropriately upset about the looming Fiscal Cliff.  Even if Congress can come to some last-minute resolution-- you can be sure that there will be areas they will overlook, and programs they don’t extend by mistake or on purpose.  Witness the impending impact on short sales, even our local Board of Realtors sent out a message on this topic--so in a nutshell, here’s the conversation topic of the week: 

Starting Tuesday there is no longer a benefit to a short sale. No matter what the final outcome may be regarding the fiscal cliff, no deal has been struck that will extend the Mortgage Forgiveness Debt Relief Act of 2007 (MFDRA).  This legislation provided tax forgiveness for short sales (that were the borrowers primary residence as well as additional requirements such as time they owned the property).

The whole reason for a short sale was that people who were “underwater” in their homes, with the approval of their bank, could sell the property for less than they owe, and the bank would forgive the debt AND because of the MFDRA the IRS would forgive the debt as well.  With the expiration of this Act, the amount a bank forgives would become taxable to the seller.  So be awarew starting Jan 1st, all short sales will have additional tax consequences until and unless Congress passes some kind of extension

The Administration is trying to find new streams of income—so they can keep spending at the new higher rate--and is reconsidering many of the things Americans have traditionally considered sacred.  Everything is on the table.

And so what about the mortgage interest tax credit?  We are all afraid of the loss of this credit, though not everyone seems to fully grasp what losing this credit might mean beyond what it might cost them personally.
The ability to deduct the mortgage interest paid to a lender for the use of their money has become a fundamental economic benefit to homeownership for tens of millions of Americans.  And just to be fair about it, the Banks have to classify these interest payments as income, and they pay tax on it too. Wouldn’t this be a double tax?

Will the loss of the mortgage interest tax deduction actually affect the health of the housing market? That really depends on how deeply the government decides to cut. If the tax credit is eliminated entirely, the impact on the real estate market could be devastating. Right now, the “move up” market is weak, and people who benefit from the tax credit comprise a good portion of that market.

Eliminating the financial benefits of the tax credit, combined with other tax hikes likely to be imposed on “wealthy” families could drive some potential homebuyers out of the market completely. To be sure, not all homeowners even take the credit, (to get it you have to itemize your return) but without the credit, home prices may well fall, or at least not increase, which will have an effect on pricing throughout the housing ecosystem, depressing prices just when our market is finally beginning to recover from a multi-year downward cycle.

At very least it seems likely the Administration will demand limits on what can be deducted, as well as more stringent regulations on what properties and loans a borrower can claim interest credit against. If these changes are significant, no doubt we’ll experience some softening in the market, likely reversing the growth in economy as a whole. After all, a weakened housing market will contribute to adverse conditions in related markets such as construction, building materials, home appliances and the like.

So even if Monday’s emergency convening of Congress is successful and we don’t go fall over the fiscal cliff, the devil is in the details.  Eliminating some of the benefits of home ownership burdens the middle class in a way that can only hurt the real estate market. Considering that it’s been the housing market that’s pulled the U.S. out of virtually every recession since World War II, it seems like we should be shifting our focus to stimulating it in any way we can rather than doing anything that might knock it down.

Dane Hahn is a real estate professional practicing in  the tri-county area. (Charlotte, Sarasota and Manatee.) . You can reach him at 941-681-0312, or at dane.hahn@gmail.com See him on the web at www.danesellsflorida.com

Note: Starting Tuesday, anyone considering a short sale should speak to an appropriate professional regarding all tax implications of a short sale.

Foreign Investors Have Cash

I was pleased to attend a breakfast this past week in which Michael Saunders was the invited speaker. This was a businessman’s meeting and Mrs. Saunders was speaking on the economy and real estate in general throughout the SW Florida area. She was not recruiting, she was not in her training mode, she was simply reporting what she sees as the immediate future issues and successes that we might experience right here.

First the good news, of which there seems to be quite a bit. Houses are selling again, prices are turning around (heading up), and the number of sales is increasing as well. She was mixing new homes with used inventory in her remarks, but because there are many more existing homes than brand new stock, the trend is good for new sales as well as resales. And the buyers have cash. About 80% of the sales we have seen over the last month were for cash.

The banks—who would normally have been lending for all these sales—are busy with refinancing existing homes for folks who have decided to stay put, but would like some of that 3.5% loan money.

It's pretty hard to ignore the opportunity to refi a home at 3.5%, especially when headlines about worldwide inflation are only a few months off, and when inflation is at 3.5% (which it no doubt will be by March or April) then your mortgage is free. Back in the day, when the inflation rate hit 6-7% and President Ford was wearing a WIN button (Wip Inflation Now) the mortgage rates were at 18%. So you can see that the Federal Reserve is holding down rates that would naturally be on the upswing.

But there was some bad news too. And I don't mean the so-called “shadow inventory”--which are the homes still owned by the banks that are vacant and will one day flood the market. That dirty little secret is still to be dealt with. No, the bad news is that foreigners are lurking out there ready to eat your lunch.

Economic and political uncertainty around the globe are benefiting real estate in the United States, especially in Miami and New York, the two “safe haven” American cities foreign investors usually look to first. Florida's real estate market is certainly no stranger to capital flight from Latin America. But the velocity at which some Argentines are investing in Miami real estate has shocked some brokers here. In the past few months, Argentines have quietly passed Brazilians to become the most active group from Latin America buying Miami real estate. Argentines are buying foreign properties not only to park their savings but also to make extra income through rentals. Argentines don’t want any more Argentine risk. So they are willing to risk their savings on Miami real estate instead. But Miami is Miami, what about us?

Mrs. Saunders related that she had a call last week from a working acquaintance of hers who owned one of the largest real estate offices in Paris, France. He left a phone message saying he was coming to Sarasota to look at property—which was good news for the Saunders Agency. But when he arrived, it turned out he wasn't looking at the million dollar properties up and down the Keys—as Saunders had suspected. He wanted to buy 150 homes under $150,000 for a syndicate of Parisians who wanted to invest in Florida real estate—and the had cash.

All this sounds fine, and is good news for sellers (albeit, most of the sellers for this batch will be banks of hold-over short sales), but in fact this is bad news for the “little guy” who wanted to pick up a piece of paradise for a few dollars under the old prices, so it's no wonder when I take my clients out to see homes throughout Sarasota and Charlotte Counties, there's not much left in their price range—the inventory has gotten thin.

And what is the Franco-American plan for the 150 homes? To rent them of course. The steps the syndicate is taking is to 1. Buy up the stock. 2. Fix them up so they can be rented. 3. Rent them for 5 years. 4. Resell them. Sounds like the late-night TV pitchmen who sell you a system on how to get rich in real estate.

Dane Hahn is a real estate professional serving clients in Sarasota and Charlotte County. You can reach him at 941-681-0312 or by email at: dane.hahn@gmail.com. See him on the web at www.danesellsflorida.com.

You Make Money When You Buy

Leverage in Real Estate investing is the use of borrowed money to increase your profits in an investment. Just a quick recap before I get into the caveats that you need to know to keep your investment sound. Remember I said that if you had $100,000 to invest and you purchased a small income property for $100,000. which had an appreciation at an average of 7% per year. At the end of the first year of operation, your property would be worth $107,000. That's a better return than a savings account, but if you had leveraged your investment by putting your $100,000 down on a $500,000 income property, at the end of the first year, it would be worth $535,000. So which is the better investment? The one that returns $7,000 or $35,000? Using leverage in your real estate investments can have a big effect on your financial statement.

Rule One--Put the minimum down on a good property, find one which has a strong likelihood of appreciating in value. Stay away from questionable properties in run down areas. If you use leverage to your advantage, it will make you wealthy.

Rule One A—Negotiate.  You make money in real estate when you buy not when you sell. I've written this before, but it's worth saying again. You can't sell a property for more than it's worth, but you can buy one for less than it's worth. Always always remember you make your money when you buy.

Rule Two—Positive cash flow is everything. Properties must produce positive cash flow each year and over time should grow in value. If you over-leverage (take out too large a loan) your properties, you risk losing them. Remember, properties are like race horses, they can make you a lot of money but they require care and feeding and come with expenses. Taking out too big of a loan on your property means your monthly expenses may be more than the property can support. We live in the “now” not in the future. The key is a positive cash flow now. The second key is the resale value—but that’s in the future.

Rule Three—Focus on your returns. Investment real estate is valued (when it comes time to borrow against it or to resell) by the income that a property generates after subtracting out expenses. So, if you can raise the income or lower the expenses, or both you will make more money now AND raise the future value of the property.

Depending on the property, this management technique can increase the value of your investment by double digit multiples. Small changes to the performance of the property over time can make you huge amounts of money.

Rule Four—More is better. Just as multiple properties are better than one property, multiple tenants are better than one tenant. Unless you own single use building like a gas station, multiple tenants allow you get past bad months so your vacancy rate can be kept low. Nobody wants to own a huge vacant building. So there is wisdom in owning an multi-units like an apartment complex, an office building, or retail center. Ideally you will always have some tenants, your expenses are likely to increase a bit over time but you can maximize your return by making small cost of living or inflationary adjustments across multiple tenants. A small increases in rent, when applied across multiple tenants, can add up to big results.

If you own a 10 unit apartment house and raise each rent $25 per month, you actually create $3,000 annually in extra income. By making small adjustments across multiple tenants it can increase your investment dramatically.

Rule Five—You can get rich slowly. But forget trying to get rich quick. Investing is not for the faint of heart nor for the impatient. Being a landlord comes with tenants—and they're not all nice. Investing comes with bills, and you will do yourself a favor to pay them on time. And speaking about time, investing and managing real estate takes time. You will find yourself investing weekends in fix-ups and repairs, and more. But in the end, it must be worth your efforts.

Rule Six—Save your emotions for your spouse. If a property is not producing, if you can't keep tenants, if you have bought a property you can't manage: sell it. Don't keep a property just because you got a great buy or one day it might start to generate a positive cash flow. If it's time to get out of the real estate investment business, come to grips with that before your investments are no longer being managed properly. When it's no fun anymore, get out.

Rule Seven-It's OK to let others do it for you. There are many ways to profit from real estate investments without the hands-on daily management issues. But just one is the FTSE NAREIT Mortgage REITs Index Fund (REM). This ETF follows an index that measures the performance of the residential and commercial real estate, mortgage finance, and savings associations sectors of the U.S. equity market, allowing investors to get exposure to both the front and back end of real estate. With a portfolio of 30 mostly medium sized firms, and with a YTD return of 26.06%, REM also boasts a handsome annual dividend yield of 11.88%

Dane Hahn is a real estate professional serving Sarasota and Charlotte Counties. Reach him at dane.hahn@gamil.com or by phone at 941-681-0312.  See him on the web at www.danesellsflorida.com

Investing 101, Using Leverage in Real Estate

Because the market is on the rebound as I write this, I wanted to say a few words about “leverage” in real estate. In a nutshell, leverage is using other people's money to buy property, and why using leverage in real estate can generate significant returns, with only a modicum of risk.

Maybe you recall what a lever is from grammar school math class. It's been a long time since I sat in Miss Alberta’s class in Ridgewood, NJ, but still, when I think of a lever I visualize a worker moving a huge rock using a long pole and wedging that pole against a fulcrum so he can make the big rock move. If you remember that scenario, the key is the length of the pole. I think it was Archimedes who said, “with a long enough pole, I could move the earth.” In real estate, the key is a low mortgage rate.

So how does elementary math and the concept of leverage translate to real estate? Well, let's say you have $100,000 in cash and you decide to invest in a house that costs $100,000. After 5 years passes, you sell the house for $125,000. In this very simple example (no fix-up, no taxes or carrying costs) you have made $5,000 per year, and invested $100,000. Congratulations, you made 5% on your money. It's a better return than a savings account, (but comes with more risk).

OK, now suppose you bought that same house for $100,000, but you only had half of the money it would cost to buy the home. You put down $50,000 and borrowed $50,000. Now at the end of those same five years, when you sell the house for $125,000, and pay the loan off, you will have your $50,000 back and the difference of $25,000 as earnings. That's still $5,000 a year, but you only needed $50,000 to make it happen, so your return on investment (ROI) is 10% a year. (A much better return than a savings account, but again, this example leaves out the expenses of operating the property and servicing the loan.)

Now in a more real world example. You buy the house for $100,000, and apply for a simple mortgage. The mortgage company's loan to value (LTV) is 80%, meaning you can get the money to buy the house with only 20% down. Now at the end of your five year ownership, when you sell the property for $125,000, you have “made” $25,000 on an investment of $20,000. That's $5,000 per year on $20,000 invested, or 25% per year on your money. (Can you do this? Yes, it happens everyday in every state in America).

What if the Federal Government wanted you to make a buck? Consider this, the HomePath program offered by Fannie Mae offers foreclosed homes directly to qualified buyers. This special program allows you to qualify with only 3% down payment and can even give you up to $35,000 back to fix up your home. And better yet, it can be an investment property—as opposed to many federal programs which only are available if you live in the home. I won't kid you, you need a good credit score to get the 3% loan, but if you qualify, it's a great program.

Using the HomePath program, if you buy the home for $100,000, using your 3% and Fannie Mae's 97%, and you sell in 5 years for $125,000. You will realize the $25,000 gain having “risked or invested” only $3,000 of your own money. Now your ROI is 166% per year. In truth, it's not going to be that high because you'll have taxes, insurance, principle and interest to pay each year, but you can see what leverage can do.

And since you only used $3,000 of your $100,000 to make this investment, you have $97,000 still to invest. I would suggest you consider owning more than one house at a time.

Are there risks? Yes, but an investor, who manages his properties will not allow risks to get out of control. He will not allow the properties to deteriorate, and will buy and sell without emotion. Not every property will be a “home run”, but enough will be so that a simple portfolio of 4 or 5 houses, or multifamily homes will produce a good rental income year in and year out, and go a long way to augmenting a retirement plan. And in all my examples, the risk is the same, just the return changes—so the smart investor, (1) buys with as little of his own money as possible, and (2) spreads the risk over multiple properties.

Years ago, on late night TV, there were hucksters flacking “no money down real estate programs” where average folks became very rich, seemingly overnight. Nerds had huge boats, Rolex watches and beautiful girlfriends. That doesn't happen very often. If you're honest, don't plan to get rich quick. But you can get rich slowly. I see it everyday.

Dane Hahn is a real estate professional practicing in Florida and New Hampshire. You can reach him at 941-681-0312 or at dane.hahn@gmail.com. See him on the web at www.danesellsflorida.com.

Dodd-Frank stings the Real Estate Market

The fiscal cliff notwithstanding, there are a number of financial issues that have the potential to sink the housing market—just when we have begun to see light at the end of the tunnel. Most of us have heard of the Dodd-Frank Act designed to mandate Wall Street reform, but the media has not spent much ink on the pending rulings on mortgage origination requirements also mandated by the Dodd-Frank.

For one, ponder the eventual fates of Fannie Mae and Freddie Mac, now in their fourth year of conservatorship. And for another, consider the Federal Reserve’s recently proposed Basel III capital standards program, which have the potential to deliver a crushing blow to both REALTORS® and consumers in today’s still-fragile housing recovery.

Basel III is an international regulatory standard on bank capital adequacy, stress testing and market liquidity developed in Europe by the Basel Committee on Banking Supervision in 2010. Basel III was developed in response to the deficiencies in financial regulation revealed by the recent financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.

All this sounds good, but the European Organisation for Economic Co-operation and Development (OECD) estimates that the implementation of Basel III will decrease annual GDP growth by 0.05–0.15%. Another smack in the face that won't help our economy. Critics suggest that Basel III requirements will also increase the incentives of banks to game the regulatory framework, which could further negatively affect the stability of the financial system.

Taken together, the outcomes of Qualified Mortgage (QM), Qualified Residential Mortgage (QRM) and Basel III rulings now under consideration would likely shut down the mortgage finance market to a good number of home buyers, and would vastly change the home ownership landscape.

Ken Trepeta the National Association of REALTORS (NAR) Real Estate Services Director Ken says “If the ability-to-repay rules of QM are written too narrowly, it will tighten credit even more for all but the most credit-worthy buyers. As for QRM, if the rule requires a minimum down payment of 20 percent, much of the first-time buyer market outside of FHA would simply disappear.”

Among the most worrisome proposed Basel III standards are detailed risk-weighting requirements that would force banks to hold more capital for all but the most conservative loans, making almost all loans more costly for consumers as well as harder to get. “If regulators do the wrong thing on any one of these issues,” he said, “the result could be a ticking time bomb for the housing recovery we are just beginning to see. Even if regulators get it right,” Trepeta warned, “credit overall will likely be tighter. If they botch it, it could be disastrous.”

NAR has both vigorously opposed any changes that would limit or undermine the current Mortgage Interest Deduction, and has also been working closely with the House Financial Services Committee and the Senate Banking Committee for two years to ensure that Wall Street reform legislation does not adversely affect REALTORS® or consumers. But the Mortgage Interest Deduction may soon be a thing of the past.

In a July 2011 letter to Fed Chairman Ben Bernanke, then NAR President Ron Phipps wrote, ”regulation of the mortgage lending industry is becoming so complex that it threatens to weaken the system instead of curing abuses,“ and that the lending industry and regulators ”have over-corrected in response to abuses that occurred in the middle of the last decade.“

The letter calls on the credit and lending industries and Federal regulators to reassess the entire credit structure and look for ways to increase the availability of credit to qualified borrowers who are good credit risks.

In September, 2012, NAR President Moe Veissi sent a follow-up letter to Bernanke on behalf of the Realtors and the American people, once again warning of the potential effects of these unresolved issues. The hope is Berrnanke would be able to preserve this widely used deduction, and influence the rule-makers. Authority for the rule-making lies with the Consumer Financial Protection Bureau (CFPB), which has until Jan. 21, 2013 to issue the final ability-to-repay/QM regulations, to take effect 12 months later.

Dane Hahn is a real estate professional practicing in Charlotte and Sarasota Counties. You can reach him at 941-681-0312, or at dane.hahn@gmail.com. See him on the web at www.danesellsflorida.com.

Investing in Obama's Inflationary Economy

Andrew Snyder of Inside Investing Daily wrote this week that even though he didn't vote for Obama, the President's financial plans are not all that bad. And by, “not all that bad”, he means if you read between the lines, there are some investments—including real estate—that will benefit from the Obama inflationary management style. Snyder points out that the day after Obama's re-election -- the same day the stock market tanked -- gun sales soared.  I say this comes down to—for every action there’s an equal and opposite reaction--you just have to understand how to react.

On Nov. 7, the day after Obama’s reelection, the government recorded the highest-ever level of firearms-related background checks. This is the check that precedes a civilian gun purchase. We won't know for sure until the full figures for the month are calculated. But we do know there were 1.6 million background checks in October -- more than 20% over the same time last year.  These are folks who share two concerns, one is that they may—at some point—need a gun, and secondly they think the President may promote new regulations which will curtail citizens access to the purchase of guns.

A new acronym, called SWAGGR, is a term for an investment “bundle” that should be relatively inflation-proof.  The SWAGGR market is comprised of the investments that will most likely flourish during the time period of high inflation.  Guns, ammo and all the self-defense industry is all part of what we call the SWAGGR market. The letters in the acronym stand for Silver, Wine, Art, Gold, Guns and Real estate... all the things I've talked about in these columns. These are the things -- maybe even the only things – that will generate real, lasting wealth in the inflationary economy.

Of course I've been a proponent of real estate as a method to avoid the rampant inflation which is sure to creep into our daily conversations as the federal printing presses crank out mountains of paper money—money with no real value.  Leaving cash in a bank account today is a sure way to lose about 10% to 20% of your BUYING POWER each year.  And Wall Street is LasVegas in New York. Why would any sane person want to occupy Wall Street?

I have discussed real estate, silver and gold as appropriate alternatives to sitting on a bank account but SWAGGR also adds wine, art and guns—these are other investments that will also provide some security as the dollar tanks. I would also add fine jewelry (generally silver, gold and gems) as well as stocks in companies that will profit from the SWAGGR categories together with long-lifespan personal property (like home additions) together with expensive items that you plan to purchase or replace over the next couple of years.

These are the assets that can't be manipulated by a government gone wild. These unconventional investments lie outside the nation's zombie economy.

You may say you don’t need or want to own a gun. But that doesn't mean you can't take advantage of the nation's fear of future fire-arm regulations. And you may not have the funds it takes to bid on a high-end piece of fine art, but investments in companies that will profit from the sale of art—like Christies.  You might not have the kind of investment portfolio it takes to buy an orange grove or a waterfront lot. Again, that's fine.

There are alternative investments.

Sturm, Ruger & Co (RGR:NYSE), the gunmaker, just declared a special dividend of $4.50 per share. That payout is equal to nearly 10% of their closing price. Or for about $10 you can buy shares of Smith and Wesson (SWHC:NASDAQ). You can get into a Real Estate Investment Trust like Plum Creek (PCL:NYSE) for under $45. These are players in the SWAGGR market... and both will probably increase in value as the herd seeks safety.

It doesn't matter which political party you voted for, you can still take advantage of the Obama effect on our stock market. One leading financial magazine refers to the pending inflationary event as "a time bomb." In short, if your money is connected in ANY way to the stock market, I urge you to be in touch with a financial planner to reallocate it into investments that will be inflation protected. And do it soon. The tipping point will likely occur whether we go over the “fiscal cliff” or not—so think January at the latest. Before that all comes to pass you should have moved the funds you hope to preserve into some solid investments.

And don't be shocked by the plans that our government has in store for us. Tax increases for everyone are almost a certainty.  I would expect to see the home mortgage deduction (earned for us all by the constant efforts of the National association of Realtors) slip away together with many other deductions we have enjoyed over the years.

In inflationary times, cash does not have the appeal that we have given it over the years, because if everything gets more expensive week by week, then it’s smarter to spend cash today before the prices go any higher.  So the SWAGGR message says stop saving money and start investing in the things that you can profit from in the future, things that people will want, which due to inflation, regulations and shortages will likely increase in value (and therefore get more expensive over time relative to the dollar).

Dane Hahn is a real estate professional serving Florida’s Charlotte and Sarasota Counties, you can reach him at dane.hahn@gmail.com or by phone at 941-681-0312.  See him on the web at www.danesellsflorida.com.

Tax Valuation of Homes

Sometimes people wonder how the County values their property for tax purposes.  When you look at your tax bill it’s clear the County changes the valuation every year and I for one am pretty satisfied that the appraisal team from Sarasota and Charlotte Counties are doing a good solid and creditable job—but how do they do it?

Bill Furst at the Sarasota Appraisers Office is happy to speak at group meetings, and to share exactly how the valuation is established, and why his team makes changes every year.  I have some experience in this arena, I have often been asked to value homes, sometimes to estimate a probable sales price, sometimes for a bank or mortgage company which may be considering a foreclosure or extending a loan and wants to determine the value of this particular asset.

But the county gathers a huge amount of data. In fact, I was surprised at the amount of effort to achieve accuracy they go through. As you can imagine, they have tons of data on the homes they send tax bills to, obviously they know what the home was worth last year and if there was a recent sale, they have that information from the clerk of the court records, (this is the data that Realtors also use) but they have even more. They can access various databases, foreclosure records, and they actually send out questionnaires to all new property owners, looking for information and condition on the property.

Highest and best use information comes from the judicial opinions, land use regulations and the building codes and ordinances.  This data helps create actual value for vacant lots as well as rezoned homes.  A house that backs up to commercial property may not be very appealing to a buyer, unless it has recently been rezoned commercial—that would increase its value measurably.

Income information is collected from landlords, so rental income will provide one of the variables in a rate of return equation helping to determine the value of an apartment or condo building.

Florida statutes require that at lest every 5 years a representative from the Appraisers office must visit each and every home in the county.  Of course they can visit every year if they believe the characteristics of the property have changed.  Arial photography is one method of determining if an addition or a new swimming pool has been added to a home without the benefit of a permit.  Unusual sales prices also will bring out questions, like why did a house we thought was worth $200K sell for $350K? But when permits are pulled, the Appraiser has the obligation to come see what’s new.

As Furst makes clear, they do not come out to your house to change the records, but to verify that the records they have are accurate.  If the landowner will not allow the Appraiser into the house to verify his data, the Appraiser has the right and power to estimate what “might” be inside the home.  In my experience, these estimates come in much higher than what the homeowner would like, and the only way to get the data corrected is to request the appraiser come back.  This is time consuming and usually results in at least one big tax bill before the corrections are made, so dealing with the appraiser from the start makes the most sense.

Some of the assumptions that an appraiser (who was not allowed into a home) might make would include lots of tile, the kitchen is new granite, and fully updated, if there is a chimney, then there could be 2 or three fireplaces, and the home’s measurements might include additional square footage under A/C.  It’s better not to have to do all this twice.

Dane Hahn is a real estate professional practicing in Sarasota and Charlotte Counties.  You can reach him at dane.hahn@gmail.com or by phone at 941-681-0312.  See him on the web at www.danesellsflorida.com

Housing Deductions

Housing never came up in any of the presidential debates, even though both candidates discussed the income tax changes they had in mind.  But just so you know, housing-related tax deductions, including home mortgage interest and real estate taxes, account for 49% of total itemized deductions. In fact for middle-income tax itemizers, 56% of deductions are housing-related, which means any discussion of capping itemized deductions would reduce tax benefits for the middle class. Naturally during the campaign anything that affects the middle-class would be taboo, but not so much today.

In listing what he did over the last four years, Obama didn’t mention any housing accomplishments. And, in listing all the problems that Obama failed to fix, Romney didn’t mention housing either. Both candidates carefully avoided discussing the mortgage interest deduction when talking about taxes. Romney suggested capping aggregate deductions at $25,000 without explicitly limiting any particular deduction, and Obama criticized Romney for not specifically calling out which deductions he would limit. Because the election is (thankfully) behind us, we can look back and wonder: now what? What if the administration decides to cut the itemized deductions on housing?

First of all, who actually itemizes their tax deductions?  Remember if you don’t itemize, you can’t take real estate deductions.   The IRS says only one-third of tax-filers itemize, but this ranges hugely by income. Only 15% of filers with less than $50,000 adjusted gross income (AGI) itemize their deductions, compared with 96% with $200,000 or more AGI. Higher-income filers include a much higher average total of itemized deductions, too. A cap of $17,000 – which is what Romney suggested– is roughly equal to the amount that the typical itemizer with less than $50,000 AGI deducts, so many lower-income itemizers wouldn’t be affected at all by that cap. But even a higher cap of $25,000 would hit many people in the $50,000-$200,000 range and probably most in the $200,000-plus range.

Among all filers, 49%  of their itemized deductions is housing-related, which includes home mortgage interest, real estate taxes and a few other small deductions like mortgage points and qualified mortgage insurance premiums. 56% of the middle-income filers deduct housing expenses, more than the share for lower-income or higher-income filers.

Housing-related deductions are a larger share of overall deductions for lower-income and middle-income filers than for higher-income filers. A limit on these deductions would be a regressive tax. Here’s why. Higher-income filers pay a lot more in state and local taxes, and because tax rates often rise with income, these deductions account for a larger share of itemized deductions.

Among itemizers with $200,000 or more AGI, 36% of itemized deductions are state and local taxes, compared with just 18% for the middle-income filers and 8% for the lower-income filers. In fact, higher-income filers deduct more for state and local taxes than for home mortgage interest – in part because the mortgage interest deduction is limited to interest on the first million of mortgage debt, which would affect higher-income filers most.

At the same time, the home mortgage interest is, by far, the largest deduction for middle- and lower-income itemizers. Lower-income people also rely more on itemizing deductions for expenses that higher-income filers are more likely to get covered by insurance or their employer, including medical/dental expenses and unreimbursed business expenses.

Many middle-income folks itemize and deduct more than $25,000, so a cap at that level would snag many in the middle-class. There’s no question, though, that if a cap on deductions is low enough to affect filers with less than $200,000 AGI, the home mortgage interest deduction would be most affected. Together, the mortgage interest deduction, real estate taxes and other small housing-related deductions account for the majority of deductions for filers under $200,000 AGI, even though these housing-related deductions are a smaller share of what higher-income filers itemize.

Removing the mortgage interest deduction might lower home prices, particularly at the high end, which would hurt home sellers. High-cost areas with high homeownership benefit most from the mortgage deduction. Younger, higher-income households in expensive homes benefit greatly from the mortgage interest deduction. Here’s why: being younger and therefore in the earlier years of a mortgage, a larger percentage of their mortgage payments are interest rather than principal and therefore provide a larger deductible.

Also, higher-income households are in higher tax brackets and therefore benefit more from mortgage deductibility, and people in more expensive homes have larger payments to deduct. However, even in the absence of the mortgage interest deduction, homeownership today is still more affordable than renting. It’s 45% cheaper to buy a home than to rent a similar home today, assuming itemized deductions and that the resident is the 25% tax bracket.

But even without any itemizing, it’s still cheaper to buy than to rent in every large metro area.  Thus, even without the tax deduction, low mortgage rates and years of post-bubble price declines have made buying much cheaper than renting.

Dane Hahn is a real estate professional practicing in the Englewood/Sarasota area.  You can reach him at 941-681-0312 or at dane.hahn@gmail.com see him on the web at www.danesellsflorida.com.

How Do I Get My Deposit Back?

This week I had a curious email with the following request for assistance:

Hi Dane

Being from UK I am not sure how things work there, I attempted to purchase a property back in April, put a deposit down, after which I had an inspection done which found some things had been damaged in the property since I viewed it. I decided not to proceed.

The Agents (mine and the seller’s) both refuse to respond. I have found from title escrow company I needed to sign a cancellation form so I have done this, but it looks like the seller is refusing to sign it, so my deposit is being held.

How do such cases get resolved? As you can see we are now in October and still I am getting no response from agents and stone wall from the title/escrow company.

Rgds
Martin

My Reply: Hi Martin, Thanks for your question. I will have to give you a fairly generic answer because I don't have all your particulars at hand. As I understand this, you placed a deposit on a property in April, and following the inspection decided not to go forward. If you were working with a Realtor who was representing you (as a buyer’s agent), this probably would not be an issue, but apparently you have an agent representing the seller--and the seller also has an agent representing him.

The situation here is pretty much two against one. (Two agents against you) So where do you go from here and what's the next step? My professional opinion is you need to find a young hungry lawyer. At this point you are in quicksand and need an ally.

I will assume that the property in question is a house, and that the inspection showed some damage or unseen wear that has cooled your desire to own this property. I will also assume that the seller was thrilled to get your offer, which may have been for more money than he was expecting to get--meaning that your withdrawal from the transaction leaves him with no buyer in that price range. (And no real willingness to relist the property and sell it to another party.)

Typically a case of this kind is settled with the seller coming to grips with the deficiency in his property and either offer to make the repair or returning your deposit and life goes on.

But because the seller is unwilling to return your deposit, probably he has given you a reason--I would suppose he is saying that there was a time period in which you could have withdrawn, but he didn't hear from you and that time frame has expired and so now YOU either have to perform (buy the house). OR he gets to keep your deposit as "liquidated damages". This would be a fairly common response from a seller faced with losing a sweet deal.

The seller himself is probably not holding your deposit (escrow) money, that's the job of the listing agent or the escrow company. I will tell you from personal experience that nobody wants this kind of deposit money in their accounts--especially if they suspect the house is never going to close. So here are two good things you probably didn't suspect, (1) whoever is holding the funds wants to rid themselves of your deposit. And (2). Interpleader is an informal real estate court, which if you ask to have the case sent there, will hear your case and rule on who gets to keep your funds. It's not free, so you need to think over that avenue of redress. At Interpleader, they may give you back all the deposit, they may split it between you and the seller, or they might give it all to him...it depends on their findings. You can invite your lawyer to come and help you.

If the deposit in question is less than $5,000, you can skip Interpleader and take the seller to small claims court. There you may have a real judge hear the case but more likely you will be asked to sit with a mediator who will hear both sides and suggest a fair way to settle, if you both agree the case will be closed, if you don't agree, get out your wallet because the next steps will be costly, and you will begin to learn the intricacies of the American Legal System.

Or you might change your mind, and decide to buy the house. You may offer a little less for the property than you first did due to the problems unearthed during the home inspection. I don't know the real facts or the personalities involved, but if that house was worthy of your offer 6 months ago, you might still want it for the "right" price.

Martin bear in mind that Florida does not allow Realtors to practice law, so my answers are only my answers, but I wish you success and hope you do consult a real lawyer.

Dane Hahn is a real estate professional practicing in New Hampshire and Charlotte and Sarasota Counties in Florida. You can reach him at dane.hahn@gmail.com or by phone at 941-681-0312

ReMax Chairman Dave Liniger: A Letter to President Obama and Governor Romney

 The following letter was issued October 25, 2012, to the Candidates from Dave Liniger,

Co-Founder and Chairman of RE/MAX, LLC

We have just witnessed the last of three presidential debates in anticipation of elections now just 2 weeks away. Considering the depth of these debates and the months of political advertisements in this campaign, it is discouraging that there has not been a serious discussion about housing. As leaders, you ignore housing at our peril.

Although the economy is recognized as the single most important issue in this campaign,
and housing is commonly blamed for the recession and sluggish recovery, it is unimaginable that relevant solutions to housing issues have not been front and center. Over 3.5 million homes have been foreclosed on in the last four years, another 3 million are likely in the next four, one in 213 homes had a foreclosure filing in the third quarter, and over 10.8 million homes remain underwater with mortgages greater than their market value.

Housing has always led the country out of the dark days of recession, but that has not happened this time. Still, housing does have the ability to promote a stronger overall recovery if it is allowed to do so. But it will take real political leadership in the White House and Congress to acknowledge this fact and take the appropriate steps.

It has been a long and painful road for homeowners and real estate professionals alike, but market performance in recent months has everyone feeling a bit more optimistic. Prices are rising and many underwater homeowners have received a lifeline. But we’re not on solid ground just yet. Significant obstacles remain on the road to recovery.

Simple steps would quickly increase home sales by another 700,000, create over a quarter of a million jobs and deposit millions of dollars into the economy. So, what are the obstacles?

One aspect of the fiscal cliff you have not discussed is the Mortgage Forgiveness Debt Relief Act of 2007, which is set to expire on December 31. If not extended, this has the potential of immediately reducing home sales by as much as 20%. Troubled homeowners who meet the qualifications for a loan modification or short sale are not likely to pursue either of these options if the remaining mortgage balance is considered taxable income.

Many of us in real estate have long been promoting the short sale as a viable alternative to foreclosure. In 2012, short sales began to shed their reputation as a cumbersome and time-consuming process, and their numbers have been steadily increasing. This helped reduce foreclosures and kick-start a struggling housing market. Now, the transaction that serves as salvation for many families facing foreclosure will come to an abrupt halt.

The CBO says a two-year extension will save distressed families about $2 billion. The average debt forgiveness in a short sale is $65,000. How are these struggling families going to pay taxes on this amount? Without debt relief they will eventually be forced into bankruptcy or foreclosure. What will the associated costs to society be then?

In normal times, most of us would never consider forgiving unpaid tax bills, but these are not normal times. It is more important for our country to get housing on a solid footing, put people back to work and have an economy that everyone can be confident in again. Just like a debt relief policy that is more appropriate to another place and time, unrealistic lending standards are also slowing the recovery.

Even with improving home sales, nearly 15% of sales contracts are falling through. This is largely the result of strict lending requirements. Obviously, we’re obsessed with fighting the last war. Today’s lending requirements may have prevented the housing crisis five years ago, but the pendulum has swung too far in the opposite direction. Otherwise creditworthy individuals are being denied or too intimidated to apply for a home loan.

Financing appears to be getting more difficult, not less. In August, the average FICO score of a rejected mortgage application at Fannie and Freddie was 734, two points higher than one year ago. And the average down payment of a rejected applicant was 19%. Historically, these are numbers that would seem like a solid lending risk, but for some reason that’s not the case today.

Additionally, requirements in the Dodd-Frank Consumer Protection Act that would unreasonably define Qualified Mortgages will certainly have the unintended consequences of making mortgages more difficult to obtain and perhaps add to the cost of financing a home. Even the authors of this legislation have said this was not their intent.

One proposal being considered that really shocks most of us in real estate is the elimination or reduction of the Mortgage Interest Deduction. This is not simply a loophole for the wealthy. It has been a mainstay of the middle class for many years, and by promoting homeownership it promotes a strong economy. Over 75% of homeowners utilize the deduction over the time of their ownership. Even a gradual elimination gives pause to many potential homeowners. This is the wrong approach at the wrong time.

Our message to you is simple, “First, do no harm.” Do not disrupt the ability of a fragile housing market to positively impact a stalled economic recovery at this critical time. Housing is a powerful economic engine that can easily add a large number of jobs and cash to the overall economy if it is not prevented from doing so.
The Debt Relief Act must be extended, reasonable lending standards established, housing-specific provisions of Dodd-Frank re-examined, and the mortgage interest deduction untouched. These steps will build a solid foundation, restore confidence, and provide clarity to lenders and relief to troubled homeowners. Take these simple steps and watch housing lead the country to real recovery, as it has many times in the past.

President Obama and Governor Romney, you still have time to detail your vision. For many Americans, housing is still a crisis and they are anxiously waiting for solutions.

Respectfully,
Dave Liniger
Co-Founder and Chairman
RE/MAX, LLC

Affordable Homes

It’s the Best of Times

Any Realtor you bump into will tell you that now is a great time to make a move into the real estate market.  So if you are thinking about buying a house, the selection, price and interest rates on mortgages could not be better.  Sometimes I hear mystics say that “the stars are in apogee, and this portends great things”.  Well my friends if you want a house, this time you’re in luck.

I can’t recall interest rates ever being lower than they are today.  So when you read that they are at historic lows, believe.  Compare today's 30-year fixed-rate average of between 3% and 4% to those days only a few years ago when 6-7% was the norm—or better yet back in the 1980’s when I personally got a mortgage at 18.5%!  So now can you see why everyone is buzzing about the great deals to be had!

Home are now at their most affordable on record. These low prices upset sellers and tax collectors—but they delight buyers.  As a buyer, you should be thrilled that home values have dropped across much of the nation. There is also a huge supply of distressed properties on the market, which sell for steep discounts.

With all these great deals it's easy to get carried away, nobody wants that, in fact a good Realtor will help you curb your enthusiasm. The bitter lesson, often learned too late by millions of foreclosed homeowners is to buy within your means, and don’t get a mortgage that can adjust itself out of your affordability range. It’s too easy to ratchet up a notch and over buy. Just because you're approved for an X dollar amount doesn't mean you should spend that much.

Actually, it all comes back to affordability.  Realtors say that home prices are affordable when the median price of the homes in your market is less than three times the median annual earnings in that market.  Meaning if the median annual income is $50,000, and the median price of homes is $150,000 or less, then the market is affordable.  So, how much home can you really afford? Consider the following.

If you have a salaried job, this can be as simple to calculate as looking at your earning statement, but if you work on commission and tips, it's important you consider both high income and low-income months.  Your friendly banker will do all of this math for you—and will consider your credit score as well.  If that’s acceptable, they will probably be willing to loan you about 3x you annual earnings.

Consider your monthly expenses, not just now, but what they might be after you’ve found your dream house. If you’re chasing a fixer upper, factor in the costs of the “fix” and then double that cost.  And don’t forget monthly cost of child support, alimony, student loans, credit cards payments, car loans, and other debts that must be paid each month.  And besides your monthly debt load there are extra expenses including: cable, Internet, cell phone, gas, food, entertainment, clothes, travel, etc.

If you are applying for a 30-year mortgage, don’t plan to sell the house in only a year or two. Homes just aren't appreciating fast enough for you to use the appreciation as your personal piggy bank. You will probably need to stay put for at least five years before you would break even on a sale.  If you think moving up or out the next 3-5 years is in your personal future, look for a home that will have strong resale appeal, and either consider a 10 year mortgage—they’re a little more expensive, or make 13 monthly payments each year, applying the 13^th payment to the principle—which will put you in better shape when you sell.

Today's job market is still a little shaky. While the unemployment rate has improved a tiny bit, many still struggle to find jobs. What would happen if you were to lose your job? Would you still be able to pay your mortgage?  You may be interested to know that about 65% of the homes that sold in Sarasota County last month sold for cash—they transferred with no mortgages at all.

Lenders expect today's buyers to have at least 20 percent to put down in addition to closing costs. So a $200,000 house will require a $40,000 down payment. If you have this money (in addition to an emergency fund) call me today. If not, you might want to consider a less expensive house or possibly suggesting to the seller that he take back the mortgage to get you into the house with a future refinance to pay him off; you last option is simply saving more money and waiting to buy.

Dane Hahn is a real estate professional practicing in Charlotte and Sarasota Counties, reach him at 941-681-0312 or dane.hahn@gmail.com.

Foreclosure? No Problem.

They call this phenomena “Boomerang Buyers”. These are the families who lost their home to foreclosure following the housing crash are now re-emerging and looking to buy again. And well they should—if they can get the money. It's much cheaper to own than it is to rent (at least for now, before the presidential election messes up our tax regulations). Many folks who lost a house, or short sold their homes will be eligible to buy a new home with FHA financing, in just three years.. Any one with a house for sale should have a burning interest in reaching out to these “boomerang” foreclosure buyers. For example, some builders and Realtors are offering fliers that detail mortgage eligibility rules for families who have undergone a foreclosure or bankruptcy. Essentially they are saying, “all is forgiven—if you want a house we'll figure a way”. In a story from the The Wall Street Journal on this topic, they reported that in order to qualify for a mortgage backed by the Federal Housing Administration (FHA), families must wait three years or more to apply again following a foreclosure or short sale. Three years ago about 729,000 households were foreclosed on during the housing crash--meaning these folks are now eligible to apply for an FHA mortgage – up from 285,000 a year ago, But just because “boomerang” families are allowed to apply again for financing for a home purchase doesn’t mean they’ll qualify for a loan. The rates are very low just now, but there's the matter of a down payment—think 20% for now. And these families will still have to show a strong credit score and meet stringent underwriting standards. For those who remember the flipping TV shows that have run over the years on HGTV (for example), or who have purchased the “No Money Down” sales programs sold on late night TV, you might want to start looking around for an investment property. Flipping is back, even if no money down is tougher to work out than the TV guys said. Many of the short sales over the past year or so were sold to folks who felt they could use the house for a year or two and then sell for a profit. With the prices strengthening and the inventory thinning out, the “flips” seem to come back on the market with a makeover—usually new kitchens and lots of fresh paint. Recently I showed a home in a tony neighborhood in Sarasota that was priced at $160,000. When I looked up the most recent sales for that street, that particular house had sold in January 2012 for $114,000. Today it has a new roof, granite counters, stainless appliances, a new “hardwood” floor, and lots of fresh paint. My clients loved the interior, but didn't like that it had an old pool and no garage. In the old listing it had a carport but no dining room; now it has a dining room but no carport. It's probably worth the money and I expect it to be sold pretty quickly. Dane Hahn is a real estate professional serving Sarasota and Charlotte Counties. He can be reached at dane.hahn@gmail.com or by phone at: 941-681-0312. See him at www.danesellsflorida.com www.danesellsflorida.com.

Good News; Bad News for Real Estate

Finally some good news: The housing market is recovering faster than expected and according to all the “experts” the economy likely won’t fall off the much discussed “fiscal cliff.”  44 economists recently surveyed see GDP (gross domestic product – the value of all goods and services produced in the United States) rising just 1.9 percent in 2012 before reaching a 3 percent pace by the fourth quarter of 2013.

Followed by some unhappy news:  Employment growth is forecast to weaken. The panel predicts that the unemployment rate will rise to 8.1 percent by the end of the year. Remember the unemployment rate? It’s the most-watched measure of the country’s economic health, and has been a prime issue in the presidential election campaign. It fell to 7.8 percent in September. But before that report, the rate was 8 percent or higher for 43 months. September’s lowish rate is likely to be restated over the next few weeks.

The economists, who were surveyed Sept. 14-26, revised upward their previous estimate for single-family housing starts and now expect them to increase 23 percent to 750,000 units in 2012. Continued improvement is seen in 2013 with a 13 percent rise to 850,000 units. Home prices are now projected to rise by 1.5 percent in 2012 and 2.8 percent in 2013, more than the economists expected in their May forecast.

A widespread concern about the economy has been the combination of about $1.2 trillion in spending cuts and tax increases that will kick in starting next year, risking a giant fiscal shock if Republicans and Democrats don’t reach a deal on a budget. But a majority of the economists are confident that won’t occur.

"We think the recovery is for real this time around," said Rick Palacios, senior analyst with John Burns Real Estate Consulting. "If you look across the U.S. economy right now, there are only a handful of industries looking at 20-30% growth over the next 4-5 years, and housing is one of those."

Home builder stocks are up 162% in the last 12 months, led by a 250% jump at Pulte Group (PHM). Other leading builders including DR Horton (DHI), Toll Brothers (TOL), KB Home (KBH) and Lennar (LEN) have all seen their stocks more than double over that time. New orders at publicly-traded builders are up 30% since January, according to Kim Barclays Capital put out a report recently forecasting that home prices, which fell by more than a third after the housing bubble burst in 2007, could be back to peak levels as soon as 2015.

"In our view, the housing market had undergone a dramatic over-correction during the prior five years, resulting in pent-up demand for housing purchases that would spark a rapid rise in housing starts," said Stephen Kim, an analyst with Barclays, in a note to clients. In addition to what Kim sees as a big rebound in building, he's bullish on home prices, expecting rises of 5% to 7.5% a year.

Construction is expected to be even stronger, with numerous experts forecasting home construction to grow by at least 20% a year for each of the next two years. Some believe building could be back near the pre-bubble average of about 1.5 million new homes a year by 2016, about double the 750,000 homes expected this year.

The experts forecast:

• Inflation will remain low next year. The Federal Reserve’s preferred measure is seen rising 1.9 percent in 2013 while the core Consumer Price Index, which includes spending on everything except food and energy, is projected to increase 2.2 percent.

• Consumer spending will be weak. The panel revised its forecast for growth in consumer spending downward to 1.9 percent in 2012 and 2 percent in 2013, reflecting slow personal income growth and limited job gains.

• Longer-term interest rates should rise. The yield on the 10-year Treasury note, now 1.66 percent, is forecast to climb steadily to 2.3 percent during the fourth quarter of 2013 as the Fed draws nearer to reversing its policy of extraordinarily low short-term rates.

• Stocks will rise modestly. The Standard & Poor’s 500 index is predicted to be 1,450 at year-end and 1,520, or 5 percent higher at the end of 2013. The key market barometer is currently 1,429.

• Corporate profit growth will show moderate but less-than-average increases. After-tax corporate profits are projected to rise 7 percent this year and 5 percent next year, below the 10.2 percent average of the last 20 years.

Dane Hahn is a real estate professional practicing in Charlotte and Sarasota counties. You can reach him at dane.hahn@gmail.com or by phone at 941-681-0312.  See him on the web at www.danesellsflorida.com.

Credit Score Primer

Alex Trebeck: “Its a three-digit number that carries a lot of influence over your future. It can dictate whether or not you'll qualify for a home, car, or business loan. It can also be the deciding factor in whether or not you qualify for a low interest rate, or no loan at all.”

Informed Contestant: “What is a credit score, Alex?”

OK, sorry for the TV drama, but I'm out of town this week, doing a little drift fishing in Montana and Idaho. And I thought a little primer on credit scores might be appropriate. Credit scores are created by witch doctors using complicated algorithms and there are a whole flock of factors that can contribute to its number.

To keep this column short and sweet I will assume you already know that a credit score is a number from 200 to 800 that reflects your payment and borrowing history. Your credit score will be modified down if you are a big spender, and up if you make payments faithfully and on time. These are some of the things that lenders use to decide a number of factors, including whether or not to lend any money at all to you.

There are three main reporting agencies: TransUnion, Experian, and Equifax. They claim to have different ways to assess your credit and assign credit scores to each and every American—but oddly their scores for any one of us are usually pretty close.

Can a credit score from these agencies be biased? The simple answer is no. Your credit score is a true and honest reflection of your debt and payment history. This means that neither a lender nor credit agency can "have it in for you." You are the only person responsible for your score. This is their way of saying if your score is low, it's your fault.

Here are some of the factors that contribute to your score:

Lenders want to see that you have a history of multiple types of credit. This can include credit cards, installment loans, and mortgages. You will have a higher score if you can demonstrate that over time you have managed credit and made timely payments.

The more debt you have the riskier you appear to a lender. This means paying down or off debt is a great way to make yourself more desirable for a home loan. But before you scream, discuss your own credit history with a lender. You may find that you can raise your credit score by canceling a few old cards (maybe even ones you forgot you even had), and by moving some debt from smaller cards to one main card with a lower (even an introductory) rate. Lenders who see that you have five credit cards, each with a ceiling of $10,000, will assume that at some point you might owe $50,000. That will cause them to think twice about lending you a mortgage.

You want to be on time with every bill. This includes everything from cable and phone to credit card payments. Late payments may be reported to the credit reporting agencies and will negatively affect your score. Even small amounts need to be paid—I once had an auto insurance policy that was billed to me monthly, I paid them in advance every three months because it was easier, but it showed up that I wasn't making timely payments. So be careful...

Do NOT under any circumstances open any new lines of credit, no matter how small, before you start looking for a home, nor even if you have found a home but not closed yet. Any new lines of credit will dock your score and may indicate to a lender that you are on a spending spree. Folks who arrive at the closing table in a newly financed car, may find they no longer qualify for their mortgage.

Younger borrowers are always at a slight disadvantage because they have a shorter credit history. A longer credit history gives lenders a better picture of what kind of borrower you really are.

Be sure to check out your credit report three times a year at annualcreditreport.com. It's free, easy, and secure. You'll have to pay a nominal fee in order to see your score, but checking out your report can help you assess areas that need improvement or areas that have errors which need corrected.
Dane Hahn is a real estate professional practicing in Englewood and Sarasota. He can be reached at dane.hahn@gmail.com. You can see him on the web at www.danesellsflorida.com.

Street Names

What’s in a name?  Ever wonder if the homes on “avenues” are typically more expensive than the homes on “streets”? Using the database of homes for sale on Trulia their analysts analyzed the median price per square foot for different types of address suffixes. In this analysis, the questions were run against the names of recently sold homes. Here’s what they found:
Top 3 Priciest Address Suffixes

1. ”Boulevard” owners can head straight to the bank.

2. “Place” residents are more likely to turn a profit.

3. “Road” homeowners are living richer.

As it turns out, homes on a street whose suffix was “boulevard” are the most expensive coming in at ($117 per square foot) while the cheapest are those with the name “street” ($86 per square foot) – that’s a 36% price difference! Although saying you live on “Whatchamacallit Road” may not sound that fancy, at $109 per square foot, homes located there are actually the third most expensive of any suffix type. In fact, the median home on a “road” is respectively 8% and 9% more expensive than those located on seemingly more upscale-sounding “court” and “circle.”

Why is “boulevard” the most expensive address suffix? Well, while the word does have a sophisticated French origin, it actually might have more to do with the mix of the homes located there. Approximately, 37% of homes on “boulevards” are in multi-unit buildings, such as apartments and condos. In contrast, these types of homes make up no more than 16% of homes on every other address suffix. A greater concentration of multi-unit buildings could drive up costs, as they are often located in denser, urban areas where space is at a premium.

“Boulevard” may be the most expensive suffix but with only a 2% share of total listings, it’s certainly not the most prevalent one. In contrast, 22% of listings are located on a “drive.” That’s even more popular than “street” (19%), “road” (16%), and “avenue” (15%).

The snowbirds are returning, and this time they are bringing furniture.  That’s the good news.  Moving vans—remember them?—are moving through our neighborhoods as we speak and bringing year ‘rounders back into town.  I am pleased to see new restaurants opening, advertising in the newspapers picking up and the phone at the real estate office is ringing.

Dane Hahn is a real estate professional practicing in Englewood and Sarasota.  You can reach him at dane.hahn@gmail.com or by phone at 941-681-0312.  Or see him on the web at www.danesellsflorida.com.

3rd Quarter Look at Real Estate

Last year, across the nation, investors purchased 1.23 million homes, a 64.5 percent increase over 749,000 in 2010. About 7 million Americans – consider themselves to be real estate investors. An additional 9 percent of all Americans own investment property today but have no current plans to buy more. Thus, one out of eight – 28.1 million Americans – either consider themselves to be residential real estate investors or own residential investment properties today.

At a median expenditure of $7,500 to update and repair these investments—per property—investors are spending a total of $9.2 billion per year just to repair the damage caused by foreclosures and rehabilitate the nation’s housing. Investors are driving their local economies by spending billions with local electricians, plumbers, roofing companies and laborers. Not to mention home improvement stores, appliance and carpet stores and—drum roll please—Realtors.

A friend in the mid-West wrote that in her area, probably only 15% of the “For Sale” signs are still left from a couple of months ago.  The For Sale signs have been replaced by remodeling signs.  So either the houses sold and the new owner is fixing-up, or folks took their homes off the market to make some updates that will help sell the place.

In Wisconsin, where she lives, she says home prices are still anemic and backlogs of unsold homes are still at unprecedented levels after several years.  I personally believe that we have seen the bottom of this slump, but I am now told that The National Association of Realtors revised the number of homes sold between 2007 and 2010 down by 14%! That’s huge.

Back then we knew we were in the dumper, but we all thought things were on the upswing, obviously it was worse that we were being told—as a result, just this week more than 32,000 Florida real estate licensees were not renewed by the Sept. 30, deadline.

We knew it was bad back then, we just didn’t know how bad it was.  The numbers for last month (August) show Florida’s housing market having more closed sales, more pending sales, higher median prices and a reduced inventory of homes.  Statewide closed sales of existing single-family homes totaled 18,669 in August, up 10.8 percent compared to the year-ago figure.  Closed sales typically occur 30 to 90 days after sales contracts are written.  That’s all positive—now all we need are more jobs.

Buyers who have been waiting on the sidelines should see this as a sign to jump in before the market escapes them again. Sellers who have been hesitant to sell should consider putting their homes on the market now. Chances are they will entertain multiple offers and be able to take advantage of historically low interest rates to buy their next home.

Dane Hahn is a real estate professional practicing in Englewood.  You can reach him at 941-681-0312, or by email at dane.hahn@gmail.com.  See him on the web at www.danesellsflorida.com

Reverse Mortgages Can Go Horribly Wrong

A good friend called asking about reverse mortgages, and the caller was very specific with his question.  I try to stay on top of these forms of credit because they allow folks who have no source of funds to tap into the value of their principal residence and take out cash that (theoretically) never needs to be repaid. But as with anything else that sounds too good to be true, there are some downsides.

Reverse mortgage loans are designed for people ages 62 years and older. This product enables seniors to convert untapped home equity into cash through a lump sum disbursement or through a series of payments from the lender to the borrower, without any periodic repayment of principal or interest. The arrangement is attractive for some seniors who are living on limited, fixed incomes but want to remain in their homes.
These loans can enable some people to continue living in their homes, which may not have been feasible without this additional source of cash. However, this loan product is not for everyone, and potential borrowers should carefully assess the pros and cons before taking on a reverse mortgage.

Repayment is required when there is a “maturity event” that is, when the borrower dies, sells the house, or no longer occupies it as a principal residence.

We are seeing that there are still some wrinkles in the concept. Recently a suit was brought against some lenders who were following the letter of one of HUD’s rules, they were requiring newly widowed people--whose names were not on the mortgage of the home they shared with their diseased spouse but who want to stay in their homes--to pay off the balance of their loans quickly, even if it is much more than the value of the home. And if they can’t (or won’t), the lenders are foreclosing.  

This is happening only to a small number of survivors who did not have their names on the reverse mortgage for a variety of reasons. Some spouses did not put their names on the applications in order to qualify for a bigger loan, without necessarily realizing that they were putting themselves in jeopardy.

Reverse mortgages were not supposed to work like this. Instead, the big idea was to let people who were cash-poor but relatively rich in home equity draw on some (but not all) of that stored value. They’d get a lump sum, a line of credit or a monthly check for either a fixed period or for as long as they stayed in the home. And nearly everyone thought the rules were clear: homeowners or their heirs would never, even decades later, owe a cent beyond the value of the property.

Now to my friend’s question: he asked about an elderly gentleman with a reverse mortgage who has been living in a long-term care hospital. As it turns out, the old fellow is getting better, and is looking now toward going into a rehab hospital and then back to his home.  But he has been out of his house for more than a year, documented by all the medical forms and receipts.  Remember, one of the “maturity events” that trigger a repayment is when the borrower no longer occupies the home as a principal residence--and is out of the house for a year.

The question is, since a year has passed that he has been out of his principal residence, will he have to sell the house now and pay off the mortgage? Or maybe he will have to surrender the house to the lender?  Or would his principal residence continue to be the house he has not lived in over the last 12 months?

I’m not a lawyer, and the State of Florida frowns on Realtors practicing law, but I believe a good lawyer could make a case for a principal residence to continue under these circumstances. After all, if you go on a year-long world cruise, your principal residence remains the house you left and plan to return to.  But a note to my readers:  if you’re even remotely considering a reverse mortgage or have a parent or friend who is, there are things that can go horribly wrong if you’re not paying close attention during the application process.

HUD sets the rules for these loans and insures them as well. For years, most borrowers and lenders read HUD’s rules to mean that a borrower or the heirs would never owe more than the loan balance or the value of the property, whichever was less. This is all well and good for couples that are both on the mortgage. Even if one of them dies, the other can stay in the home and keep drawing on any remaining money from the reverse mortgage until he or she no longer lives there.

HUD requires anyone who is applying for a reverse mortgage to talk to a counselor. I’d urge you to talk to two counselors, preferably two who work for different organizations. This may all seem a bit extreme. But my guess is that we’ll see a lot more people (or those who are lucky enough to have any home equity, at least) turning to these products in the next couple of decades if HUD doesn’t tighten its rules too much more.

By the time people need to tap their home equity in this way, it will probably be the biggest asset by far that they have left. At that point, it’s simply not possible to be too careful.  Dane Hahn is a real estate professional (not a lawyer) practicing in Florida and New Hampshire.  He can be reached at 941-681-0312 or at dane.hahn@gmail.com. You can reach him on the web at www.danesellsflorida.com.