July Real Estate Advisor

July Real Estate Advisor
Real Estate Advisor: July 2016
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Appraisals and Home Inspections
When buying or selling a home, many have heard of an appraisal and a home inspection. While both are very important to the entire transaction, an appraisal and home inspection are two very different things. If you’re looking at buying a new home or property, or you’re interested in selling your current property, it is beneficial for both parties to know the difference between the two and why they are important.

What is a home appraisal?

A home appraisal is an educated guess as to the worth of a property.

An appraisal is required by a financial institution; if you’re looking to get a mortgage loan, the property will have to have an appraisal. If a mortgage loan is not needed (the buyer is paying with cash), then an appraisal is not required for the purchase. Who pays for the appraisal? As part of the final contract, the appraisal can be negotiated between the buyer and the seller, but traditionally the buyer pays for the appraisal.

But why is an appraisal needed?

An appraisal lets the bank or lender know what the loan collateral will be set at for a worst-case scenario situation. What does this mean? The bank wants the home to appraise for a similar amount they are going to loan to the buyer. Should anything happen, and the bank has to sell the home, the bank doesn’t want to be stuck with a home that had a million-dollar loan on it but can only be sold for $100,000.

Appraisals are important, but they can be a tad stressful. The appraisal is done after the sale price is negotiated and the contract has been signed, which is why many people hope the appraisal is close to the sale price negotiated by the buyer and seller. To protect the transaction for both sides, the buyer and seller should have a sales-and-purchase agreement that addresses the possibility of the appraisal being below the purchase price. This would allow the buyer to terminate the contract or renegotiate the sale price. If not, the buyer could be obligated to cover the difference between the purchase price and the appraisal.

What does an appraiser do?

The appraiser will walk around the property and look at the value of the home, but she or he will also make note of any problems or issues. It has happened that an appraiser has pointed out things to be fixed in order for an appraisal to come back higher. Appraisers mainly look to check the main characteristics of the house: square footage, bedrooms and bathrooms, the overall condition of the property, recently sold comparable properties in the area and any noticeable health or safety issues. Appraisals are not an in and out thing – they can take up to a couple days to complete, and loan underwriters can request more information than in previous years. As a seller, the number one thing you can do to help the appraisal process is to make sure the house or property is in good order.

While an appraisal determines the value of the property based on an inspection done for the loan company, an appraisal is not a home inspection. The appraisal is for the mortgage lender; the home inspection is primarily for the buyer.

What is a home inspection?

A home inspection is the inspection of the physical condition of a home or property. A home inspector is going to look for defects or malfunctions in the property’s structure, systems and physical components (which can be anything from the roof and plumbing to the HVAC system, floors, windows and foundation). A home inspection generally takes place after the seller and buyer have signed the contract. The home inspection can help guide any repairs that might need to be done to the property, or it can alter the final selling price if major repairs need to be done to the property. But it’s important to remember that a home inspection is not a mandatory part of buying a property. Sellers can sell their properties “As Is,” and any home inspection done will simply be a way for the buyer to know what to expect once they receive the keys.

Who is responsible for the home inspection?

The buyer generally arranges and schedules the inspection; your agent or Realtor will most likely be able to suggest a home inspector she or he has worked with in the past, but it’s important to make sure the inspector has experience and is a member of the American Society of Home Inspectors. But the most crucial part of the home inspection is to provide a thorough and tough inspection of the property to the buyer.

When buying or selling a home, it’s important to know and be aware of all that is available to buyers and sellers. While the appraisal is done for the benefit of the lender, the appraisal also benefits both the buyer and seller by determining a value on the property. The home inspection is done for the benefit of the buyer, but it’s also a good indication for the seller about the property and any issues that might need to be addressed should the buyer drop out of the transaction. Both an appraisal and home inspection are valuable and important parts of a property transaction.

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Buy vs Rent a Different Perspective.

Buy vs Rent a Different Perspective

Being in the business of real estate I often see news reel clips from the different cable news outlets extolling the virtues of home ownership or of renting.  These are diverse topics covering lots of ground but here is a quick little take on the subject.

The most blatantly obvious reason for home ownership is Net Worth!  For many years now the net worth of a renter as stated by the Federal Reserve hovers just above $5,000. In contrast the net worth of homeowners, according to the same data source, has increased to a projected $220,000 in 2016.  This is a HUGE difference.

So the biggest reason to own a home could be that you are VERY likely to increase your net worth by leaps and bounds!  What are the reasons to rent? One reason swam across my Facebook feed just this morning.  One “friend” was sad because their furnace had stopped working and they were going to have to spend money to have it replaced.  A comment from one of their “friends” was “that’s why I rent, I let the landlord take care of all of that stuff”.  Well that is certainly true. The landlord (if they are a good and upstanding person) will have to take care of that for the renter.

So the renter saves money. Well not really, at least not in my market.  Renting a house, generally costs much more then owning that same house.  This is not true for all price points and all houses but is generally the case.  I see again and again where a renter pays at least a couple hundred dollars per month more to rent than the principal, interest, taxes and insurance are likely to be for the mortgage (HOA’s and PMI can eat up some of the savings of home ownership but that is information for a blog all on its own).

So let’s do some math again…  If you save $200/month owning you would have the money for a new furnace in about 3 years, roof may take 6-8 years to recoup the cost if you had to pay for it out of your pocket, a water heater, about 1 year. So as long as the home is in OK shape when you buy it you will hopefully not come out on the loosing side of this equation.  Even if things do seem to be breaking faster than you had hoped, your mortgage payment will stay relatively the same for 30 years (only taxes and insurance are likely to change).  Rent as a rule is always headed up, up, up! So again, you will probably come out ahead even if lots of stuff breaks.

Another advantage of ownership is that under the current IRS rules you get to write of the interest you pay on your mortgages.  This can really be a substantial savings, especially early on when you are paying nearly all of the monthly payment towards interest! In many cases this can easily be $100-$200/month in “savings”.

The other big point renters use to make themselves feel good about the decision is that they can move at any point they like. They are not tied down like an owner.  Not really true. Most landlords make you sign a year lease and you are on the hook for all that money.  Even if you have a great landlord or are on a month-to-month lease, well that’s still a month.  In a normal, healthy real estate market you can list, close and move out of your house in 2-3 months. Or, you can always rent out your house and be gone in a month just like your renter friends! So yah, not as foot loose and fancy free, but pretty dang close.

So your landlord will fix your broken furnace and you will likely be BROKE compared to your home owning friends even though they are spending money to fix thing and you are not. All this, and we did not even get into the paying of principle or owning a generally appreciating asset.

List NOW! Buy NOW!

List NOW! Buy NOW!

Many may not know that right now we have the lowest inventory of real estate listing most professionals in the business have ever seen! Even at the December sales rate, which is usually relatively low, we have less than two month of inventory!  To place that into perspective, a normal balanced market is considered to have 5-6 months of inventory at whatever the most recent months sales rate. If this seems complicated, call me and I will explain it to you, because this information is not the main reason for my writing of this post.

What everyone needs to understand is the our real estate market needs listing and it needs them right now.  If you or anyone you know is thinking of selling their house, they should put it on the market as soon as possible.  Normal wisdom is to wait until summer buying season to get listed but right now is likely as good or possibly better than the summer season will be for sellers.  Since the inventory is so low, homes that are priced right sell very easily and quickly occasionally for over list price (just like they do in the summer)!

Sure you say, “but if I wait until summer time the prices will be up and I will get even more for my house!”  That is likely, and you will pay more for the house that you want to buy after you sell yours, so where is the advantage there? This is one point I debate with people from time to time.  If you are staying in the same general market, it does not matter all that much if prices are up or down. You will get about the same ratio of return no mater what.  When prices are up you make more you pay more, when prices are down, you make less you pay less, simple.

The last reason to list now is a bit different. I believe that we need as many listing as possible to create a more balanced market.  If inventory stays low and demand continues to out pace it we run the risk of creating a bubble. Many of you may have heard how crazy the Denver market has been over the past couple of years.  We are not Denver and we will likely not see that scale of growth here. And that is good. We don’t want that level of growth. Slow and steady wins the race.  We need more listing to slow down the price growth.  Over the long term this will help us sustain growth in our community and lessen the chance of economic problems in the future.

So why then do I say buy now, if it is a seller’s market?  My main rational is that many projections expect 4-5 years of steady, or better than steady growth in real estate.  So basically the sooner you get in the better! You may as well take advantage of the great gains.  You also should take advantage of the still very low interest rates! The Federal Reserve has made a liar out of me for six years straight, (they say they will raise rates and then they don’t) so I am no longer predicting that rates are going to go up, even though they really are going to have to go up some day (the Federal Reserve did raise rates 1/4% but it had little affect on mortgages so far). And when they do…  I know that sounds like the beginning of and old man about to give you advice, but seriously, when rates finally clime LOTS AND LOTS of people will be kicking themselves for not getting in at the bottom.  Just the way that some of you reading this wish you would have purchased a house when prices where at or near the bottom, so it will be with interest rates.

I could write an entire small blog  post on how interest rate affects buying power, and maybe I will but not today.

If you buy a house in the near future for $200,000, and it appreciates at an average of 6% per year for the next 4 years, a pretty easy task if things keep moving on their current trajectory, that home will have an estimated value of about $254,000.  $54,000 of new wealth in only four years for living life indoors. Let’s now assume that this 6% appreciation is not sustainable nor is the growth cycle and home values fall. The bubble bursts, oh dear lord the horror!  Historically, when the bubble bursts prices drop about 10% or less.  Obviously the Great Recession that we just lived through was greater than 10% price drop but actually it is an anomaly. The growth was so huge that the bubble was much larger than “normal”. So if you take a 10% hit on the value of your home you have a value of approximately $225,000. That is not nearly as good but you are not upside down and could certainly get out from under it if you needed to sell.

This does not take into account all the other advantages that one gets from home ownership. Which, by the way, is what my next blog post will cover.

Don’t wait! Get in the market! Get a piece of these LOW interest rates! Help increase inventory! 

OK, love you, bye bye! Or buy buy if you can!

*** Please note, this is just meant to be informative, all facts and figures are assumed to be true and accurate but there can be differences in all values stated depending on the source material used.

Investing in Real Estate or the Stock Market


Real Estate Wins!


So you want to invest some money and you are not sure if it should be in the stock market or in real estate, keep reading. For this blog I am specifically talking about investing not buying the house that you want to live in. Owner occupant purchase of real estate is a vastly different endeavor then that of an investment purchase. I am writing this with the assumption that the reader already owns a home and is looking to better their financial situation with an investment

Let us start with some basics:

If you only have a small amount of money and/or you are not very good at saving it up to be a larger amount, small incremental investments in the stock market is likely your best play. For those that are not good at saving you can still create wealth and be heading in the right financial direction. If you have some money saved up and can make a down payment on real estate, you will likely be better off purchasing a house and renting it out. As for what I consider to be a reasonable amount of money you will need… well 25% of the purchase price you want to buy in is a great place to start.

You don’t need 25% of the purchase price for the purchase but it is the best way to go.  The main reasons for saying this is that it reduces your risk of loss.  If those that purchased speculative or investment real estate in the last housing boom would have put 25% down then we almost certainly would have not been caught in the situations we kept seeing and hearing about (which is another blog post in itself).  When you put 25% down you reduce the mortgage to a level that will help, making the payment from the rents received much easier. There are many points to how this helps.

Most obviously 25% less principal to make a payment on is a big deal.  Another reason 25% down is crucial is that you will automatically save yourself the cost of private mortgage insurance (PMI).  Once you put a minimum of 20% down, reaching 80% loan to value (LTV), you will not have to pay the extra expense of mortgage insurance. This can easily be a $150 per month savings. Lastly, the vast majority of lenders will not make an investment loan with less than 25% down.

For many, an even larger hurtle to overcome is for your first investment property you will need to be able to cover the mortgage expense of both houses (the one you live in and the one you wish to purchase). There are ways around this but that is a topic for another time and another blog post. Lending regulations change all the time and many lenders, especially smaller ones may have a product that can get around this but as of the time of my writing this blog, this can still be a tripping point for many.

So, let’s get to the meat of the math that shows you why real estate beats the stock market.  Depending on what source you use you will find that the stock market has increased somewhere just under 1900% since 1968.  Even if we use this large number, real estate still wins.  Here is the math.  If you were so blessed as to have $20,000 in 1968 and you placed it in the stock market you would have approximately $380,000 today.

If you were to take that $20,000 and invest it in real estate in 1968 even if it was just bought a single property, you would have an increase of just under 1100%. This is a much smaller return, and stocks pay dividends, etc. Yep, totally true! So real estate is a big looser. Nope! The way real estate wins is that you have a much larger vehicle for appreciation.

As we have seen above with that $20,000 dollars you could have purchased a property worth $80,000 (that would have been quite the home back in 1968).  Sticking with the 1100% increase, that home would be worth $880,000.  Not too shabby!  Now of course there are lots of costs that go with home ownership and those are not factored into this simple equation. Still, we are talking about better than double the value. Oh, and this is an investment property! SOMEONE ELSE HAS BEEN PAYING THE MORTGAGE ALL THIS TIME!  Also, it has been payed off since 1998 and a big cash cow for the past 17+years!  REAL ESTATE WINS!!!

So if you are not tired of the math up to now let’s take it one step farther. If you were a savvy real estate investor and this fits better into the reality for most of us, you likely would have taken that $20,000 and purchased four houses putting $5000 down on each one.  This gets you the same total appreciation, but would have done something you hear said is important for investing in stock, diversify your risk.  Sure it is all in real estate but an extended vacancy will not hurt the budget as it would with all your eggs in one basket. The last, almost unseen, benefit to this strategy is that those $20,000 houses would be worth $220,000 today, the current median home price in the US. This makes them the most likely and easiest to rent and keep rented and the most likely and easiest to sell if financial difficulties were to happen.

The last point that needs to be made is this:  Lets assume for easy math, that those four houses had an average rent of $1000 of the 18 years since they were paid off.  That is $4000 a month, 12 months per year equaling $48,000 per year, times 18 years equals an astounding $864,000!!!!  That should easily cover the cost of repairs and probably any dividends that the stocks would have paid you

So, yes, real estate wins!

Oh, and did I mention the most astounding part of all this? Banks will line up to lend you 3/4 of the money to invest in (buy) a historically appreciating asset. No one is going to give you $80,000 to put in the stock market!

If you have any questions about this topic I would love to talk with you, feel free to contact me!


*** Please note, this is just meant to be informative, all facts and figures are assumed to be true and accurate but there can be differences in all values stated depending on the source material used.

10 tips about mortgages and refinancing in 2013

Good article: http://finance.yahoo.com/news/10-tips-mortgages-refinancing-2013-080135586.html

If you’ve been sitting on the sidelines, waiting for the best time to refinance or get a mortgage to buy a home, think of 2013 as your last chance to act.

With good credit, persistence and some shopping skills, you can still snag phenomenal deals this year — even if you are underwater on your loan.

Here are 10 mortgage tips to help you with your mortgage decisions in 2013.

Tip 1: Stop procrastinating and refinance

If you haven’t refinanced recently, you’re probably paying a higher interest rate on your mortgage than you should. Take advantage of today’s record-low mortgage rates while they last. Rates are expected to remain low during the first few months of the year, but they should gradually increase. When they do, many borrowers will regret having missed the opportunity to grab the lowest mortgage rate in history.

Tip 2: Buyers, get moving

With rates near the bottom and home prices on the rise, it’s still a perfect time to buy a house. If you can afford a home and qualify for a mortgage, this may be your last chance to take advantage of the market and own a home for less. To speed up the homebuying process, get a mortgage preapproval before you start shopping.

Tip 3: Compare FHA vs. conventional loans

Many homebuyers opt for a Federal Housing Administration mortgage because it allows them to buy a home with as little as 3.5 percent down. But the already costly FHA fees that are added to your loan will increase again in 2013. As the costs of FHA mortgages rise, some buyers may consider saving a little extra for a conventional loan. Buyers need at least 5 percent down to get a conventional mortgage, depending on their credit. If you can afford the slightly higher down payment, get quotes for FHA and conventional loans, and compare the costs.

Tip 4: Ensure that your credit is golden

Credit standards remain tight. As new mortgage rules are unveiled in 2013, the standards are not expected to loosen. If you plan to get a mortgage anytime soon, you must treat your credit as one of your most valuable assets. Most lenders want to see a spotless credit history of at least a year on your credit report. You’ll need a credit score of at least 720 to get the best rate. Borrowers with a credit score of 680 or more can still get a good deal, but the lower your score, the harder it will be to get approved.

Review your credit report before you apply for a mortgage. Sometimes, paying part of your credit card balances can boost your credit score quickly. Generally, if you are using more than 30 percent of the available credit on your cards, you may be hurting your score. Also, check for credit errors and have them corrected before you apply for a loan.

Tip 5: Want to pay off your mortgage earlier?

If you are one of those homeowners who dream about being mortgage-free, the low-rate environment may be a good opportunity to refinance your 30-year mortgage into a 15- or 20-year loan. But make sure you can really afford the slightly higher payments on the shorter loan and that you have some money saved for emergencies.

Tip 6: Underwater refinancers: Don’t take ‘no’ for an answer

If you owe more than your home is worth and have tried and failed to refinance, why not give it another shot in 2013? The Home Affordable Refinance Program, or HARP 2.0, was revamped to allow homeowners to refinance regardless of how deeply underwater they are.

Even after revisions to the program, many borrowers still found obstacles when refinancing. But the situation is improving. Lenders are much more open to HARP 2.0 refinances these days than they were a few months ago. If one lender says you don’t qualify for a HARP refi, don’t take “no” for an answer, and try to find a lender willing to do it.

Tip 7: Give your lender a chance

If you have trouble paying your mortgage, don’t ignore your mortgage servicer. There are new programs available for borrowers who struggle to keep up with their mortgage payments, including forbearance for those with FHA mortgages. Lenders have been more willing to work out delinquent loans through loan modifications and even short sales for homeowners who can’t afford to stay in their homes. It can be a frustrating process to deal with your lender, but communication is still your best tool.

Tip 8: Shop for a low rate and good service

Even with rates hovering near record lows, you should still shop for the best mortgage deal. Get quotes from at least three lenders and compare not just the interest rate but closing costs and the quality of their service. Favor lenders that have a reputation of closing on time. Start with referrals from friends and relatives when shopping for a lender and read online reviews from other borrowers about the particular lender or mortgage broker you are considering.

Tip 9: Approved for a mortgage? Leave your credit alone

Most lenders order a second credit report for the borrower a few days before closing. Don’t open new accounts or charge up your credit cards at the furniture store while you wait for closing day. New credit lines and maxed-out cards may hurt your score. If you were on the edge when you qualified, your mortgage loan could be rejected at the last minute.

Tip 10: It’s not over until the loan closes

You’ve submitted your mortgage application and locked a rate. The race has just begun. Submit any documents requested by your loan officer or mortgage broker within 24 hours, if possible. Any delays in responding to the lender or in letting the appraiser into your house are wastes of valuable time. Lenders will remain overwhelmed with the large volume of refinance applications at least through the first few months of 2013. It doesn’t take much more than lost paperwork or last-minute requests from your lender to delay your closing. If that happens, you risk losing the locked rate. Follow up with your lender or mortgage broker at least once a week to ensure the process goes smoothly.