Real Estate Transitions
Moving UP or DOWN, or just moving can be a headache in itself.
Staying at home in 2020 caused of lot of owners to think about how nice it would be to have a larger home to accommodate the additional activities that come along with isolating. Particularly for people with children at home or possibly, the potential of either adult children or parents coming to live with them.
There are other owners who are trying to weigh the pros and cons of selling their larger home and downsizing. For entirely different reasons, the advantages could be very appealing to an owner. A smaller home is easier to maintain and usually, has lower utilities, insurance, and property taxes.
Some people might be considering the convenience and ease of mobility of a single level home. It may be finding a location with proximity to the activities they are now interested in. A newer home might have less maintenance and be more energy efficient.
Married taxpayers who have owned and occupied a principal residence for two years can exclude up to $500,000 of capital gain while a single taxpayer can exclude up to $250,000. Liquidating the equity in their home without a tax liability could have multiple benefits.
Some people might choose to pay cash for the replacement home. Others might put 20% down to avoid mortgage insurance and possibly, even get a 15-year loan to get the lowest rate. The balance of the equity could be invested at a rate higher than the interest on their new mortgage. Still, others might want to have some reserve funds available for whatever the next unanticipated crisis might be.
It could be a way to fund a longtime goal like children’s or grandchildren’s education, or wedding, or a once-in-a-lifetime trip. Maybe part of the equity could be used to start a business or make a grant to a worthwhile charity.
Selling a home and purchasing another will have expenses involved that have to be taken into consideration. Purchase costs could be 1.5 to 3% while sales expenses could be easily be 2.5 times that much. The transition of selling and buying in itself is very technical. There are many moving parts to keep in mind so ensure a smooth transition.
Regardless of whether it is moving to a larger home or a smaller one, now may be a good time to make the move. Due to the low inventory in most markets, homes are selling quickly, many times, in less than a few days. Normally, these winter months typically have less activity which means less competition for buyers. Although with inventory as low as it is, the competition continues to be strong.
Another driving factor are the incredibly low mortgage rates. As of 1/21/21, the 30-year fixed rate was at 2.77% and the 15-year at 2.21%. This environment is encouraging many buyers to purchase as they see prices continue to increase.
Like any other big change in life, it is recommended that you take your time to consider the possible alternatives and outcomes that may affect you. You can expect that we will provide information that can be valuable in the discernment process such as what your home is worth, what you will net from a sale, marketing strategies, as well as, alternative properties for your next stage in life.
Real Estate Investments-Rental Homes
Rental Home Investments
Rental homes whether they be single-family detached properties, condos, two, three or four-unit properties share many of the same benefits. Most people instinctively understand many of the working parts because they are the same as their home. They have a basic understanding of value and how to maintain the property. The service providers for a home would be the same for a rental home.
These properties allow an investor to obtain a large loan-to-value mortgage at fixed interest rates for up to thirty years. They appreciate in value, currently exceeding many other assets; have defined tax advantages and allow an investor more control than many alternative investments.
Most lenders require 20-25% down payment and will finance the balance at rates close to owner-occupied homes. Buyer closing costs will add another three to four percent to the amount of cash needed to close. It is also prudent to have available funds for repairs and maintenance.
There are successful real estate investors in every price range and part of town. If your ultimate goal is to have the rent handle the holding costs and to sell the appreciated property at the end of a seven to ten year holding period, it might be advantageous to stay in predominantly owner-occupied neighborhood. They usually appreciate faster and will appeal to a buyer who wants it for their home. Chances are, this type of buyer will pay a higher price than an investor who may not be willing to pay as high a price.
By staying in an average price range, or possibly, slightly lower, you’ll be able to appeal to the broadest group of not only buyers but also tenants while you are renting the property. Even during the mid-80’s when FHA interest rate was 18.5%, buyers were still purchasing homes. Whereas the higher priced homes have a tendency to slow down during trying economic times.
Ask your real estate professional what price ranges sell the best, rent the best and have mortgage money available.
Some investors manage their properties themselves and others don’t want to be involved. Professional property management has advantages like expertise, established contacts, operating statements and economies of scale. The main disadvantage is the cost factor but if they can rent it for a higher price and keep expenses lower than you can, it could minimize the difference.
A possible consideration might be to have a real estate professional place the tenant, check the credit and write the lease. There would be a one-time fee for this, but the owner/investor could then, manage the property, saving the expense of a monthly fee.
Understanding the landlord tenant laws would be particularly important to an investor managing their own property but regardless, the investor needs to have a basic familiarity of the law. There can be civil as well as criminal aspects. Examples might be that a landlord is required to change the locks on a property for a new tenant; the number of days before a landlord must return a deposit and what to do if there are damages causing all or part of it to be withheld.
Another tool that can be very helpful for investors is an investment analysis that will assist them in selecting a property that is likely to provide a satisfactory rate of return. Ask your real estate professional if they can provide this for you. They should be more familiar with rents and expenses to be able to determine the cash flow and what kind of yield you may be able to expect over your intended holding period.
For more detailed information, download our Rental Income Properties and contact me to schedule a meeting to talk about the possibilities.
The Value of Pre Listing Inspections
Imagine what happens when there is not a pre-listing inspection. The buyer contracts for the home with a provision for professional home inspection. When it is made, there could be things that the buyer didn’t expect or even, anticipate. If it doesn’t trigger an action to terminate the contract, the buyer will inevitably, ask the seller to make all the repairs.
When presented with the buyer’s request, the seller may take the opposite position of not wanting to do any of the repairs. The buyer could accept the property in its “as is” condition or negotiate the repairs or a reduced price with the seller.
Any experienced agent can tell you that sometimes a mutually agreed negotiation is reached and other times, an impasse is met that cannot be resolved. The contract is terminated, and the house has to go back on the market but this time, a disclosure has to be made to all parties looking at the home which may deter showings.
Taking a pro-active approach, by obtaining a pre-listing inspection, the seller can find out about things that will probably show up in a buyer’s inspection. They can get them repaired before the home is shown and it will help the buyer feel more confident with the home. Another option would be to disclose them as not working and make a price adjustment, either way, the seller is in control and is taking a position of transparency with potential buyers.
In some cases, the pre-listing inspection may show things in working order that the buyer’s inspection indicates as needing repair. With two disinterested parties having opposing opinions, negotiations have a more likely chance for a mutual agreement.
Disclosing things that are not in working order can reduce liability in the future. Some deficiencies with the home are not discovered prior to the closing and the surprise issues could lead to liability. The pre-listing inspection by a professional combined with the seller disclosing it properly can reduce potential liability.
For the small investment in the pre-listing inspection, the benefits are well worth the expense. For example, it can provide opportunities to take care of potential issues on your own time with control over who does the work at a certain cost. For a qualified do-it-yourself type homeowner, some items may lend to offering you to perform the work before a buyer puts the house in contract. This can save a lot of money and time without needing the work of a contractor, although it can be risky to take on the liability if repairs are not performed correctly and to code.
You and potential buyers will also have a better idea of the condition of your property and know what to expect. You can present the property in a transparent way that will build confidence with the buyer. You’ll avoid unpleasant surprises as well as possible delays or terminations. Starting over as a seller can be a very challenging hurdle to overcome depending on the market conditions. Pre-listing inspections can lead to faster sales and satisfaction for everyone involved.
For more information, download the Sellers Guide.