By Jeff Donnellan Re/Max
Residential real estate has been turned upside-down in the last 4 years. Purchasing a home was a fairly simple process. A buyer could find a home they like, make an offer directly to the owner, negotiate price and terms, then close within thirty days. Today real estate is a completely different world and the market is dominated by short sales and foreclosures ( up to 50% of all sales in some areas). However, there’s a lot of confusion concerning expectations and values between these types of sales. The largest differences between the three types of sales are price, timing, terms, and condition.
A traditional real estate sale will usually reflect the top price of the market. In most cases the owner has maintained the home and will quickly negotiate reasonable offers. In addition they will be open to fixing problems that come up during an inspection. This situation is ideal for a purchaser that wants to move quickly
Short sales are a type of distress sale where the owner can not keep up with mortgage payments or property maintenance. This type of purchase can take between two & six months before receiving a counter offer from the seller’s mortgage company. Most cases the seller will likely not make repairs to defects in the home. The typical discount when purchasing a short sale is 13%-30%. If you have time to wait and don’t mind making a few repairs this can be a great option.
Foreclosures are usually the deepest discount, but there are many unknowns. The home has been vacant for some time and an empty home in the winter has a high probability of frozen water pipes which then break. Repairs can be extensive and a buyer will need cash or a rehab loan. If the repairs needed are extreme, the home may not qualify for financing. A very thorough home inspection is needed to determine what type of repairs are necessary and how they will cost. Responses from the bank are usually quick and very from 24-72 hours. Closings can also happen quickly and in 30 days or less. This is definitely a “buyer beware situation.” If not planned properly a foreclosure could turn into a money pit.
When purchasing a home you must consider which option best fits your situation. Before falling in love with a home find out what type of sale it is and can it be financed. Realistic expectations are critical.
Jeff Donnellan Re/Max
http://www.webhomesearcher.com
If I can could share just one real estate tip it would be to pay off your mortgage early. I will show you how by using biweekly payments. It’s a simple and easy trick that your bank doesn’t want you know about and will save you tens of thousands of dollars.
I bought my first home during the peak of the real estate boom thinking I would own it for a few years and make a massive profit because prices were rising dramatically every year. Was I ever wrong. Within 2 years my property value took a downward spiral and to this day I owe way more than what it’s worth. But this doesn’t bother me because I have a long-term plan where my home will make me money every month. Let me show you how.
For those of you who have purchased a home, there was most likely a document you signed called the truth in lending disclosure. It showed how if you made every payment on time for the next 30 years you would pay almost double what you bought it for. That is how bankers calculate compound interest loans. Let me show you a different set of rules that will literally save you tens of thousand of dollars. It’s called biweekly payments, and will help you gain home equity at a rapid rate
Now the bank’s way of calculating interest is based upon paying the loan payment once a month using compound interest. With a biweekly mortgage payment plan the loan payment is divided into half of the monthly amount paid every 2 weeks. You would make 26 half payments which equal 13 monthly payments. The is the equivalent of making 13 mortgage payments in 1 year instead of 12 and takes a 30 year mortgage pays it off completely in 25 years. Let me show you what this looks like in actual dollars.
As you can see the biweekly payment plan accelerates the principle pay off so the finishes 5 years early and saves $30,000 in interest payments. The key principal is that you pay the same amount every month like a normal mortgage but it’s divide up into two equal payments. Now who wouldn’t want to save that kind of money, gain rapid equity in their home and finish making payments 5 years sooner?
This abbreviated chart below shows principal remaining by year for a $250,000 mortgage at 4% interest.
|
Year # |
Standard Mortgage |
Biweekly Mortgage |
|
1 |
$245,597 |
$244,342 |
|
5 |
$226,118 |
$219,315 |
|
10 |
$196,959 |
$181,869 |
|
15 |
$161,357 |
$136,171 |
|
20 |
$117,885 |
$80,401 |
|
25 |
$64,808 |
$12,058 |
|
26 |
$52,860 |
$0 |
|
27 |
$40,426 |
$0 |
|
28 |
$27,485 |
$0 |
|
30 |
$0 |
$0 |
Notice how after year 25 the balance is completely paid. In this example it would save $29,000 in interest over the life of the loan.
Standard monthly payment of $1,193 & total interest paid $179,673. Biweekly mortgage payments of $596 & total interest paid $150,450. The biweekly option creates equity faster by paying the principle quicker.
One detail I do want to explain. Not all mortgages have a biweekly option and some charge a service fee. When inquiring make sure you choose the loan accelerating option. If your mortgage doesn’t have a biweekly loan accelerator option you can do this on your own by taking the principal payments you make each month and divide by 12. Add this amount to your mortgage payments every month as additional principal.Notice how after year 25 the balance is completely paid. In this example it would save $30,000 in interest over the life of the loan.
Now most people would say, “I don’t plan on owning the same home for 30 years.” In many cases this is extremely legitimate. Jobs change, families grow or shrink, all kinds of life changes happen, causing Americans move every 5-10 years. But let me show you something first and I’ll use the same data from the figures above. The same home that was mortgaged for $250,000 had a 5% down payment and a purchase of $262,500. If that home appreciated at a modest 1% (Illinois average over last 30 years was 4.8%) 5 years later it would be worth $275,890, after 10 years $289,963, and after 30 years $353,810. If we use an appreciation of 4% that same home would be worth $851,391 in 30 years. Now that’s absolutely amazing.
If you’re satisfied with this one tip then there’s no need to read further. But if you want to know how to build wealth in real estate with no gimmicks, risky schemes, or speculation, just honest hard work and smart decisions, then please read on.
An overwhelming number of Americans are not super rich and made of money, but over time through working a steady job are able to save a little bit of each paycheck. Let me give you an example of how you can leverage your personal savings account, buy another home and “move up.”
When the average American moves in that fifth year, what if they were to rent out their existing home and purchase another? The passive income opportunities could be absolutely astounding in the years to come. I’m going to stick with the figures from above and estimate that same home would rent for about $2000 per month. The table below will explain cash flow per year.
|
Principal & Interest |
$1,193 |
|
Taxes |
$479 |
|
Insurance |
$50 |
|
Monthly Rent |
$2,000 |
|
Monthly profit |
$278 |
|
Yearly Profit |
$3,336 |
|
Rate of Return on Down Payment |
25% |
This table does not take into account lawn care, snow removal, or maintenance fees since these items vary drastically.
Rate of Return:
Yearly Profit divided by initial investment
3336/ 13,125 = 25%
Let’s convert this to investment terms and return on investment (ROI). Let’s remember the initial 5% down payment or $13,125. Divide yearly earnings of $3,336 by $13,125 and your rate of return is 25% per year with your initial investment being paid off in just 4 years. That is outstanding considering only the riskiest stocks pay 15%-18%. Taking this scenario to it’s logical conclusion has the tenants paying off the entire mortgage, after which point $1193 a month is all profit in today’s dollars. This does not account for inflation, rental price increases and tax increases since we have no idea what that would be so far into the future.
So there you are earning $14,000 a year, the home is paid off, and appreciated up to over $850,000. How does that sound? What if you were to do this more than once and purchase one home every 5 years as either a “move up” or investment property. Given the same scenario from above, by purchasing 6 homes whose value’s are $262,000, the total appreciated value when owning each for 30 years is $5.1 million (4% appreciation), and the potential rental income in today’s dollars would be $90,000 per year, earned just by collecting rental checks.
This is why I’m a strong advocate for long-term, buy and hold real estate. No matter what kind of market you buy into, rental income can pay your monthly bills and over time the asset or home is paid off, allowing you to pick the perfect time to sell when the market is up.
The four main benefits of real estate are:
1. Cash flow
2. Appreciation
3. Loan amortization
4. Tax shelter.
I have explained the first three and here is how real estate functions as a tax shelter. The IRS has a mortgage interest deduction. In the same example from above with the $250,000 mortgage the tax deduction would be about $9800 per year at the beginning of the loan and slowly decreasing until it is paid off. The second benefit comes in to play with rental properties and it’s called depreciation. The basic principle is the IRS degrades a property’s value down to zero over 27.5 which is considered it’s useful life. In this same example it would average $9000 per year in further tax deductions. This combines for a total tax shelter of $18,800. Combining both tax deductions may even drop you into lower taxable rate from paying 25% in taxes to 15%. On this topic I would definitely contact your accountant to see how it would affect your personal finances.
|
Yearly Loan Interest Paid |
$9,800 |
|
Mortgage Interest Deduction |
$9,800 |
|
Depreciation Deduction |
$9,000 |
|
Total |
$18,800 |
|
Rental income |
$3,336 |
|
Additional Tax Shelter of other Income |
-$15,464 |
$15,464 is a paper loss only and may shelter part of your full time income. Speak to an accountant about your specific tax return.
I hope you have enjoyed this and helps give direction to your financial future. Please contact me with feedback and questions.For these reasons real estate out performs all other asset classes year after year, decade after decade. It builds long-term wealth, generates monthly income, long-term appreciation, has tax benefits, you can personally manage it, can be financed, your money can be leveraged and most importantly everyone needs a place to live.
Jeff Donnellan
Re/Max
773-828-8151
Jeff Donnellan Re/Max
Building an new home is an exciting process and some times necessary when the real estate market is short on supply of what you need or want. When people have specific needs or looking for that forever home it’s important to get what you want, otherwise you just end up moving again.
The home builder market has shrunk considerably since 2007, with many being stuck with a large inventory and eventually declaring bankruptcy. In many ways this was a good thing since it cleared out many of the people that had no idea what they were doing as well as the disreputable business men. What remains is the best of the best and home builders with a well run business. Most home builders do not build spec homes any more or if they do, the selection is very limited. Because of this they some times charge a premium which is a little bit over market.
The benefits of a building a new home are that you get to make all the selections, such as location, lot, features and amenities with no trade offs or remodeling. The benefits of projected long term ownership and energy efficiency can be well worth paying a bit over market because moving costs are extremely expensive when you consider closing cost, hiring a Realtor and paying commissions.
Once you find the right home builder and location it’s important to negotiate the final price of the home with the lot and all upgrades. Find out what is standard and what is an upgrade. Ask about the materials used and how they effect over all usage, durability and energy efficiency. Make sure the home builder provides a warranty and is reliable about fixing any issues that go wrong in the 1st months of ownership. Also ask for at least 3 referrals.
The largest challenge is planning a strategic move. Financing plays key role and may take some creative financing to make it work since many home buyers also have a home to sell. Here are some options that can set you up for success if you currently own a home and want to build a new one.
1. You many need to qualify for loans, your current and the new one in order to start construction. The construction period is usually 4-6 months. This would give 3-5 months to market your home and find a buyer. This may be challenge depending your current real estate market.
2. Qualify for both loans and rent out your existing home just before construction is complete. This may be a great option if you can afford the new down payment and use rents to pay your existing mortgage.
3. Find alternative financing or a portfolio loan. The rates may be a bit higher but they do not have to meet conforming mortgage standards and could be a bit more flexible. Many of these mortgage lenders will set up a refinance with in 1 year once the mortgage has seasoned and you build property management history. At that point you can qualify for a conforming loan with lower rates.
4. Option 4 is to sell your home and find temporary living while the new home is being built. This could be a short term rental of 6 months. The key to this option this option would be to select all the details of your new home and once you get a purchase contract for your existing home, get the construction process started immediately.
Good luck with your new home.
Jeff Donnellan Re/Max
Click here for Short Sale HELP
The Mortgage Debt Forgiveness Act is set to expire at the end 2012. This act provides tax exemptions to home owners who have a deficiency judgement as the result of a foreclosed or short sale their home. A deficiency judgment is an unsecured money judgment against a borrower whose mortgage foreclosure sale did not produce sufficient funds to pay the underlying promissory note, or loan, in full. The IRS considers this taxable income. For example is a mortgage balance is 100k and and after the home is sold through short sale or foreclosure the total amount recovered after expenses is 50k. The IRS would consider the 50k of debt cancellation as taxable income. The Mortgage Debt Forgiveness Act is an exemption for home owners to not be taxed on forgiven debt, but this is the last year to claim it.
A major benefit of a short sale over a foreclosure is the ability to negotiate the deficiency judgement away. When using an experienced short sale Realtor & attorney they will most likely be able have the bank release the mortgage deficiency and have it reported to your credit scores as “paid in full” or “settled.” This has a dramatic difference simply because a foreclosure will not be on the record, which will damage credit for 7-10 years. In effect it’s like a fresh start with the slate wiped clean, giving home owners a chance to start over and one day purchase again.
Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:
More information is available on the IRS website http://www.irs.gov/individuals/article/0,,id=179414,00.html
Jeff Donnellan Re/Max
Search for Chicago Condos here
Condos are very different from purchasing a single family home, town home, or apartment building. While most homes will qualify for almost any financing, condos can be much more difficult. Since they are a collected group of owners sharing the same land, walls, & maintenance expenses, rules are necessary to govern the common good of the entire building or buildings. An association of home owners or a private management company will administer the rules, collect monthly payments, pay bills and administer improvements or repairs. In order for a condo building to qualify for financing the association must be active and healthy. Here are 10 tips to make your condo purchase smoother and flush out all the potential challenges before making an offer.
1. Will the building qualify for financing? Since the down turn in real estate, financing options have changed and tightened up considerably. Unless you are purchasing a home with cash, it will need to be financed. Make sure the building can be financed with relative ease. Find out what types of loan can be used, this will effect ease of resale if multiple loan types can be used.
2. What types of loans can be used? Currently the most common financing options for purchasing a condo are:
The next 6 questions will determine financing options.
3. How many condos are being rented? Owner occupancy will effect financing since conventional & FHA loans allow no more than 50% to be rented. A good association will have rules in place to keep rentals at an acceptable level.
4. What’s the investor concentration? Find out if 1 person or entity owns more than 10% of the building. With smaller buildings 3-10 units if 1 person owns more than 1 condo. This is another financing guideline for FHA & Conventional loans. This standard is in place so if that 1 person or entity defaults, the whole building doesn’t suffer.
5. Are more than 10% of the condos delinquent or behind in assessment payments? This can also be road block to financing because it is usually leads to the entire association not being able to pay it’s bill or insolvency. Many times it’s also sign that condos owners will default on their loans.
6. How many condos are for sale as foreclosure or short sales? Not only do a high amount of short sales and foreclosures hurt values for all condos in the building but, conventional & FHA guidelines only allow for 25% or less.
7. How much is in reserve funds? Reserve funds are meant to pay for special projects or common repairs such as a roof, decks, exterior walls or other common elements.
8. Are there special assessments? When a condo building doesn’t have enough reserves to cover repairs or updates a special assessment is needed. This comes in the form of additional payments from each condo owner with a 1 time payment or monthly installment payments over a set period of time ie 1-3 years.
9. What’s included in monthly assessments? Find out what your monthly assessments cover heat, electric, cable, internet, parking and common amenities such as a pool or gym.
10. Is parking included? Parking spaces can be included as a common element with each unit, deeded & sold separately, or leased.
Before starting your condo search make sure you get pre-approved for a loan. This will help guide in your condo search by letting you know which financing method you can use and which buildings will qualify for that type of financing. The most disappointing feeling is finding that perfect place and finding out later that it won’t qualify for the type of financing you are using.
All signs point to 2012 being the year of the short sale.
Back in 2007 no one had ever heard of a short sale and the process was a complete disaster. Real estate agents didn’t know how to price short sales or get them approved by the banks. The whole process was a mystery because there was a complete lack of communication from the banks and they had no idea with thousands of defaulting loans. So many horror stories came from the early days of the housing crisis and home owners were on the loosing end, and the final chapter was foreclosure.
Real estate felt like the wild west. Prices were falling through the floor and loans were defaulting left & right. Banks were so far behind on handling home owners who fell behind on their payments and because they had no systems in place the only option was to foreclose. Most owners didn’t know what to do when their mortgage company wouldn’t answer phone calls or would send them into voice mail loops for days and weeks at a time and could never speak to a live person. Home owners became frustrated beyond all belief because there were no answers to the problems they faced.
5 years later the game has changed. Banks have realized that it’s more expensive to foreclose than helping home owners to complete a short sale or modification. Between attorney’s fees, loss of revenue from a paying mortgage ( some times for 2 full years), property damage, and endless management fees until the home finally sells as foreclosure. Systems & procedures have been established to give home owners more options than ever when they can no longer afford their mortgage and the major banks are extremely cooperative when payments fall behind. Many of the mortgage lenders are now calling when this happens to offer owners a way out with incentives up to $35000 in moving expenses for completing a short sale. In November, short sales accounted for more than 9% of single family home sales and were up 32% from the year before, according to CoreLogic. Short sales are being approved now more than ever providing home owners a way out.
The short sale process is being refined down to the finest detail so home owners have a way out now and prevents the dramatic decline in values that foreclosures represent ( up to %40 loss of value). Programs like HAFA, HAMP, & HARP are designed to free home owners from burdensome mortgages and receive moving expenses (up to $3000). Banks are offering cash incentives ($3000- 35,000) for home owners who complete short sales and streamlining the process so home owners have direct answers in short time periods. BofA, the largest servicer of home loans, did 107,000 short sales last year. That was up from 92,000 in 2010, which was double the 2009 volume, it says. New legislation has even been proposed to have answers in writing with in 75 days of an offer being submitted on a short sale.
Under water homes have more options than ever to get a fresh start, get out from a mountain of debt created by an economic down turn & a bad mortgage. However time is of the essence because the mortgage debt forgiveness act of 2007 is set to expire at the end of the year. This prevents owners from having to pay taxes on the difference of what they sell for and what they owe.
An opportunity exists for people who are behind on mortgage payments or soon will be. The opportunity to sell a home for less than what is owed while having the least impact to credit scores and receive cash to help with moving expenses. At no other time during this financial down turn have so many advantages been offered to struggling home owners.
Jeff Donnellan Re/max
http://www.webhomesearcher.com
We are now in year 6 of the foreclosure crisis. In the beginning most real estate professionals like myself thought it was a temporary down turn and things would pick back up with in a year or so. No one knew what a short sale was nor did any of the banks want to accept less than what was owed. What started as a sub prime mortgage mess has become an epidemic effecting everyone. Some estimates say we have lost $7 trillion (with a T) in home values and over 5 million homes have been foreclosed. 10 million more are at risk. For most Americans their home was their most valuable asset. Now foreclosures have driven back home values to 2001 levels in most areas.
So what’s the solution? How do we stabilize falling prices and return value to our housing market? Well there is no magic bullet, but if we combine multiple solutions that help a few thousand home owners here and there, now we’re getting some where. Foreclosures have a massive downward pressure on our housing market ( lowering neighborhood values by 40%) and make recovery impossible as long as they flood the real estate market. As a result our country has over 1.5 million vacant homes which are a breading ground for crime. As a country and as responsible citizens our focus should be on helping at risk home owners before they get to the end of their rope and fall victim to foreclosure.
$20 billion will go to help at risk mortgages in the form of principal reduction with a maximum of $20,000 per modification and refinances to today’s historically low rates. Last week 49 US Attorney’s General came to a settlement for $26 billion with the 5 major banks Chase, Wells Fargo, Alley Financial, Bank of America, & Citigroup over wrongful foreclosure proceedings. These banks were using attorneys who forged and falsified foreclosure documents that wrongfully put 750,000 Americans out of their homes. This settlement will help thousands stay in there homes over the next 3 years while programs are implemented.
Just because your mortgage statement may say Bank of America or Chase, it does not mean they own the loan. Fannie Mae & Freddie Mac are the nations largest mortgage purchasers but usually let the major banks service the loans i.e. collect payments. They have come up with their own programs that are meant to help home owners refinance or modify their loans. HAMP or home affordable modification program is designed to help change the loan terms, reduce principal, reduce interest rate, extend the terms ( from 30 years to 40) or a combination of all 3 methods. HARP or home affordable refinance program is designed for home owners who are current on payments but who owe more than their home is worth. Home owners that are under water can take advantage of today’s rates and reduce monthly payments because the program does not use value as a factor. To see if your loan is owned by Fannie Mae or Freddie Mac go to www.fanniemae.com/loanlookup orwww.freddiemac.com/mymortgage .
A new tactic the banks are using in the battle against foreclosure is offering a cash incentive to home owners to successfully complete a short sale. Chase has offered up to $35,000 and other banks are testing pilot programs to do the same. It’s now more expensive for them to foreclose and in some cases takes 1 or 2 years if they do not have the proper documentation. For the home owner the massive cash incentives are extremely enticing and help them to start over in a new home and have less damage done to their credit or financial future.
HAFA or Home Affordable Foreclosure Alternative is another government designed program to help home owners complete a short sale.. The program is designed to slow down the foreclosure process, give timely answers, and gives the $3000 for moving expenses to home owners. The deficiency judgement is waived ( difference between amount owed and amount paid) and reported to the credit bureaus as “settled” instead of a foreclosure which stays with a home owner for 10 years.
Combining all these options will provide a solution and reduce the amount of foreclosures putting downward pressure on housing market while at the same time making our neighborhoods safer. Our government is offering help, most banks are offering help, but it’s up to individual home owners to take advantage.
Jeff Donnellan Re/max
http://www.webhomesearcher.com
Tips for Underwater Home Owners Who Want to Avoid Foreclosure
by Jeff Donnellan RE/MAX
The US is beginning its 6th straight year of declining home values. Like myself, 10 million home owners are underwater on their mortgages. This is not always a problem if there is a long term solution like waiting out the market or renting your home until the mortgage is paid off or values return. Many home owners that have experienced a hardship like loss of income, wage reduction, increased bills, death of a family member or divorce time is working against them. They can’t wait out the market until it gets better, they need a solution now. Most people in these situation are at the end of their rope and savings accounts are running dry. Now is the time to find out what solution is best, refinance, mortgage modification or short sale.
Here are a 10 tips for home owners who owe more than what their home is worth and they don’t know what to do.
1. BEWARE of foreclosure prevention scams. Many unscrupulous people prey on distressed home owners at their moment of weakness. Never agree to up front fees. Check credentials and ask for referrals.
2. Be realistic. If you’re spending more than you make each month or have a hardship now or foreseeable future take action now that could prevent defaulting on your mortgage and bills later on. Ignoring the problem will only make it worse.
3. Must ask the question can I (we) or do we want to stay in the home? Be honest with yourself.
4. Seek out information. My website is filled with information to help home owners. www.webhomesearcher.com
5. Contact your bank and specialists like a Short Sale Realtor, Short Sale Attorney, Mortgage broker. Each will be able to help you discover all possible options. Banks are more willing now than ever to keep people in their home instead of foreclosing.
6. Government sponsored programs such as HAMP (mortgage modifications), HARP ( refinance), & HAFA (short sale 3k to home owner for moving expenses) are available to struggling home owners. Use these programs while they are still available.
7. A Short sale is not the end of the world. It’s a practical solution to a difficult situation. No cost to home owner. Credit scores can be affected as little as 50 points, better than foreclosure on credit report and can qualify for a new home mortgage in as little as 2 years and can negotiate away the deficiency ( difference between amount sold and amount owed).
8. In some cases renting the home is possible if rent prices meet or exceed mortgage payments. This can be a risk as well because if the tenant doesn’t pay mortgage payments will be missed.
9. Consider what is best for your short term and long term future. A foreclosure can stay on your record for 10 years and could prevent purchasing a home again for up to 7 years.
10. Some banks are offering up to $35000 for home owners to complete a short sale instead of letting the home go into foreclosure. Contact your bank to see if there are incentives.
My best advice is to meet the problem head on. The longer a home owner waits to take action the fewer options will be available. I have often been contact when there is only 1 month left until a home forecloses and there is very little that can be done to save a home owner. In contrast when I’m contacted early in the process all options are available. This process can be scary & frustrating, but in the long run will benefit your financial future.
