Wealthy decide to rent, not own

An interesting article on CNBC today.  I had written several weeks back about how people completely capable of affording their mortgages were choosing to walk away from their homes with no intent on paying.  They could afford it but saw no point to do it when they couldn’t make the money back that they invested when they purchased it.

This article is similar.  It talks about how wealthy Americans are choosing to rent homes instead of buying them because of the state of the housing market.  While many wealthy Americans could flat out buy a home in cash without ever having a mortgage, some are worried that a need to move will have them losing money.

And it’s not just a fear of selling down the road.  One of the pitfalls of home ownership can be routine maintenance and the need to fix items or replace those beyond repair.  It’s also keeping up with the exterior maintenance, etc.  With renting, they can avoid all this.

According to the article: “More affluent Americans are opting to rent as oppose to buy,” says Jack McCabe, an independent real estate analyst and CEO of McCabe Research and Consulting in Deerfield Beach, Fla. “Within the last year, so many people have seen their family and friends get burned in real estate. They don’t see it as being a risk free investment as they used to.”

But what about the flip side of the coin?  Isn’t that throwing money down the drain by paying a landlord each month instead of investing?  And isn’t this turn in the housing market great to get a house for a lot less than what it used to be worth?  Maybe that works if you’re planning to stay in your house for a long period of time, at least 5 years.  But for those looking to feel out a new neighborhood or relocating for a short time, renting could be a better option.  A lot of these renters also believe that it’s not the same investment as it once was.

One reader left a comment about the mortgage crisis contributing to this problem.  He suggests that if you want to buy a home you need to take out a personal loan that will automatically be deducted from your paycheck each month so that you can’t default.   If you’re not working or retired, he suggests cash only, or you can’t get a loan.  I think that really takes away from the American dream of home ownership.  While it’s a tough market right now, it can only get better.  And for goodness sake – if you don’t need to sell your home, don’t move!

I’m curious to hear what you think of this reader’s comment and if you think it would work.  And I’m also happy to help you look for a home to buy or to rent.  Please visit me online.

Remodeling not worth as much as it used to be

In a not-surprising news story in the Chicago Tribune, it turns out that those homeowners who choose to do some remodeling in their homes will not make as much money in resale value as they would have in previous years.  Most people are under the impression that if you do an upgrade or remodel to certain aspects of your home, you’ll get most or all of that money back when you sell.  Well, not so much in this market.  Unfortunately, more money is going in the contractor’s pocket than will go back in yours at the closing table.  

Remodeling Magazine has just put out their annual cost vs. value report for 2010-2011.  While you’re able to look at statistics and numbers for all areas of the country, I want to focus in on Chicago.  Let’s use a midrange major kitchen remodel for this year.  With the average job cost of $58,367, the homeowner would have a resale value of $40,126.  The percent of it being recouped is 68.7%, one of the highest values of all the remodeling projects.  However, last year that percentage was 72.1%.  So not a significant decrease, but still noticeable.

What’s interesting is that every single category the magazine studied, the percentage in recouped value was a decrease from last year.  Some examples of those categories include a basement remodel, bathroom addition, bathroom remodel, master suite addition, deck addition, siding replacement, window replacement, and others.  They also break it down into midrange projects and upscale ones.

Kermit Baker, director of the Remodeling Futures program at Harvard University‘s Joint Center for Housing Studies said, “A lot of what drove the (remodeling) market in 2003, 2006, 2007 was the notion that you were playing with house money.  You could get 90, 95 percent of your investment back. It was really a no-risk proposition. The mentality has clearly shifted to, ‘What kinds of features do I want in my home?’ given how long you live there and your lifestyle.”

So what does this mean for sellers in today’s market?  Just be smart about what projects you take on.  You might not have to spend the money on a complete kitchen remodel.  Sometimes just painting the cabinets and changing the hardware can make a world of difference.  You might not need to replace them all.   And if you have linoleum, it’s worth the upgrade to ceramic tile or hardwood.  Not every home needs granite countertops, especially those with small kitchens already.  It’s not worth the extra expense.  But do know that kitchens are the best room in the home to remodel.  While you might think you need to spend the money to finish your basement, that’s not necessarily true.  A young couple could come in and have a completely different idea of what they want it to look like.  See what the feedback is from the potential buyers coming through your home before you make any drastic improvements.  Talk to your Realtor about what he recommends before spending all that money.

For more information or to have me give you a market analysis on your home, please visit me online.

The next problem with the housing market

I read another fascinating article in the Chicago Tribune again this weekend.  Fascinating.  I was telling family, neighbors, and friends about it.  Fascinating.  As if the housing market isn’t in enough trouble as it is.

So the article discusses the ethics of being a homeowner in this time, during the recession, in this housing market.  Foreclosures are all over.  Short sales are overwhelming the banks.  So what’s the problem now?  Homeowners who have no trouble paying their mortgage, those who can afford to, are walking away from their homes.  They call it “strategic default.”  This is what it’s come down to.  With home values at an all-time low and days on the market going up with increasing numbers, people are sadly walking away from their homes.  They can’t sell.  They can’t rent.  What they’d get for their home if they sell is half, or a quarter, or three-quarters of what their home is actually worth and what they still owe on their mortgage.  So what do they do?

The article talks about a man who lives in Florida who has two properties, both with Bank of America.  He told them he’s going to stop making payments because he can’t sell or rent at a price that would cover his payments and he wants to move out of state.  Since the bank refuses to work with him on a modification or a refinance or adjust the terms of his loan, he’s walking away.  Again, what’s a guy to do?  He said he felt guilty at the beginning.  He’s quoted as saying, “It [the guilt] all stopped when I saw them take $90 million in executive bonuses.  They take bailout money and do nothing for the little guy. They wouldn’t do anything for me.”

I can’t agree more with this homeowner.  I’ve talked about clients who couldn’t refinance or those whose modification wouldn’t go through.  And here the banks are accepting bailout money left and right, upping their salaries, and they won’t work with clients to help them stay in their homes?

So this is going to be a huge disaster.  We already have lenders taking months to respond to buyers interested in a short sale.  They’re just going to have a whopping increase in their inventory now.  Response time will be on the rise, inventory will too, and people who do this won’t get back into the market to buy something new because their credit will be ruined from walking away.  So it’s going to be harder for people to sell or for values to get back to where they should be.

As I said, I feel for these people.  They’re in a tight spot.  But at the same time, it’s going to make the housing crisis an even bigger crisis.  How do we get out of it?  The only remedy I see is more lenders willing to work with their clients and modify existing loans.  It will keep more people in their homes and help the entire market.  Readers, what do you think?  I’d love to hear your thoughts.  Please leave me a comment or visit me online.

Can you handle being a FSBO?

Everyone is trying to save money.  You’ve probably seen a lot of people offering their homes For Sale by Owner to avoid paying a Realtor’s commission.  While this tactic works for some, it doesn’t work for everyone.  The spokesperson for ForSalebyOwner.com even had this to say, “It’s more work to sell your home without a broker.”   AOL Real Estate posted a great article on questions to ask yourself before you attempt to sell FSBO. Before attempting this, you need to be able to answer yes. I wanted to go over some of the main ones.

1.  Can you price it competitively?  People will skip right past a showing of your home if the house is priced too high.  Even if you spent thousands of dollars renovating over the past couple years, it’s hard to recoup that in this market.  Make sure you’re priced competitively based on other comparable sales in the area with similar features to your home.  You might need to have a Realtor pull information for you from the Multiple Listing Service.

2. Can you market it?  How are you advertising your home?  Besides the red and white sign in the front yard, how will people know it’s for sale?  More than 90% of buyers search for their home on the Internet.  You need a licensed Realtor to have it listed in the Multiple Listing Service and Realtor.com.  So make sure your home is getting the exposure it needs for people to contact you.  You need to be comfortable getting out there and spreading the word.  It’s like being your home’s own salesperson.

3. Can you be available?  If you’re gone all day at work and aren’t available to handle showings very often, going FSBO is probably not the best solution.  Many buyers still view homes during the day.  You won’t want to throw on a lockbox and give out the combination to complete strangers.  When Realtors do this, they verify the agent is licensed prior to providing that information.  You’ll want to be there to let all potential buyers in.  If this doesn’t work for your schedule, definitely consider hiring a Realtor.

4. Can you negotiate the forms?  A real estate lawyer can definitely (and should) help you with this.  You’ll also want to learn about how the process works beforehand, especially if you’ve never sold a home before.  You need to know about the different contingency periods, home inspections, and how long a buyer has to secure financing.  Before signing anything, consult with an attorney.

These questions should help you determine whether you’re capable of handling this on your own.  If you have any questions on the process or need to speak to someone, please visit me online.

Prep your home to sell in fall

I don’t know about the rest of you, but I can’t believe how fast this summer has gone by.  In two days, it’s going to be September.  It seems like it was just yesterday that school was ending for the summer.  Maybe it was the consecutive high temperatures we’ve had in Chicago, but this summer flew by.  So for those of you who will be putting your homes on the market for the fall or for those of you who have your homes listed but want a better chance of it selling now, here are a few tips to get your home sold this fall.

1.  I can’t stress the importance of curb appeal.  I’ve said it before and I’ll say it again.  I’ve had buyers decide not to look at the interior of a house because the exterior was so neglected.  Your home could look like the Taj Mahal inside, but if the outside isn’t taken care of, it probably won’t matter.  So make sure leaves are raked and clear of the driveway and walkways.   Keep the lawn mowed.  Nothing is more unappealing than a front lawn that looks like the rainforest.  Trust me; I’ve seen it.  Keep gutters free of debris so that they drain properly.  If you get snow early, make sure to shovel any area that a potential buyer will walk on.  Again, I’ve had people not able to reach the front door because of 12″ of snow blocking the path.  If your home is vacant, make sure to go back to take care of these items or hire a service to handle it for you.

2. Keep windows clean.  Nothing brightens up a room more than a sunny day.  When the sun is shining through those windows, it’s pretty obvious if they’re covered in grime or dust.  The house will look bigger and brighter if you open up curtains/blinds to let the sun shine through clean windows.

3. If you have rooms that are painted dark colors, considering lightening them up with something neutral, or even a light yellow color.  It will make the room feel larger, brighter, and even cooler, especially as it gets dark earlier.  Buyers will be able to get a better sense of what the room looks like if they come to view your home in the late afternoon/early evening.

More great tips can be found here.  If you’re ready to get your home on the market, I’d love to help you prep it for fall.  Please visit me online.

What’s most important in selling your home

I read a great article this morning in the Chicago Tribune. It talked about why sellers might be upset that the home they’re selling isn’t going under contract and why their neighbor’s home might be.  It listed some good points as to what will help get buyers through the door to get a sale.  Given the current housing market, homes aren’t selling as quick as they used to.  Market times are up, but given the right conditions, these tips will hopefully get your home to sell faster.  I want to go over a few of them.

1. Price.  This is the absolute most important reason why a home is not selling.  If you’ve had 30 buyers through the door and don’t have an offer yet, this is a good reason as to why not.  It’s probably overpriced.  This is not the right economy to “test the water” and list higher than market value for your home.  It will just lead to your home sitting on the market for longer and becoming stale for buyers.  If you need to sell quickly due to a divorce or relocation, for example, you will need to price your home below market value.  Make sure you discuss comparative properties with your Realtor as to what a good price should be.

The article also made a good point that you shouldn’t list your home for $299,900, thinking it will look better than $300,000.  You’re missing out on all the buyers who are looking for homes from 300-350 or 300-400K.  If you have a buyer looking from 250-300, your house will get noticed on both lists.

2) Curb appeal.  I cannot stress enough how important this is.  There’s a home in my friend’s neighborhood that just went on the market.  It looks like a jungle in the front yard where it’s impossible to find the front door.  It doesn’t take much time or money to trip the trees, rip out the weeds, and mow the lawn.  If I were a buyer looking for that home and I drove up for the first time, I wouldn’t even bother going inside.  So make sure your lawn is mowed, you have easy accessibility from the street or driveway to the front door, and even plant a few flowers with bold colors to make the front pop. 

3) Clear the clutter.  I’ve mentioned before how I’ve shown homes with dirty dishes in the sink, dirty laundry on the floor, and so much clutter in one room that you can’t even walk through it.  If you’re selling your home, now is the time to cut back.  Put some belongings in storage.  Clean out half your closet.  Make sure to remove family photos from the walls.  And do the simple things: put your dishes away, set the table, take your lotion and contact solution off your vanity and put it in a cabinet or drawer.  The less stuff of yours showing up, the better.

4) Internet marketing.  Make sure your home is being shown in the places where the buyers are looking.  It might be important for you to make sure your open house is showing up in the newspaper and there’s a big photo of your home there, too.  This is not where the buyers are looking anymore.  You want to make sure your Realtor is advertising on the proper sites: Zillow, Craigslist, Realtor.com, etc.  Ask any agent before you hire them what they do in terms of advertising and how many buyers will see it.  Find out how quickly the sign gets placed in the front yard.

These tips will help you sell a lot quicker.  If you have questions about if your home is ready for the market, please visit me online.

Congress considers possible real estate tax burdens

Congress is considering two new tax burdens, both of which will have a significant effect on real estate and real estate owners. 

The first will mainly affect those who are landlords or those who own rental properties.  Anyone owning real estate that collects rental income will be affected.  If you have had any work done by anyone on your rental property, you would be required to fill out the proper 1099 forms for all service providers who performed work on the property.  This can include regular handymen, roofers, electricians, painters, etc.  You must have paid them at least $600 in the last calendar year.  Landlords would be charged a penalty for failing to fill out these forms.  Most people haven’t used these forms before and could require them to have to hire a tax professional for assistance.  This creates a financial burden on many.

The second proposal is to tax carried interest rates at a higher rate than the current capital gains rate.  This is when you go to sell an investment property and are taxed on any money you have gained.  For example, if you bought a property for $100,000 and later sold it for $200,000, you have gained $100,000, which is what you’d be taxed on.  This money is considered a capital gains, and taxed at a lower amount.  Congress is proposing to get rid of the capital gains rate.

The National Association of Realtors strongly opposes these two proposals.  Aside from not wanting to see clients negatively affected by this, the market is still in flux.  We’re still dealing with many foreclosures and home values decreasing across the country.  These proposals will only delay getting the market back to a stable position. 

We’re asking for you to write to your senators and Congress representatives to let them know how strongly you oppose this.  I’ve included a sample letter below, thanks to Creative Real Estate Investing Guide.  Please let them know your thoughts on this issue.  You can find the contact information for your State representatives here. I’d also love to hear any comments.  You can leave a comment or visit me online.

Sample letter:

Dear [decision maker name inserted here],

I am a property owner and your constituent. Reports indicate that Congress may vote this week on a spending and tax measure that could include two harmful tax provisions directly affecting real estate. I urge you to oppose these changes.

The first would require that ALL landlords provide an IRS Form 1099 to all contractors they do business with if they pay that contractor $600 or more in any given year. The proposal would apply even to those who own just one property. This is a trap for the unwary. Since many of my clients are “little guys” looking to supplement their income with real estate investments, any proposal requiring them to file Forms 1099 would impose new expenses and subject them to penalties they are ill-equipped to pay. Often these small landlords don’t use tax professionals; if adopted, this proposal could force them to incur the expense of hiring tax professionals. This proposal is burdensome and overreaching. Oppose it.

I also oppose a proposed change to tax carried interest at ordinary income rates. A real estate investment however, is fundamentally different from a hedge fund or financial instrument investment. An investment in real estate is nothing like playing with other people’s money. Real estate is a fixed asset held for a long period of time. The worst thing about this proposal is that, for the first time, a particular type of real estate investment gain would no longer qualify for capital gains treatment. This is a terrible precedent. Oppose it.

The real estate industry, in all its commercial, multi-family and individual investment categories, is still very fragile and likely to remain so. These proposals are ill-advised, inopportune and potentially destructive. Keep our real estate market recovery on track by opposing these measures.

Sincerely,

[Your name here]