The following are several important introductions and guides for you to consult depending on your concerns.
Everyone wants to make sure the car they buy is not a lemon, and that is doubly true when it comes to buying a house. If you are buying a pre-owned home, you can only hope that all of the previous owners before you took care of the house, using the proper methods.
To set your mind at ease, and to make sure you are not getting a bad deal, home inspection, seller disclosure requirements and the experience of your professional real estate agent, Michael Keller, will all help to safeguard you. Disclosure laws vary by state, but in some states the law requires the seller to complete a real estate transfer disclosure statement. The following are some items you can expect to see on a disclosure form.
• Range oven, microwave, dishwasher, garbage disposal, and trash compactor.
• Safety features, burglar and fire alarms, smoke detectors, sprinklers, security gate, window screens and intercom.
• TV antenna, satellite dish, carport or garage, automatic garage door opener, rain gutters, sump pump.
• Amenities such as pool or spa, patio or deck, built-in barbecue and fireplaces.
• Type of heating, condition of electrical wiring, gas supply, and presence of any external power source, such as solar panels.
• The type of water heater, water supply, sewer system or septic tank..
Sellers are also required to indicate any significant defects or malfunctions existing in the home’s major systems. The checklist specifies interior and exterior walls, ceilings, roof, insulation, windows, fences, driveways, sidewalks, floors, doors, foundation and electrical and plumbing systems.
The disclosure form also requires sellers to note the presence of environmental hazards, walls or fences shared with adjoining landowners, any encroachments or easements, room additions or repairs made without the necessary permits or not in compliance with building codes, zoning violations, citations against the property and any lawsuits against the seller affecting the property. If you are looking to buy a condominium you should be informed about code and deed restrictions.
Make sure to look for or ask about settling, sliding or soil problems, flooding or drainage problems and any major damage resulting from earthquakes, floods, or landslides.
The amount a seller is required to disclose about defects has broadened significantly over the years. It helps to protect the buyer from buying a cosmetically good-looking house that is a potential money pit. But even with all the forms and laws in place, make sure to ask a lot of questions. Especially if you are unclear about something, or if your concern was not addressed on the forms provided to you.
1. Clean house! The first rule of moving is to get rid of unnecessary clutter before you go. That way, you won't have to find a place for those rarely-used items when you get to your new home. Host a garage sale or donate goods to a local charity.
2. Get organized. Two months before your move, keep track of all your mail and make a list of people, subscriptions, and organizations that should be notified. Contact the postal service to change your address. Don't forget about your bank, your insurance agent, your doctor and your vet.
3. Cancel and re-order. Make another list that included utilities such as telephone, gas, electric, water, cable and Internet access. Remember to contact your pest control, lawn care, window cleaning and other services to let them know about your move. Proper planning insures that you won't be paying for services you're not using!
4. Be "mover friendly". If you're using a professional moving company, make yourself available to answer questions on both ends of the move - loading and unloading. Review the home inventory paperwork and make sure the driver has your contact information and details of your delivery.
5. Be safe. Whether you're hiring professionals or doing it yourself, remove all rugs, low handing items and tripping hazards. Keep walkways clear at all times. Arrange for someone to take care of your children and pets while everything it being packed and unloaded onto the moving truck.
6. Know what you're packing. Label boxes in detail, including contents and the room in which they belong. This will save time and questions for your movers. Pack essentials like a change of clothes, snacks, and the coffee maker and take them with you.
7. Know what NOT to pack. Charcoal lighter fluid, pesticides and paint thinner are a few of the items that professional moving companies won't touch. Make arrangements to transport these items or leave them with a neighbor. Valuables such as cash, jewelery and important documents should stay with you or be shipped via trackable shipping service.
8. Check and double check. Before the moving van leaves, make sure everything is loaded or unleaded, for both ends of your move. Check the attic, basement, closets, and garage for things you may have forgotten. If something is damaged during the move, notify your moving company immediately and take photographs of the damaged item.
9. Keep smiling! Moving can be manageable, with the right attitude and thoughtful preparation. It will all be over soon - and you'll have days, weeks, or even months (!) to unpack at your leisure. Throw yourself a "welcome home to your new home" party and meet your new neighbors.
Relocating With Children
Handle with care! Moving to a new home is a big change for everyone, even little people! Your children's lives will be affected by a move, and it’s a good idea to keep them informed and even consult them about choices when possible.
Some things to consider:
Teenagers are most concerned with fitting in. They worry about making new friends and adapting to a new school. Will they have the right clothes? What about hairstyles, cars, bicycles, etc? Be sure to talk with them about their concerns, and if you take an orientation trip be sure to take photos of the neighborhood and their new school. Reassure them that they can still keep in touch with their old friends as well.
Ages 6 to 12
These children will want to know how the everyday routines of their lives are going to change. If your children take dance lessons, karate, etc., or even if their favorites thing to do is go to the pizzeria and play video games, you can find these places in your new neighborhood and bring back pictures or brochures. Signing them up for sports teams is a great way to ease the transition into a new area.
Children under 6 years of age may worry abut being left behind or being separated from their parents. Be sure to reassure your children that you will be back if you must go on an orientation trip without them. Bring a souvenir back to them when you return and maybe a picture or postcard to show where they will be living with you. It is very important for them to express how they feel about the move. To help them feel more secure, you might have them pack up their favorite toys and label their boxes with crayons and stickers.
Is there a formal method of making these measurements? Obviously, we do not want to pay for more than we are actually getting.
Answer: There is an old expression that when there are two lawyers, there will be three opinions. In real estate, when you are trying to analyze square footage, you may actually get four or five opinions.
Measuring square footage has become a hotly debated topic to which there is no real answer. Although there are industry standards when measuring single family houses and office and apartment buildings (which are often ignored anyway) to the best of my knowledge, there are no such industry standards for measuring condominium and cooperative apartments.
The American National Standards Institute (ANSI) has published a document entitled, "Square Footage - Method for Calculating" (ANSI Z765-2003). However, it only applies to single family houses. For attached properties (such as townhomes - which we used to call "row houses), ANSI states that "the finished square footage of each level is the sum of the finished areas on that level measured at floor level to the exterior finished surfaces of the outside wall or from the center lines between houses, where appropriate. Note the words "exterior" or "center lines".
In a condominium unit, however, developer attorneys who prepare the legal documents tell me that they try to get the engineer who is preparing the measurements to follow the unit boundaries as are spelled out in those documents. In a condominium, there are two important legal records: the Declaration and the Bylaws. The former creates the condominium and contains the basic concepts, including a definition of units, common elements and limited common elements.
Here is an example of a definition of a unit from a local District of Columbia Declaration:
Each Condominium Unit includes the horizontal space between the Unit side of the exterior wall so of the building and the finished walls separating the Unit from corridors, stairs, and, where applicable, to the surface of the finished walls of those interior walls which separate one Unit from another Unit. Each Condominium Unit also includes the vertical space measured from the (topside) surface of the subflooring to the finished (exposed) surface of the ceiling of such Unit.
Note that this refers only to the inside of the unit. This is how condominium square footage should be measured.
If you’ve shopped for a mortgage lately, you probably feel like you’re learning a new language. PMI, ARMs, balloon payments, amortization schedules, closing costs – what does it all mean?
Here are some basic mortgage terns you should know:
• PMI is Private Mortgage Insurance, an extra cost that a lender tags on if you’re putting less than 20% down.
• ARMs are Adjustable Rate Mortgages, which features interest rates that change from year to year.
• If you take out a Balloon Loan, you’ll get a great low interest rate for a short time, then you’ll have to pay the loan off or refinance it.
• Amortization schedules spell out how much of each payment goes to interest and how much to principal.
• Closing costs include various fees and charges associated with buying a new home. You’ll want to know exactly what’s included in the closing costs when you compare different mortgage plans.
With house prices falling in some cities, but not Spokane, Washington, there is still a need for many buyers to remember that lenders are making home loans more difficult to obtain. Yes, home prices are steady in Spokane, but the number of homes listed are up about 25% from a year ago. This gives the buyer more choices, but it is still imperative that the buyer be prepared for the fact that mortgage companies have tightened up their standards for obtaining a mortgage. Even borrowers with excellent credit, employment longer than 2 years and cash for a down payment are going to undergo more scrutiny when applying for a mortgage. What are your strategies going to be?
Raise your credit score: Any black marks caused by unpaid bills or late payments are going to remain on your credit history for seven years... yes, even if you pay them off. Paying down loans and reducing your credit line can improve your score.
Previously, mortgages could be obtained with "stated income", in which lenders didn't require documents as to what you make. If you're employed, be prepared to produce your W-2 for the previous year, and if you are self-employed, your tax returns for the past three years are going to be required. If you recently got money via a divorce settlement, you may be asked to show the actual decree.
Make your down payment larger. The more money you put down, the better our chance of qualifying for a loan. Despite good credit, if you don't have at least 5% of the purchase price for a down payment, the chances of your getting a loan is greatly reduced.
Before you begin your negotiations with a lender, be sure you check your credit score. you can get free credit and FICO sent from AnnualCreditReport.com. Realize that credit scores can be wrong so check over the report carefully. This will allow you to see the legitimate factors that are hurting your score and do something about them, such as paying off an overdue bill or paying down credit card debt. The FICO score is used in over 75% of mortgage-lending decisions.Think about reducing your loan amount. Keeping conforming loans under $417,000 are easier for lenders to sell in the secondary market and therefore easier to approve.
When you apply for a loan you need to realize that fees and rates are negotiable. Check with at least two lenders so you can compare their good faith estimates. It is very important that you ask questions and that you fit your loan within your budget. You also need to know if the loan is a fixed or adjustable interest rate and whether it has a balloon payment.
Get pre-approved for a loan before you begin looking at homes. Do not confuse "pre-qualified" with "pre-approved". Pre-qualified is a casual process, where a lender tells you how much money you probably can borrow based on how much money you make, how much debt you already have and how much cash you have for the down payment. Being pre-approved is a much more difficult process and involves actually applying for a loan. You typically submit tax returns, pay stubs and other information. The lender verifies the information and checks your credit. If everything is okay, then the lender agrees in writing to make a loan for your new real estate purchase.
Previously, mortgage money was too easy to get. People tend to overbuy and that is a formula for foreclosure.
Shopping for homeowner’s insurance? Don’t shop just on price alone! Here are four important points to keep in mind as you choose an insurance policy:
• Compare apples to apples: Make sure the quotes you get are using comparable coverage and deductibles.
• Be picky about the insurer: A great, low premium won’t do you much good if the company is out of business by the time you file a claim. Check the company’s business rating from Moody’s, Standards & Poor's and the Better Business Bureau.
• Understand the difference between “actual cash value” and “replacement cost": coverage: A policy designed to reimburse you for the cash vale of an item covers only the depreciated value – what it’s worth now, factoring in age and condition. “Replacement cost": coverage, by comparison, costs a little more but will pay for the actual amount needed to replace the damaged property at today’s prices.
• Get all the coverage you need but no more. Under insuring your property can backfire. Many policies have a “coinsurance penalty” that proportionately reduces your payment for a claim if you didn’t carry sufficient coverage. On the other hand, it may not make sense to buy earthquake insurance if you live in a non-seismic area, or flood insurance if you live on a mountaintop with no foreseeable threat of flooding.
Want to keep your insurance premiums down?
Consider these options:
• Choose a higher deductable. By bearing a bit more risk to yourself, you may be able to reduce your premiums substantially.
• Ask about “package” deals. You may get a better rate if you insure not only your home but also your cars, boat, or other property with the same company.
• Inquire about discounts. Do you belong to a union, travel assistance program, senior citizens’ group or other organization? Are you a non-smoker? Does your home have deadbolts or some other security system installed? Any or all of these factors may help you qualify for a premium discount.
EXTRA TIP: If you have a large amount of equity in your home or own other valuable assets (and especially if you own rental property), consider carrying substantial limits of personal liability coverage or ask your insurance agent about umbrella insurance which can limit your liability. Ask your insurance advisor for additional information and help in choosing policy limits.
Home Warranties: Five Facts to Consider
When you buy a home, there are lots of things to worry about. Is the furnace in good condition? Is the hot water heater on the verge of a breakdown? Is the electrical system up to par? While a professional home inspection can help set your mind at ease, a Home Warranty goes a step further and guarantees your peace of mind – or does it?
Here are five facts to consider about Home Warranties:
• They are fairly inexpensive. For a few hundred dollars, you can get a year of protection.
• They usually involve a deductible or a service fee. You’ll want to know what this amounts to ahead of time. Of course, keep in mind that you’d pay a service fee plus the repair costs if you didn’t have a warranty on your home.
• They vary quite a bit in their coverage. Some plans only cover your heating, plumbing, and electrical systems. Some cover everything from your furnace to your doorbell. If the home seems to be in pretty good shape overall, you might want to go with a basic plan. If you want to know you’re completely covered, look for a plan that includes everything from top to bottom.
• They require you to use certain service providers. Ask who this would be in your area and check out their credentials by contacting the Better Business Bureau or by asking for references. After all, you want your repairs to be done by qualified people.
• They typically allow you to request service 24 hours a day, 7 days a week. This is an important consideration since major appliances don’t necessarily choose convenient times to break down.
• Your Home Warranty contract should spell out all of the above considerations in great detail. If you’re unsure about anything, ask!
A Home Warranty is often a great idea, since our homeowner’s insurance won’t cover repair costs for appliances. Particularly for an older home, a complete, head-to-toe warranty gives you a worry-free first year, and you may be able to extend the warranty for additional years after that.
Ask Michael Keller for advice on a Home Warranty. He can probably recommend a plan to fit your needs. Then you can sit back, relax and enjoy your new home!
Should You Buy a Fixer-Upper?
For many buyers “handyman’s special” or “needs TLC” in a home listing are synonymous with the term “money pit.” But for savvy homebuyers who can see beyond a home’s present condition, a fixer-upper could potentially yield some profits down the road.
If you’ve found a home that needs some renovation, ask yourself these questions before placing a bid:
Is the home worth salvaging?
Most buyers don’t hire an inspector until the seller has accepted their offer. But you may want to walk through the house with an architect or contractor friend. Make sure to browse the neighborhood as well. If other homes are well kept, or if the neighborhood is experiencing revitalization, your chances for long-term profit are better.
What is the home’s current and potential value?
First, gather contractor estimates for all anticipated improvements – new furnace, carpeting, a third bathroom and tile, for instance. Add those to the home’s list price. Then compare that figure to other homes of the same size and age in the neighborhood. If your prospective home is listed at, say, $125,000, but comparable homes are selling or $175,000, and you don’t think you’ll spend more than $40,000, you may have found a bargain.
Remember, however, that you can’t recoup your costs on all home improvements. Look for ways to increase the home’s living spaces so you can get the most bang for your buck. And, consider living in the house for a while so it can naturally appreciate.
How much work really needs to be done?
Cosmetics improvements like new wallpaper and kitchen cabinets, or structural repairs like a new roof are much different than gutting the entire first floor. Know what you’re getting into and how much mess you can tolerate. If a little drywall dust doesn’t bother you, but living in your basement for six months would, look for a dwelling that needs less extensive work.
How will I finance the renovations?
If you’re mortgage is less than what your home is worth, a home equity loan could pay for improvements. Low-interest government loans might cover renovation costs as well. Estimate your monthly costs for the mortgage and other loans, and make sure you can swing payments for both.
How much work can I do myself?
If you’re a Bob Villa type, you may thrill at the idea of nailing shingles on a rooftop or re-plumbing the bathroom. On the other hand, if you hire a handyman whenever your living room needs repainting, factor in labor costs for even simpler improvements.
As with all investments, those that have the greatest potential for payoff are also the riskiest. But that’s what appeals to some buyers. A smaller outlay now could yield big rewards later if you’re willing to take that chance.
Home Inspections: A Good Idea
You’ve found the home of your dreams. It’s sparkling clean, it’s tastefully decorated and it’s in a great neighborhood. You may be tempted to waive your right to a home inspection, but before you do, read a little further.
Home inspections are generally a good idea even if an aroma makes a terrific first impression. According to the 2000 House Master Resale Home Deficiencies Study, two in five resale houses have at least one major defect that could cost you anywhere from a few hundred dollars to as much as $15,000 to repair.
A Home inspection is simple, inexpensive, and could save you lots of time, trouble and money. For $350, you can hire a professional home inspector to scrutinize your home from top to bottom. Typically, an inspection includes the heating and cooling systems, major appliances, windows, roof, foundation, ceilings, floors and electrical plumbing systems.
A thorough inspection will leave you with a detailed list of items which might need replacing, as well as suggestions on improvements or repairs which might prevent future problems. It allows you to negotiate a better price if deficiencies are found, and give you the inside scoop on a better home before you commit to the purchase. The bottom line is, it’s just a good idea!
Good intentions, such as deeding your house to your children, can end up costing them in higher taxes.
Owning a home tops the dream list for most Americans, and for plenty of good reasons: it's a shelter for your family, a gathering place for your friends and a good long-term investment.
Tax breaks are also frequently cited as motivation for moving from renting to owning, and there are many ways a home can cut your tax bill.
But, as is often the case with the U.S. tax code, home ownership tax benefits are not always clear cut. That frequently leads to some bad information floating around.
While myths, half-truths and misconceptions may abound, we've narrowed it down to five which, if you buy into them, could cost you.
1. My mortgage interest will reduce my tax bill.
This is true for the majority of homeowners, but not for all. And this tax break won't work forever.
To take tax advantage of your home loan's interest, you must itemize and come up with a total that exceeds your standard deduction. On 2016 tax returns, the standard deductions will be $6,300 for single taxpayers, $9,300 for head-of-household filers and $12,600 for married couples who file jointly. These amounts increase a bit each year to account for inflation.
"Given home prices these days, most owners are itemizing," says Mark Luscombe, principal tax analyst with CCH of Riverwoods, Ill. By the time they count mortgage interest, property taxes and other non-home deductions such as state taxes and charitable gifts, their itemized totals easily surpass their allowable standard deductions.
But most is not all.
Taxpayers who buy a home late in the year, for instance, might find the standard deduction is more beneficial, at least initially, says Kathy Tollaksen, a CPA at Sikich LLP in Aurora, Ill. In these cases, where you make only a few payments in a tax year, you might not pay much interest, at least not enough to exceed standard amounts.
Timing also could reduce or eliminate other home-related tax breaks.
"Quite a few states have real estate taxes that are calculated in arrears. That is, they have already been paid or mostly paid (by the seller) by the time you buy," says Tollaksen. "In the first year, you're seeing taxes that are someone else's responsibility so you're not getting the full tax value of your real estate taxes."
The benefit of mortgage interest also could be a myth if you've lived in your home for a long time. In this case, you likely are paying more toward your loan's principal instead of interest. So homeowners at the end of a loan term don't get much, if any, from this tax break.
Or, as Bob D. Scharin, senior tax analyst and editor of Warren, Gorham & Lamont/RIA's monthly tax journal "Practical Tax Strategies," puts it, "Every deductible expense you incur may not produce a deduction."
2. All costs related to my home are deductible.
There are no two ways about this one. It's flat-out false.
"Some buyers think, hope, they can write off everything connected with the house," says Tollaksen. "Not so. Association fees and property insurance costs are not deductible."
Don't try to deduct basic maintenance, repair or home improvement costs though.
Tollaksen says, "I've had people say, 'I put a new roof on my home; can I deduct that?' No."
If you try to write off these expenses, expect to hear from the Internal Revenue Service and to pay a higher tax bill (and possible penalties and interest) after you refigure your taxes without the disallowed deductions.
However, you still need to keep track of these expenses.
"If you convert the home to rental property or sell it," she says, "these costs will affect the property's tax basis."
A home's basis is critical when it comes time to sell. And, selling is also a tax area in which many people fall for myth No. 3.
3. I must use money from my home sale to buy another residence.
This used to be the only way to get around a tax bill on a home sale. Even then, you were only able to defer taxes by purchasing a new residence of equal or greater value with the profits from your other house. When you sold your final house, you'd owe those long-deferred taxes you had rolled over throughout the years. Home sellers age 55 or older were allowed a once-in-a-lifetime tax exemption of up to $125,000 in sale profit.
But on May 7, 1997, home-sale tax law changed. Still, almost a decade later, many homeowners are confused about the tax implications of selling.
"I recently heard some neighbors talking about having to buy another house when they sell to avoid the taxes," says Scharin. "If the last time you sold the house was before 1997, you're thinking of those old rules."
Don't worry. Most taxpayers still get a nice break. Now, if you live in the house for two of the five years before you sell, the IRS won't collect tax on sale profit of up to $250,000 if you're single or $500,000 if you and your spouse file a joint return.
"The law change has really affected people's behavior," says Luscombe. "Before, it didn't really matter much whether you sold frequently or held onto your home for a long term. You, basically, could roll over the gain into a larger home and people could avoid tax until they sold for the final time without putting it into a replacement home.
"Now the law rewards people who sell frequently. In this current market, people who sell every couple of years can get and keep their gain," Luscombe says. "But people who buy and hold might find they have reached the point where the gain exceeds the exclusion."
That means they face unexpectedly high tax bills, even at the lower 15 percent capital gains rate. The profit could also push them into a higher overall tax bracket, meaning they would make too much to claim some deductions, credits or exemptions. They also might even end up owing alternative minimum tax.
Another problematic consequence, says Luscombe, is that when the new rules took effect, people basically quit keeping records related to their homes.
"They thought: Since we're never going to be taxed on the sale, there's no need to keep track of what we paid and what improvements we made," he says. The improvements add to your home's basis, which you subtract from the sale price to determine your profit and whether any of it is taxable.
"Now with inflation in the housing market, a lot of people are selling homes in excess of the gains without any way to show that their tax bill should be less," says Luscombe.
4. Putting my child on my home's title is a smart tax move.
Worries about taxes on a residence can lead homeowners to fall for this myth. It's a particularly tricky one because it combines confusion about residential taxes with the even more complex estate-tax area.
"Sometimes we'll hear about taxpayers who, in doing some quick back-of-the-envelope estate planning, decide to put their home in the children's names," says Tollaksen. "The thinking is: My son or daughter won't have to worry about this when I die."
The goals: avoid probate, keep the home in the family and get the property out of the parent's estate for those tax purposes. Such a move, however, could produce other tax problems for your children.
Unless the child moves into the newly deeded house with the parent and lives there long enough (two of the previous five years) to make the house the child's main residence, too, the son or daughter won't get the $250,000 or $500,000 residential tax break when the child later decides to sell, says Tollaksen. Without establishing primary residency in the house, either before or after the parent passes away, the child's ownership is viewed as an investment property.
Other parents opt to simply add a child's name along with theirs on the title to the house, known legally as a joint tenancy. It doesn't mean that all the owners live in the home, but simply that two or more people hold title to the property.
This, too, can produce tax complications.
Generally, when someone inherits a property, its value is stepped up. That means when the owner dies, the property becomes worth its fair market value that day.
But if the child co-owns the property with his parent, the child doesn't get to fully use stepped-up basis. Tax law considers the addition of the child's name to the title as a gift. And, along with that half of the home, the child receives half the basis that his or her parent has in the property.
This is known as the property's carry-over basis. And it could be costly.
Consider, for example, that you bought your house many years ago and your basis in the property is $50,000. You add your daughter to the title. When you die, she inherits your half of the home, which by then is worth $250,000. A buyer offers $300,000 for the home.
Pretty good deal right? From a real estate perspective yes, but not when it comes to your daughter's tax bill on the sale.
Rather than owing taxes on just $50,000 more than the house's stepped-up market value, your daughter will owe on three times that amount. Here's the math:
Parent owns home with a basis of:
Parent adds child to title, "giving" child carry-over basis of:
At parent's death, house is worth $250,000, producing on the inherited half a stepped-up basis of:
Home subsequently sells for:
Child's total adjusted basis (line 2 plus line 3) is:
Taxes due on sale profit (line 4 sale price less line 5 basis) of:
What had been done with the best parental intention turned out to carry a big price because of this home ownership tax myth.
5. If I take a capital loss when I sell my home, I can write it off.
This myth, like No. 2, was probably started by wishful homeowners. Sorry, it's just as wrong.
It is true that real estate, like any other asset, has the potential to go down as well as up in value. But unlike most of those other holdings, you cannot write off any loss you suffer if you must sell your main residence for less than what you paid.
That's because your residence, under tax law, is considered personal property.
"When you sell your home for a loss, it's not like other capital items," says Scharin. "You don't get to deduct personal property that you sell for a loss."
"It's the same as any personal property that declines in value," says Luscombe, "like that old TV you sold to the neighbor kid so he could take it to college. You sold it for much less than you paid, but you can't take a loss."
You do, however, have to pay tax on gains you make when selling personal property.
But at least you now know the difference between fact and fiction when it comes to your residential property, which will help you make appropriate real estate and tax decisions in the future.