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There is much talk about how cash is king. Cash is king when you can’t pay your bills. Cash is king if you’re starving and need a hot dog. It is king when you have liquidity problems.
Cash rules when you can’t meet your financial commitments.
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This is a guest post from Maria Smith
Mortgage refinancing rates has become historically low. Due to the historic low level of long-term interest rates, more and more people are turning to mortgage refinancing, making it easier to benefit from such investments. Refinancing is not only restrained to home loans. Your investment property loan can also qualify for a refinance.
Your investment property loan may have seemed to be very lucrative at the time you took it but due to changing market conditions, you may be facing difficulties making the payments on it. With the low refinancing rates, it is easier to refinance your mortgage on the investment property. Refinancing also provides ways to leverage the equity in your property reduce your monthly payment and boost your cash flow. Have a look at how a mortgage refinance can help your investment property.
Mortgage refinancing of your real estate investment property can be an easy source of cash and can be a valuable tool for those who invest in the real estate market. Refinancing frees up much needed cash that you can use to purchase other real estate to generate even more monthly cash in order to see your real estate investment portfolio start increasing.
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Yesterday I went to a luncheon sponsored by Liberty Road Foundation a local nonprofit in Washington that partners with businesses in Northwest. Kemper Freeman was the speaker of the day. To be honest, I didn’t have high expectations, as I didn’t know what to expect. I ended up really enjoying it and learned a gold nugget I thought worth sharing.
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Vanilla and chocolate - the perfect recipe for a better investor.
It’s 8am Saturday morning, the day of Berkshire’s 2010 Annual Meeting. As my wife and I walk up to the entrance at Qwest, shareholders pass us eating Dilly Bars. Remind you, it’s 8 o’clock in the morning and 50 degrees out! How many sixty year olds eat that for breakfast? We thought to ourselves, what a peculiar thing.
Dilly Bars are what’s for order. Just ask Bill Gates. My wife and I got a chance to say hi to him as he was finishing up a Dilly Bar right after the annual meeting.
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As you probably know, I have a deep respect for Warren Buffett. Not just because he’s one of the wealthiest men alive or that he gave all his wealth to society, but because he’s such a great example and teacher.
When asked, “Why do you teach people the principals of your investing strategy when it basically educates your competition?” Warren responds, “I was freely taught by Benjamin Graham and believe I should do the same.”
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…in 3 Steps.
The HO-3 and HO-6 policies.
If you said “Huh?” you’re in good company.
Whether you plan to buy homeowners insurance or already have a policy, you likely fall into either of these two buckets. The HO-3 (or Homeowners-3) is commonly known as “basic” homeowners insurance and HO-6 (or Homeowners-6) is commonly known as the “basic” condo insurance for the unit owner.
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You can run, but you can’t hide.
You signed on the dotted line. Now every month it comes to get you.
Your mortgage.
It hits you every month. For some people, paying the mortgage isn’t a second thought. For others, it’s a daily challenge. Whether the economy blazes or struggles, the average American spends a large percentage of their paycheck on their mortgage – often times, more than half of the take home.
Fortunately, in the world where short sales account one out of five homes sold and foreclosures account for one in 136 homes in the U.S., there are programs that can give you relief and lower your mortgage payment. Sometimes these programs can lower your mortgage payment by a half or more.
Probably the most popular method to stabilize your mortgage payment. It costs you nothing, but time, diligence, and patience. No matter what the bank tells you, modifications typically take 60-180 days for approval. Bear in mind, that many loan servicers do not own the note and only have the latitude given to them by investors (or note owners). Before you start, you want to check to see if you have a Fannie Mae or Freddie Mac that qualifies for the Obama Home Affordable Modification program and whether your lender is participating. If your lender is participating, follow the instructions on the government site. If not, contact your loan service and follow the steps below:
Just because you get preliminary qualification, doesn’t mean you’ll get final approval. In order for you to get approved you must pass all the requirements such as: the property must be owner occupied; loan needs to be originated before January 1, 2009; first lien must be less than $729,750; and it must meet the net present value (NPV) test.
The NPV test calculates the net present value of the cash flows from a modification and compares that to the NPV of the cash flows if foreclosure were pursued. If the NPV of a modification is greater than otherwise, then you’ll get the modification. If it is less, you may or may not get a modification at the discretion of the loan servicer. All things equal, the more your house value has dropped, the more you’re likely to qualify.
If you don’t qualify for a modification, you might still be in luck. This is different from the Home Affordable Modification program above, in that it does not give you as much of a “break”. This is low cost (or in some cases, no cost) and does not have income verification or hardship letter requirements. If you have an interest only (IO) loan or a fixed rate principal and interest (P&I) loan over 5.5% you must call and see if you can save money. You can qualify for a better rate or better terms. In many cases going from an IO to P&I will increase your payment, but at least you can lock in a low rate and allow yourself future certainty that your payment will not go up.Remember, rates will only go up from here.
The kicker: These loans can go over 100-110% loan-to-value ratios, which NO banks will originate now. For many, this is the only option to keep your home in the long-run. This process is way more pleasant than a short sale or foreclosure and does not impact your credit.
Essentially, the lender takes title of the home and releases you of your obligation. However, this appears on your credit score and sometimes impacts your score like you had a foreclosure. These are less frequent as sometimes that could let borrowers off the hook too easily.
In my experience, banks use this option sparingly. Essentially, the bank “parks” the principal and does not charge interest on this portion of the loan. For example, you have a jumbo loan of $400k. You negotiate with them and they agree to “park” $150k and only accrue interest on the remaining $250k. You still owe the parked principal in full.
The lender forgives some of the debt and allows you to refinance into something you can afford. Also, known as a mortgage “cram down”. This option, while it can be highly effective, is used less often by banks.
In this scenario the bank defers your interest payment and gives you time to get your stuff together. However, you are still responsible for all the interest deferred. This option only works if you have a temporary hardship. Because remember, to get back to even you have to pay current interest payments and all the back interest. This is a great scenario for the bank since there is absolutely no loss to them.
Important tips when negotiating with the bank:
Tip #1: Log everything. Log all of the interactions you have with the loan servicer, mortgage officer, loan coordinator, escrow agent, title agent, etc. The devil is in the details. It’s not enough to say you called on July 1st, 2010. You need the name of the representative you talked to; what they confirmed with you; what other items they need from you; and their phone number and email (if possible, some reps don’t give this out). That’s the only way to keep accountability. This way, you can always reference previous calls to exacting details and ask for explanations if needed. You should hope for the best in people, but sometimes people who have more experience in an area can weasel their way out of responsibility if you don’t diligently document correspondence.
Tip #2: Play dumb. Sometimes, you don’t want the bank to think that you know all the possibilities. They can get apprehensive and think you’re trying to game the system. Gaming the system is wrong. But, you should be mindful of these psychologies especially when working with smaller or community banks where they have a lot more latitude and judgment calls for workouts.
So give it a shot and see if some of these programs can work for you. Feel free to email success stories. Good luck!
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The US Government subsidizes real estate in the tune of trillions of dollars (that’s right, trillions).
Taxpayers Uncle Sam subsidizes real estate by backing and guaranteeing mortgages through Fannie Mae and Freddie Mac. According to the Wall Street Journal, nine out of ten residential mortgages currently originated in 2010 are backed by the government.
How does this benefit you?
You get lower interest rates. The Government’s purchasing spree has pushed down and kept interest rates low for quite some time.
What’s another subsidy you can take advantage of?
Tax breaks for homeowners.
As a homeowner (or potential one), know and take advantage of three of the largest tax breaks legally available to you.
Like most people, you probably know mortgage interest is a deduction for tax purposes. For simple math, let’s say you make $3000 per month and on average, 20% of your income goes to taxes. If you pay $1500 in mortgage interest per month, that means you can potentially save $300 per month in taxes. Of course you won’t get it back physically every month (unless you adjust your withholding amounts accordingly), but you will realize it at the end of the year when you file your tax return. The calculations may change a bit depending on whether you’re a 1099 contractor or W-2 employee, but you get the idea.
According to the IRS Publication 936 regarding Home Mortgage Interest Deduction, interest on your mortgage might qualify for a tax deduction. However there are requirements and limitations that need to be met in order to qualify for the deduction. See below.
Requirements:
Limitations:
If you’re a homeowner with a mortgage, you likely fit the criteria above. Even in cases where you might not get the full deduction, you still get something back from paying all that interest.
I don’t suggest factoring in projected tax savings as a major part of the budgeting process in deciding whether or not to purchase a home, , but the projected tax refund will still serve as a nice “surprise” come tax time.
You’ve heard it said, “Only two things are certain in life: death and taxes.”
That’s a lie.
The former is true, the latter is not .
When you have gains on your stocks and bonds or interest from a certificate of deposit (CD) all these gains are taxable. A $100k gain in a stock investment is great, but you’re still taxed at long-term capital gains, currently 15% for most people. If you’ve owned the stock for less than a year, you’re taxed at the short-term capital gains rate, which is a much higher rate.
Gains on real estate is another ballgame.
One of the greatest benefits of home ownership is the potential to make money and have it TAX FREE (up to $500k). In order to meet this exemption per IRS Publication 523 you have to meet the ownership and use test.
Many have heard about this before, but for those of you who haven’t, here’s the quick rundown:
Some examples below.
Meeting the ownership test, but not the use test. You buy a home January 2000 and live there for two years. Then you decide to move out and rent your property for the next 4 years. In this case, while you meet the ownership test, you do not meet the use test. The gain (if any) from the sale of the property is therefore NOT exempt.
Different periods of ownership and use. You purchase a property and live in it for 6 months. You move out (for whatever reason) for the next two and a half years. Then you move back to the home and live in it for one and a half years. You pass the test. As long as you meet both use and ownership test within the most recent five years ending on the date of the sale, you pass the test.
As you can see, this serves as a huge boon to homeowners whose properties have appreciated in value. Having a $200k profit that is tax exempt is like having a $300k profit that is taxable (if you’re in the 34% tax bracket). Huge difference!
Robert Kiyosaki, author of Rich Dad Poor Dad mentions this as one of the methods “Rich Dad” uses to acquire wealth. Many wealthy property owners use the 1031 exchange to defer taxable gains while allowing them to “parlay” or roll their gains into bigger assets tax free (for a time, at least). Essentially, the 1030 exchange allows you sell your existing property without any current tax on its appreciated value, provided you purchase a “like-kind” property within a certain time frame.
In order it to be a 1031 Exchange the properties have to be “like-kind”. If you’ve taken accounting, this is review. For most of us that haven’t, see the IRS definition below.
Properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties. However, livestock of different sexes are not like-kind properties. Also, personal property used predominantly in the United States and personal property used predominantly outside the United States are not like-kind properties.
Real properties generally are of like-kind, regardless of whether the properties are improved or unimproved. However, real property in the United States and real property outside the United States are not like-kind properties.
Like-kind applies to assets other than just real estate, but we will limit our discussion only to real estate.
According to IRS:
Generally, if you exchange business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, gain is recognized to the extent of the other property and money received, but a loss is not recognized.
Typically, investment properties qualify for like-kind exchanges. Say you purchase a home, a1100sf rental property. Later you want to upgrade to a bigger rental property, or even to a duplex; the new property will likely qualify as like-kind property. You do not get taxed on the appreciation on the sale of the old property so long as you “receive” and pocket no funds from the sale of that property.
Simple steps for doing a like-kind exchange:
Over time, when you compare the difference between deferring taxes and paying taxes every year, the difference is huge. For example, a $10,000 investment that returns 8% annually and requires you to pay 20% gains tax will total $64,306 after 30 years. However, if you defer those gains, pay a one-time long-term capital gains tax of 15%, your investment will be worth $87,033. Deferring your taxes means your investment yields 35% more.
While the long-term return of real estate is 5.68%, the unique tax advantages make real estate a compelling alternative to stocks and bonds. Through the use of tax deductions, deferrals and exemptions, the IRS can make real estate investment worthwhile to you.
Note: This article is not meant to give tax advice, but for real estate owners (or potential owners) to get a general idea of tax benefits that might be available to them. For more information and tax advice, consult a accountant or visit the IRS website.
Seattle Real Estate | Bellevue Real Estate | Kirkland Real Estate | Issaquah Real Estate | Sammamish Real Estate | Renton Real Estate
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Short sales. Buy pennies on the dollar. Instant equity. A lender’s loss is your gain.
A couple years ago, your pocketbook could only afford you a modest house with three bedrooms, now with the same pocketbook, it appears can afford a mansion with five.
Before you get your hopes up and your heart set on getting your dream house for 50 percent off, remember that short sales typically have a 30% success rate. Sellers change their mind, buyers walk from the deal, or banks disapprove of terms.
So before you put in an offer, arm yourself with information that your agent may (or may not) be telling you.
Before banks approve a short sale they must order a broker’s price opinion (BPO). Real estate agent or appraisers create BPO’s in BULK to determine the price. Since these agents don’t spend all day evaluating the value of the home, these BPO’s are rough estimates of value. They will look at homes that closed recently, but may not adjust for views, great floor plans, corner unit (for condos and townhomes) and other unique characteristics. As you know, of course, elements like these can have HUGE impacts on price.
The fundamental flaw with BPO’s: heterogeneous homes do not lend themselves to quick valuations. No two homes are exactly the same. This means for areas such as Seattle – where a $1 million home and $200k condo are located on the same block – huge margins of error may result. Conversely, newer developed areas like the Issaquah Highlands where most homes consist of new construction (built after 2004), BPO’s are less likely to get mispriced.
After the BPO is ordered and received by the bank, the bank decides how much of a discount they will give off the BPO. After talking to industry experts, I found out that near the end of 2009 banks were approving short sales at 12-15% discount to BPO, but now they’re only discounting 7-10%.
Of course, there are exceptions.
Areas in which the “right” side street or the “wrong” side of the street can create 15% price swings, create nice opportunities for the buyer. In these situations, a mispriced BPO can allow you to get a home for a deal and I’ve even seen people buy for 80 cents or better on the dollar. However, you’ll have to search for these jewels, be less discriminating with location, and fight for the property as other buyers see opportunity as well.
That is the exception. For the most part however, banks will not rollover and approve a short sale pennies on the dollar.
It does NOT matter.
First lien holders are foreclosing left and right which means junior liens are getting wiped out. For example, you purchase a home and use US Bank for your first mortgage. Later you find you need some extra cash and get a second mortgage known as a home equity line of credit (HELOC) from Bank of America. US Bank is the first lien holder (senior lien) and Bank of America is the second lien holder (junior lien).
In the event of default on the first lien, US Bank has the right to foreclose. If US Bank forecloses for less than what it is owed, US Bank will take a loss and Bank of America (BofA) will not get a dime from the foreclosure.
Now, in many cases Bank of America will likely obtain the right to go after you for what’s known as the deficiency, however, the key is BofA’s lien gets wiped out.
As a result, junior liens will likely cooperate and get SOME money for their lien rather than risk getting NO money.
In most cases, the second lien holder gets only 10% of the note amount (or amount owed). Perhaps earlier in the “bust” cycle of homes, second lien holders believed that they would recoup the majority of their lien position. Now, junior liens understand that if they’re difficult to work with and don’t approve a short sale along with the first lien holder, the first will just foreclose and wipe out the second.
Let’s take a look at an example. US Bank has a first lien of $200k and Bank of America has a second lien of $100k. The short sale price is $190k, and US Bank approves to pay Bank of America $10k (10% of the loan amount) from the proceeds of the sale. If BofA accepts the offer, then the deal can move to close. If BofA gets stubborn and refuses to accept 10% for its lien position, US Bank can exercise their right to foreclosure which will mean BofA will get nothing from the collateral.
Something is better than nothing. Junior liens smell the coffee (as bitter as it may be).
Yes, Bank of America is huge and has tons of problems (like other major banks). There is much talk about how IMPOSSIBLE it is to get a short sale approved by the bank. Like any short sale, it takes work. If you put in the work, you will find that Bank of America can and does approve short sales.
If you plan to buy a short sale and you’re working with Bank of America, no worries. They approve.
Since FHA is the only place you can get a loan with 3.5% down, it’s important to understand the hoops you’ll have to jump through to get an FHA loan.
Often times buyers get excited when they see “FHA approved!” only to get disappointed when they CANNOT get an FHA loan. The word “approved” can be misleading. Properties are technically “eligible” and only approved when it meets all FHA requirements.
In order for FHA to approve the property, the property condition must meet guidelines. FHA approval guidelines catch many buyers by surprise. In straight sales (a non-distressed sale), sellers usually maintain and take care of the property. When you purchase a distressed property however, often times the abandoned property has been neglected by the seller for months. A small leak becomes rot and mold (you get the idea).
Required repairs are limited to those repairs necessary to preserve the continued marketability of the property and to protect the health and safety of the occupants, aka the three S’s:
- Safety: protect the health and safety of the occupants
- Security: protect the security of the property (security for the FHA insured mortgage.)
- Soundness: correct physical deficiencies or conditions affecting structural integrity
Items that may produce “health risks”.
- Inadequate access/egress from bedrooms to exterior of home
- Leaking or worn out roofs (if 3 or more layers of shingles on leaking or worn out roof, all existing shingles must be removed before re-roofing)
- Evidence of structural problems (such as foundation damage caused by excessive settlement)
- Defective paint surfaces in homes constructed pre-1978
- Defective exterior paint surfaces in home constructed post-1978 where the finish is otherwise unprotected.
As you can see, the property needs to meet many requirements in order to obtain financing. Financing is the number one deal killer. Make sure you (or your agent) understand FHA guidelines if you plan to buy short sales. This will save you tremendous time.
Many buyers don’t realize this, but BUYERS usually pay for SELLER’S repairs before closing. The seller gets absolutely no money from the short sale and has no incentive to put money into the house to repair broken windows or replace missing roof shingles.
In accordance with all short sale agreements, there’s a provision that explicitly says the seller cannot receive ANY funds from the sale. The theory, since the bank is taking a haircut, the seller shouldn’t receive a penny.
While this makes total sense, this gives sellers no incentive to put money (or much effort) to close the deal. “Why throw good money after bad money?”
As a result, buyers should budget $300-1500 for minor repairs needed to get clearance from FHA inspectors.
Next time you plan to go look at short sales, be prepared. Know what it takes and decide for yourself if you want to travel this route. It definitely requires more work, but it could be well worth it.
Good luck.
Seattle Real Estate | Bellevue Real Estate | Kirkland Real Estate | Issaquah Real Estate | Sammamish Real Estate | Renton Real Estate
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Your home is your biggest asset. Many things can destroy your asset – termites, a fallen tree, three wild rambunctious five-year-olds, you name it.
What would Dwight do (WWDD)?
If you are an Office fan, I’m sure you just saw the most recent episode of Jim and Pam having a baby! On the way to the hospital, Pam asks Dwight Schrute to pick up an iPod from her home, but made it very clear to only touch the iPod. While searching for the iPod, Dwight finds mold in their kitchen and feels he must eradicate the deathly mold from the premises. He takes a sledge hammer (while no one is home, of course) to the counter tops heroically, and tears apart the kitchen with the altruistic mission of getting rid of the black fungus.
According to wiseGEEK, “Mold is a type of fungus that grows on plants and fibers and is most often associated with damp, musty locations such as bathrooms, basements and attics. Mold travels through the air as tiny spores which like to make their home in wet areas, where they will breed. If mold is spotted, it’s best to nip it in the bud immediately lest it spread to other areas. It’s also a good indication of a moisture problem, which should be dealt with as soon as possible.”
While mold is very common in homes, it can cause serious health risks. Mold can cause allergic reactions, asthma, skin rashes and other respiratory problems. In extreme cases certain types of mold like Stachybotrys (“toxic black mold”) can cause headaches, nausea, vomiting and bleeding in the lungs and nose.
In vast majority of cases, mold starts with water damage. However, sometimes constricted airflow in homes can cause mold as well. This is more common of newer homes that are “air tight” which can prevent the home from breathing. However, water intrusion is the most common issues that lead to mold.
Many things can cause water damage. A poorly insulated wall; incorrectly installed siding; missing shingles in a roof; busted water pipe; or a dishwasher gone mad.
For the most part water damage can fall into two categories: “sudden and accidental” or gradual. The sudden and accidental is when you drill into a wall and mistakenly hit a pipe in the wall. And gradual is when your window seals break and water accumulates on your window sill slowly.
Whether it’s sudden or gradual can make all the difference when making an insurance claim.
Water damage is one of the most common home insurance claims. Most people don’t realize what their insurance covers until they’re caught in a pickle. Learn what your insurance covers BEFORE accidents happen. That will teach you what to be prepared for. Allstate has a cool site that lets you determine the most common claim types in your zip code. After entering a hand full of zip codes in Washington it shows that water damage comes up consistently as the top three claims (the average claim is over $6000!).
Depending on what type of policy you have, water damage that is “sudden and accidental” is typically covered under the most common homeowners insurance known as Homeowners-3 (HO-3).
However, if the sudden accident is caused by your negligence, you might not be covered. For example, you have a vacant vacation home out in Suncadia and you fail to keep the home heated when it’s 5 below zero. Not covered.
Experts say homes that are not dried out within 48 to 72 hours of the water damage will likely have mold growth. I’ve helped manage over 30 rental properties and whenever I hear about flood, you get people out there IMMEDIATELY. If it happens on a Friday, you don’t wait till Monday. You get people out there Friday.
Whether it’s a flood, busted pipe, or a leaky roof, you get an experts to remedy the situation immediately.
If you’ve bought a home and hired an inspector before you know they cost $$$. It can range from $250-400 for a general inspection. Getting an inspector to come by semi-annually is impractical. The good news is you don’t need to have a professional come by every six months. You can do it yourself.
All it takes is a bit of effort and attention. Go through the following list at home:
Make sure you and everyone else in your home knows where the shutoff valves are for your main water line and fire sprinkler system (if you have one). You can’t wait for a contractor or fireman to arrive to shut off the water. When you have a busted pipe or waterline the difference between shutting off the water in 2 minutes versus 20 minutes makes ALL the difference.
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