Buying vs. Renting

by Dan Krell
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Is buying a home right for you?

A home owner recently told me that he had no idea that he would be able to sell his home for more than double his purchase price. When he purchased his home eighteen years ago, he recalls having kept to a strict budget so he could afford his mortgage payments and other related housing costs. Now, he will have a sizeable profit from the sale to purchase his dream home. This home owner’s story is like many other home owners’ stories of wealth building through home ownership.

Unfortunately, due to recent market fluctuations, some home buyers have questioned the value of home ownership. Decreased consumer confidence along with almost daily stories of foreclosure might make you wonder if any homes are selling.

Additionally, some renters feel that home prices continue to be too expensive for them to make the jump into home ownership. Economic commentator, Barry Ritholtz (bigpicture.typepad.com), believes that too; although the rent to buy cost ratio for the Washington area has dropped significantly from an all time high of 21.4 to around 16.6 (according to Moody’s economy.com), he feels that home prices are still too high nationwide as compared to the rent to buy cost ratios of the 1980’s and 1990’s (when the average ratio ranged from 10-14). However, even with a decreased consumer confidence, many understand the benefits to home ownership.

Many analysts and commentators agree that owning a home is typically better than renting. For example, Suze Orman has stated in a Yahoo Finance exclusive (biz.yahoo.com/pfg/e10buyrent) that “there’s no better investment.” Although Ms. Orman does strongly suggest having your financial matters in order as well as making certain that you can afford all the housing related costs before you make a move, she does state that “home ownership is a great achievement and a terrific investment.”

Although the benefits of home ownership are touted by many in the industry, owning a home is not for everyone. Renting does offer limited maintenance and the flexibility if you need to move, but home ownership offers tax incentives (tax breaks and deductions) as well as a chance to build equity.

Before you buy your first home, you might consider how long you intend to live in it before selling. For example, the National Association of Realtors reports that the typical home owner intends to stay in their home for ten years (although the actual time of ownership varies). Financial and affordability factors to consider before buying a home include interest rates and market conditions. However, some considerations are not financial but emotional; for example, some renters are concerned about their security deposit as well as dealing with an obnoxious landlord or management company.

Freddie Mac (FreddieMac.com) offers the following benefits to homeownership: Owning a home can facilitate your participation within a community, the home can be passed through many generations as a source of security, the tax benefits typically offset the amount you might otherwise pay for rent, your monthly payment won’t increase if you have a fixed rate mortgage, and building equity through home ownership “is the single greatest source of financial security and independence for the majority of people who’ve taken this step.”

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of June 16, 2008. Copyright © 2008 Dan Krell.

Real Estate Tax traps You Need to Know About

by Dan Krell

It is unfortunate that many home buyers and home sellers neglect to consult with experts and sometimes enter into situations that may not be in their best interest. There are several common situations that are associated to real estate transactions that seem beneficial, but may actually incur a tax liability to those involved. The situations are the “short sale,” rebate programs, and the use of a down payment assistance programs.

The short sale has gained popularity recently as a sluggish market has forced some desperate home sellers to reduce the price of their home below what is actually owed. A short sale is when the lender agrees to accept an amount that is less than the payoff amount in order to sell a home. The concept is simple although the process is sometimes problematic. Although there is no net profit from a short sale, the financially challenged home seller can find some relief when they engage in such a process.

Although the short sale can help you out of a mortgage crisis, the IRS looks at the difference between the actual mortgage payoff and the negotiated payoff as a financial gain to you. You will most likely be issued a 1099 at the end of the year by your lender.

Another popular practice that seems beneficial but may have some liability is the rebate program. Rebates are offered to Home buyers and home sellers as a business incentive from organizations, brokers, and Realtors to use their services. Some organizations and credit unions offer buyer rebates as a value added service to its members if an affiliated broker or Realtor is used. For example, Costco offers rebates to its members of up to 0.75% of the price of the home when affiliated service providers are used. USAA offers its members up to $3,100 when the MoversAdvantage® program is used. If you participate in such a program, you may receive a 1099 as you may have incurred a tax liability.

Although they have been scrutinized by HUD and the IRS, down payment assistance programs have been used by millions nationwide to assist in the purchase of a home. Down payment assistance programs are non-profit organizations that assist home buyers with limited funds to purchase a home by providing the money needed for their down payment. The funds provided to the home buyer are typically received by the program as a gift from the home seller. These programs have been criticized as being a circle scheme funneling extra money from the home seller to the home buyer to assist in the purchase of the home, circumventing the underwriting guidelines.

Last year, the IRS revoked the non profit status of some of these programs citing that that the amount given to the program from the seller is directly related to the amount provided to the buyer. Additionally, the amounts in question are only provided to the program if the sale closes. If you use such a program, you should consult the IRS on the tax exempt status of the program as well as any tax liability you may incur.

As any real estate transaction may have tax ramifications, you should always consult a tax expert for advice.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of May 21, 2007. Copyright © 2007 Dan Krell.

FHA Comes of age

by Dan Krell

Congress recently passed H.R. 1852, The Expanding American Homeownership Act of 2007. The act is a move forward for a seventy-three year old program federal program called the Federal Housing Administration, also known as the FHA. The recent legislation was devised in the spirit of the FHA and looks to assist millions to obtain home ownership.

The FHA mortgage program (administered through the department of Housing and Urban Development since 1965) was created in 1934 when about only ten percent of Americans owned their home. At a time when home buyers needed a fifty percent down payment to obtain a three year balloon mortgage, the FHA’s progressive mortgage programs provided a spark for the nation’s stagnant housing industry (HUD.gov).

Through the years, the FHA provided progressive programs to assist those in need. The FHA took part in financing military housing in the 1940’s. During the 1950’s and 1960’s, the FHA made funds available for adult, handicapped, and low income apartments. When rising inflation and energy costs threatened many apartment buildings in the 1970’s, the FHA made emergency funds available to assist in keeping these properties operational. In the 1980’s, when lenders pulled out of oil producing states because of falling home prices, the FHA offered mortgages to those who could not otherwise buy a home.

H.R. 1852 comes at a time when the mortgage industry is in crisis and home ownership is threatened for those who need financing alternatives. The bill expands the mortgage program to offer more financing options as well as increasing FHA mortgage originators.

Reforming the FHA mortgage program will expand the program and allow home buyers who do not qualify for a conforming loan (Fannie Mae or Freddie Mac) have access to alternatives to sub-prime lending. The FHA mortgage program will be expanded by increasing loan limits, eliminating the three percent down payment requirement, and implementing a risk based pricing system.

When home buyers do not qualify for a conforming loan, they turn to a sub-prime lender. Unfortunately, many sub-prime mortgages have high interest rates and other possible unfavorable terms. By increasing FHA loan limits in high cost areas these home buyers would possibly be able to obtain more favorable mortgage rates and terms through FHA.

Additionally, many first-time home buyers do not have the funds for a down payment or closing costs. These home buyers are typically driven to the sub-prime mortgage market as well. However, eliminating the FHA three percent down payment requirement will allow many more home buyers to obtain a FHA mortgage as well.

Many credit worthy home buyers who do not qualify for conforming mortgages due to mitigating circumstances are also forced to use sub-prime lending. Implementing risk based pricing may allow many of these home buyers to obtain a more favorable mortgage through FHA.

Presently many mortgage brokers do not originate FHA mortgages because of the restrictions and rigorous qualifications. However, increasing mortgage broker participation by reducing broker requirements and eliminating mandatory auditing would increase home buyer access to the FHA program.

The expansion of FHA programs may seem counterintuitive in a time when the industry is in turmoil. However, these reforms to a venerable housing program are welcome by many as well as being reminiscent to its legacy of commitment to home ownership.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of May 14, 2007. Copyright © Dan Krell 2007.

Condo Craze or Just a Phase?

by Dan Krell © 2007
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When you think of a condo, what may come to mind is the typical flat in a building. However, condos come in many shapes and sizes, including duplexes, townhomes and semi-detached homes. The term condo is actually in reference to ownership, rather than style of home. Condominium ownership means that your home is part of a condominium association that owns and maintains common areas, while you own the interior space of your unit. The common areas typically include the building exterior and common grounds as well as amenities, such as a pool or play ground.

Everyone in who owns a unit in the association pays a fee, typically monthly, for maintenance costs. Condo fees vary depending on the size of the association, types of amenities, and whether or not utilities are included.

For some, living in a condo offers convenience and worry free living that a single family home does not. Many condos developments are convenient to the amenities of downtown areas, such as Rockville, Bethesda, Gaithersburg, and Silver Spring. These homes can be close to metro too, reducing your need to drive a car. Additionally condo ownership typically means that you don’t have to concern yourself with mowing a lawn or repairing a roof, as the association takes responsibility for these things.

Condo living is an affordable opportunity to owning a home. Compared to single family homes and townhomes, condos tend to be less expensive and a viable option for many first time homeowners.

There is a downside to condo ownership, however. Although condos may be more affordable, history suggests that they do not appreciate as fast as other types of homes. Because some condo buildings appear densely populated, some neighbors can be noisy. Additionally, the level of maintenance may vary depending on the condo association and management company.

If you are considering purchasing a condo, here are some ideas to assist you. First, exercise your right under Maryland law to review the condo docs. The condo docs include the association rules and bylaws as well as a recent budget, which includes reserve funds for emergencies. Reviewing the condo docs can reveal rules that may impact your lifestyle, such as having a pet. Additionally, the budget and reserves can reveal how well the association manages condo funds.

If you have an opportunity, attend a board meeting to get a feel for what is happening within the association. Internal politics can impact the way the condo is managed. If you want to have input in the direction of the condo association, get involved with the association board.

Although the condo association has an insurance policy that covers the physical building, you may want to consider a policy to cover your possessions inside your unit.

Parking in your development can be easy or it could be a problem. You may have one or two reserved spaces for your unit. However, if your condo is convenient to metro or other amenities, you may find non-residents taking advantage of this.

No matter how you look at it, purchasing a condo can be a practical and affordable home for any home buyer. As there are many considerations when purchasing a condo, ask your Realtor for additional resources and ideas in helping you decide on the best home.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of April 30, 2007. Copyright © 2007 Dan Krell.

Fair Housing Month 2007

by Dan Krell

April is finally here, which means spring is around the corner and we celebrate another Fair Housing Month. When you think of Fair Housing Month, thoughts of celebrating equality among the diverse come to mind. This year, however, people are talking about the recent sub-prime mortgage meltdown as an indicator of how we are doing in promoting equality and fairness in real estate.

At first you might find it difficult to fathom how lending practices and fair housing go hand in hand. After all, isn’t mortgage lending a highly regulated industry? Aren’t lenders using exacting rules to qualify home buyers for mortgages?

The mortgage industry is vigilant in maintaining strict quality control standards as well as cracking down on abuses such as fraud. However, the saying “where there is a will, there is a way” holds true. There are unscrupulous people who continually scheme to make their fortune through blatant mortgage fraud and other dishonest practices.

Although there are new schemes that pop up every year, most schemes involve the use of straw buyers (fraudulent using another person’s information to obtain a mortgage), giving false information, and/or providing manufactured financial documents to obtain mortgage funding. Fortunately these folks get caught and end up in jail.

Another problem that contributes to issues in the mortgage industry is the forcing of clients to use a specific lender for a kickback (violating federal law). When this happens, it is common for the consumer to pay excessive fees, points, as well as having a higher than average interest rate.

Mortgage schemes like these are just a sample of lending abuses that occur. In addition to other predatory lending practices, all lending abuse preys on an uninformed consumer. Perusing the Mortgage Fraud Blog (mortgagefraudblog.com) you overwhelmingly get an idea of the extent of the problem.

Why talk about mortgage lending practices, predatory lending, and mortgage fraud during Fair Housing Month? The reason is that many of the abuses that occur in the lending industry are due to the targeting of certain classes or sub-classes of home buyers.

The problem does not lie with the mortgage industry per se. The problem extends from the lending industry to other professionals involved in the real estate transaction. If the settlement agent or Realtor is not already aware of the abuse, they may turn a blind eye when they become aware at settlement when they review the closing documents. If the home buyer catches on to the high fees and interest rate, they are sometimes guaranteed a refinance in a couple months by their Realtor or settlement agent (which is a common predatory lending practice).

Like many things in life, it’s not the tool; however, it is the tool’s abuse by the ill intentioned or uncaring that produces disrepute. It needs to be said that Sub-prime and interest only mortgages are needed and can be useful tools in the purchase of real estate. However these tools need to be used responsibly. A guide to mortgages and other consumer information can be found on the National Association of Realtors website (www.realtor.org/housopp.nsf).

This Fair Housing Month, let’s just not commit to practice fair housing, rather let’s assist others to practice fair housing by not turning a blind eye to their lapses.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of April 16, 2007. Copyright © 2007 Dan Krell.