Homeseller turned landlord

Dan Krell, Realtor®
DanKrell.com
© 2012

Reluctant home sellers turn to renting their homes.

Handing over the keys of your most expensive investment to another person is not how you think you would have moved on with your life. But, because the housing market threw a wrench in many peoples’ plans, many home owners who could not sell their homes decided to rent it instead. Unfortunately, some didn’t know what to expect from their tenants, while others didn’t realize that they had obligations as a landlord. And as you might imagine some rental arrangements did not turn out so well.

Although the home owner turned landlord may feel kinship to the hard core real estate investor, there are some differences. Unlike the genuine real estate investor, most people are not accustomed to leaving their home in another’s care (often the person is a total stranger). Another difference is that the home owner may decide to rent their home to ride out the housing market, while the hard core investor has made a commitment to the real estate investment as a vehicle for accumulating wealth; many investors will hold property for many years looking forward to the future payoff of appreciation when the property is sold.

Of course there is a commonality too; the desire for positive cash flow. The positive cash flow is the perpetual incoming of cash so the mortgages and other real estate related expenses (such as property taxes, HOA/condo dues, maintenance, insurance, etc.) can be paid. Although a positive cash flow is a good thing, some are content just to break even and have no net proceeds from the rental. Expenses can add up quickly and turn the rental into a negative cash flow situation (when the rent does not cover all the home expenses); which can became the source of serious financial issues.

So, you decided to rent your home (or maybe you were talked into it) so you could move on with your life, what now? Finding tenants and maintaining the property can be an issue for the novice and experienced alike. Although seasoned real estate investors have systems in place for various aspects of their business (from finding tenants to collecting rent); you might consider hiring a licensed professional to manage your rental property. For a fee, professional property managers take care of your rental property: which can include finding tenants, collect rents, and maintain the property.

And since rental agreements can be rather legally complex, consulting with an attorney prior to entering into the agreement would be prudent; as well as consulting with an attorney when issues arise between you and your tenant.

Consider getting additional information about rental properties before embarking on your new journey. Some municipalities and local governments offer resources to inform you of your obligations and provide additional resources. For example, the local government of Montgomery County MD offers resources for landlords and tenants. Besides the “Commission on Landlord – Tenant Affairs,” which hears landlord – tenant disputes; other resources are available including a description of “ordinary wear and tear,” and links to the District Court of Maryland listing actions a landlord can take against a tenant (and vise verse).

What seems to be a comprehensive guide is the “Landlord – Tenant Handbook,” which is offered as a manual to renting for both the landlord and tenant. The handbook describes: the obligations of the landlord and tenant; property licensing requirements; rental application and lease; security deposits; property maintenance; complaints; terminating the lease; and “survival tips.” The handbook and other landlord – tenant resources can be found at montgomerycountymd.gov/dhca (click the “Landlord & Tenant” link).

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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 September 10 , 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

May 10, 2012

Real estate pent up demand or pent up optimism

by Dan Krell © 2012
DanKrell.com

The National Association of Realtors® latest news release of April 26th stated that March’s increased pending home sales figures is an indication that the housing market is recovering. The NAR reported that March’s Pending Home Sale Index (the PHSI is a “forward looking number indicating contracts signed”) increased from February’s PHSI and is much higher than the PHSI a year ago. Lawrence Yun, NAR Chief Economist, claimed; “The housing market has clearly turned the corner. Rising sales are bringing down inventory and creating much more balanced conditions around the county, which means home prices, will be rising in more areas as the year progresses…” (realtor.org).

Regardless of the newly sparked optimism for the housing market, a news release of one week prior (April 19th) indicated although March’s existing home sales were better than the previous year, the number of home sales declined from February’s totals. Dr. Yun cautioned that, “We were expecting a seasonal increase in home listings, but a lack of inventory has suddenly become an issue in several markets with not enough homes for sale in relation to buyer interest”…“Home sales could be held back because of supply factors and not by demand…”

My local market (Montgomery County MD, which includes Bethesda, MD, Chevy Chase MD, and Rockville MD) is part of the one of the stronger housing markets in the country, and pending sales are strong. The April 2012 Montgomery County Single Family Home Housing Report released by the Greater Capital Area Association of Realtors (gcaar.com) indicated that the number of contracts increased 12.4% compared to the same time last year, as well as increasing 8.5% year-to-date compared to the same time last year.

However, when looking at closing sales, pending sales may not be converting. Although the number of settlements of single family homes in Montgomery County is reported to have increased 5.8% in April 2012 from April 2011, the number of settlements year-to-date has decreased 1.6% from the same time last year.

Additionally, housing inventory continues to pose a problem for the market. Montgomery County single family home new listings decreased 14.6% in April 2012 from April 2011; while total actives reported for year-to-date through April 2012 decreased 15.1% for the same time last year. A diminished housing inventory is not so much an issue of meeting an increased buyer demand, as Dr. Yun has stated; but rather the issue may be that the declining housing supply may be lowering to meet buyer demand.

However, if housing inventories were not meeting an increased buyer demand, then we might be experiencing something akin to what occurred 2005 through 2006 (when homes sold relatively quickly, the average time on market was less than 30 days, and home prices were increasing). But we’re not experiencing the activity of 2005-2006. Additionally, the average single family home sale price for Montgomery County as reported by GCAAR is $496,144 for the month of April 2012 (compared to $515,161 for the same time last year).

I remember (and reported) similar optimisms declared in recent years; for example, an October 2009 report indicated that the PHSI was proclaimed to be at the highest level since March 2007. Enthusiasm for a market turning point would surely be welcome; but the data is inconsistent. And in fact, maybe current reports of pent up home buyer demand may be indicative of something else- a projection of pent up optimism.

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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 May 7, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

April 5, 2012June 3, 2020

Medicare tax on real estate transactions

As pundits and commentators speculate about the Supreme Court’s opinion on the Patient Protection and Affordable Care Act of 2010 (PPACA), the National Association of Realtors® (NAR) reminds us that the 3.8% tax on unearned income imposed by PPACA is not a transfer tax. This is a tax collected on “unearned income” is to be applied to the Medicare Trust Fund (e.g. a medicare tax).

Although the new tax is not a transfer tax, it could apply to your home sale. Unlike transfer taxes, which are collected by state and local governments when real property is transferred between individuals; the “Medicare tax” is not calculated on the sale price nor is not applied to the proceeds from every real estate transaction. Rather, the tax provision kicks in when specific thresholds are met.

Incidentally, even though a real estate transaction may meet the threshold to be taxed under the new Medicare tax; it’s not the only “unearned income” that may be taxed under this provision. According to the NAR “Medicare tax faq”, “Unearned income is the income that an individual derives from investing his/her capital. It includes capital gains, rents, dividends and interest income. It also comes from some investments in active businesses if the investor is not an active participant in the business. The portion of unearned income that is subject both to income tax and the new Medicare tax is the amount of income derived from these sources, reduced by any expenses associated with earning that income. (Hence the term “net” investment income.)”

To clarify, Henry Paula explains the Medicare tax in his January 2011 article (Planning for affluent taxpayers under the 2010 healthcare reform. The CPA Journal, 81(1), 46-47); “Under the Patient Protection and Affordable Care Act (ACA) …there is a new 3.8% tax imposed on the net investment income of certain individuals, estates, and trusts considered to be high earners.”…“For tax years beginning after Dec 31, 2012, a 3.8% tax, called the Unearned Income Medicare Contribution, will be imposed on the lesser of net investment income or an individual’s modified adjusted gross income in excess of: $250,000 if married filing jointly, $125,000 if married filing separately, or $200,000 if filing single.” Mr. Paula summarizes, “The 3.8% tax will affect taxpayers with business activity income from activities that are passive for the particular taxpayer and generate net investment income that, when combined with other income, is in excess of the thresholds…”

The NAR gives this example (from the Medicare tax faq), “If AGI for a single individual is $275,000, then the excess over $200,000 would be $75,000 ($275,000 minus $200,000). Assume that this individual’s net investment income is $60,000. The new 3.8% tax applies to the smaller amount. In this example, $60,000 of net investment income is less than the $75,000 excess over the threshold. Thus, in this example, the 3.8% tax is applied to the $60,000… If this single individual had AGI [of] $275,000 and net investment income of $90,000, then the new tax would be imposed on the smaller amount: the $75,000 of excess over $200,000.”

Aside from the anticipation of the Supreme Court opinion, the new Medicare tax will begin in 2013. If you’re planning a home sale, consult your CPA, financial planner, and any other tax specialist to determine if (and how) the new Medicare tax applies to your situation.

Original located at https://dankrell.com/blog/2012/04/05/medicare-tax-on-real-estate-transactions-and-other-unearned-income/

By Dan Krell

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This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

January 5, 2010June 30, 2019

Coping with the stress of the real estate transaction

Unless you are under the care of a psychiatrist prescribing you Valium, “stress free” is not something that comes to mind when describing real estate. According to the American Institute of Stress (stress.org), stress is subjective and can originate from negative and positive experiences.

On the “Holmes-Rahe Social Readjustment Rating Scale” otherwise known as the Holmes and Rahe Stress Scale (Holmes & Rahe 1967), having a mortgage over $10,000 rates 31 (just above being foreclosed upon) and moving is rated as 20. This commonly used stress scale (which rates life events to determine risk of illness) is cumulative, so the rating for buying a home is at least 51. Your stress level obviously increases when you add in other life stressors such as (but not limited to): getting divorced (73); getting married (50); having a baby (39); changing careers (36).

The reason why buying a home may rate so high on the Stress Scale is that, unlike other transactions, buying (and selling) a home is a large emotional investment! Gordon Gekko, from Oliver Stone’s Wall Street, was on to something when he said, “don’t get emotional [over stock], it clouds your judgment.” Emotions often become amplified when stress increases and can interfere with judgment.

Although most real estate agents don’t understand stress (what it is or how it’s reduced), it does not stop them from lecturing and blogging about “reducing stress” during the home buying or selling process. Being prepared and dividing the buying/selling process into segments is common advice and makes sense. This guidance often helps buyers and sellers feel a sense of “control” by understanding what to expect. However, the wonderful thing about real estate is that every transaction presents a new set of personalities, conditions, and (sometimes) problems. Reactions among buyers and sellers, as well as real estate agents, vary depending on their personalities and life circumstances. So no matter how much you plan, prepare, and visualize what it may be like, stress can be produced just by going through the process (created by both positive and negative feelings).

For some, being prepared is enough to help them anticipate and deal with most circumstances that may arise; while for others, the act of preparation may actually increase stress. Emotional factors, often based on needs and fears, can play a key role in your stress levels. Sometimes your needs are beyond your control and can increase your stress level, such as the need to stick to stringent timelines. And sometimes your needs can adapt and change which can mitigates your stress, such as finding the “perfect home.”

Fears about the outcome of the transaction can increase your stress, especially if you’re a first time home buyer. Common buyer fears include mortgage approvals and rising interest rates; sometimes buyers fear that the home inspection may reveal problems with the home. Common home seller fears include the home buyer’s qualifications and the ability to consummate the sale.

Good real estate agents know how to address the needs and fears of the real estate transaction to keep stress levels in check. Regardless, some people may turn to self help, “pop” or common stress reduction techniques (such as meditation); and if the stress is overwhelming, it wouldn’t hurt consulting with your physician or a qualified mental health professional – especially if you’re already stressed by your job, family and other life stress.

This article is not intended to provide nor should it be relied upon for legal and financial advice. Permission to use this article is by written consent only.

By Dan Krell
Copyright © 2010

April 15, 2008November 23, 2021

Pre-sale Home Inspection

by Dan Krell
Google+

Home inspections are commonplace among real estate transactions these days. Many people who bought without a home inspection during the recent sellers’ market will testify to the value of having one performed to determine the condition of the home. Generally, home inspectors vary by training and experience; however as of January 1, 2008, all home inspectors operating in Maryland are required to be licensed.

Now that the market has shifted to a buyers’ market, you might see advertisements by some real estate agents and home inspectors stating that a pre-listing home inspection will sell your home faster, eliminate home inspection negotiations, and reduce your liability.

If you do have a home inspection conducted prior to your sale, don’t expect the home buyer to forgo having a home inspection performed. Unless the home buyer has experience in home construction, most home buyers will want an opportunity to have a home inspection. Even if you are selling the home “as-is,” home buyers can still require (as part of a contract) to have an inspection performed to determine if there are serious issues to address in the home.

The pre-listing home inspection could possibly eliminate additional negotiation brought on by a buyer’s home inspection. But since home inspectors vary in experience, you can count on variances between your inspection and theirs. Additionally, there is always the chance that your home can sustain damage after the initial inspection, especially since listing periods tend to be longer these days. If there is additional damage, you can count on the home buyer’s inspector to point it out as well as the buyer asking you to fix it.

Does the pre-listing home inspection eliminate your requirement for disclosure of latent defects? No. Even if you had a pre-listing home inspection, the fact remains that you are still required to disclose any known latent defects (latent defects are defined as defects that a purchaser would not reasonably be expected to ascertain or observe by a careful visual inspection of the real property and pose a health or safety threat).

Don’t get me wrong, having a pre-listing home inspection performed should be on everyone’s pre-listing checklist. Actually, pre-listing home inspections have been performed by savvy home sellers for many years. The purpose of the pre-listing home inspection is to determine the home’s condition and reveal if there are serious issues to remedy. To improve your home’s appearance, you should consider making the recommended repairs. However if you cannot make the repairs, you can price the home based on the home inspector’s repair recommendations. Additionally, the home inspector’s critical eye may serve to provide feedback on enhancing the home’s appeal to potential home buyers.

Should you have a pre-listing home inspection? As a home seller, you should absolutely consider having a pre-listing home inspection performed. Although the pre-listing home inspection on its own doesn’t necessarily bring in home buyers or make the sale, it is a tool that acts as a guide to make your home more appealing to home buyers and to assist in facilitating a faster sale. For more information about a pre-listing home inspection, you can visit the America Society of Home Inspectors (ASHI.org) or the National Society of Home Inspectors (NSHI.us).

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 April 7, 2008. Copyright © 2008 Dan Krell.

Dan Krell, Realtor® DanKrell.com © 2012

Reluctant home sellers turn to renting their homes.

Dan Krell, Realtor®
DanKrell.com
© 2012