Tag: buyer

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Handling an Appraisal Gap

I think that I can safely say that most homebuyers are going to finance some portion of their purchase with a home mortgage. There are always those special circumstances where someone might not, but by-and-large there’s going to be a mortgage lender involved.

First, it’s important to remember that the bank and the lender are looking at the purchase of a home as whether or not it is a good investment. A buyer may have been preapproved to purchase a home up to $400,000 but that doesn’t mean that the bank will lend you that money on just ANYTHING. They want to ensure that the home you select is worth what they’re lending you because if you default on your mortgage the only thing the bank is really going to get is ownership of the house.

With the current market factors of many more buyers than homes available to purchase on the market, prices should increase, but oftentimes bank-perceived values don’t increase as fast as a potential buyer would like. It’s because there’s an inherent flaw in real estate valuation: the flaws of historical data.

When a borrower selects a home the only way to get an idea of what the home is “worth” is to look at recent closed sales in the area. No matter who is doing the estimate of value we’re all looking for the most-similar homes within a close proximity, but the variable that we can’t correct for is that those homes were sold weeks or even months ago. A lot can happen in the market in the matter of a few weeks, so putting in an offer can contain some risk. Basically, is the lender going to see the value that the buyer sees in the home when looking only at historical (outdated) data points?

Sometimes the answer is yes, and sometimes the answer is no.

For example, if the lender deems the value of a house to be $280,000 then the bank will only lend up to 280,000 on the purchase of that home. It doesn’t matter if the buyers were originally approved for much more, and it definitely doesn’t matter if the under contract price is higher. The bank isn’t going to budge on their value calculation (usually).

In this example let’s say that the buyer is under contract on the home at $300,000. There are some options, but none of them are particularly fun. First, the buyers and their agent can argue the appraisal. For this to go anywhere the agent better have historical data to back them up, and it better be undisputable and unbiased. Basically if there’s a sale in the neighborhood that you know about that wasn’t taken into account in the appraisal report and it sold for more and was very, very similar to the house you’re trying to buy, you submit that sale for consideration by the lender’s team. Again, it’s making an argument based on historical data.

What’s more likely is that the buyer has to figure out a way to cover the difference between the appraisal price of $280,000 and their under contract purchase price of $300,000. This means that the buyer needs to have $20,000 in cash available that they were likely not anticipating needing to have. And this is in addition to the money they need for the downpayment for the lender on a $280,000 value of home and the closing costs (escrow funding needed, fees paid, attorney costs, etc.)

If your lender approved you with a certain percentage of purchase price as down payment (for example, 20%) ask if they can approve you with less money down. The difference in the downpayment required can then be allocated to the appraisal gap. This could mean that you’re now going to have to pay mortgage insurance interest (MIP) so make sure you have a full understanding of how this will impact your mortgage payment and the fees that you pay each month.

If you are very-very lucky, you may be able to structure receiving a financial gift from a family member to help with financing your home. Make sure that you discuss this possibility with your mortgage lender as there are documentation requirements and they are extremely detailed. Basically, you do not want a financial gift to need to be repaid as this would mess up your debt to income ratios and could make it impossible for you to qualify to purchase the home. There will likely be a requirement that the person giving the gift signs a gift letter stating that the money does not need to be repaid. The person giving the gift should also consult with their tax advisor prior to making a financial gift.

Lastly, if the appraisal comes in low you can go back to the seller and ask them to drop the purchase price to the appraisal value. This used to work, but in our current market it’s not a great option. Most buyers are willingly offering more than they think the home will appraise for and will therefore waive this option as part of their original offer. It’s more likely that the seller will want to put their house back on the market and get someone to waive the appraisal contingency up front than to lose potentially thousands of dollars by dropping the purchase price down.

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Investor Offers

Charlotte is full of people looking for investment properties, whether it’s to rehab and resell, or to rent out and earn monthly income. It’s tough out there, so investors can be aggressive in finding and purchasing properties. Some will knock on doors and offer cash for a home, others will network to find people who are thinking of listing their home for sale.

Cash offers, sight-unseen, no repairs, quick close. There are definitely up-sides to selling your home to an investor. There are still some things that you’re giving up and some areas to be aware of along the way.

Remember: investors do this all the time. You don’t.

Before entertaining an offer from an investor, know what your house is worth, aka know what recent similar sales in the area closed at. Do your research online, call a few Realtors, and get some price opinions. Be upfront that you’ve already received an offer. Many Realtors will do a full presentation on listing your home including comps to try and win the listing if you elect not to go with the investor offer.

A good Realtor will graciously answer a few quick questions knowing that this is a people business, whether you sell with us or not. Keep in mind that real estate transactions can get very complex without warning, so even though you’ve received an offer it’s still a good idea to hire a Realtor to counsel and represent you in negotiations. If you have more than a quick question or two, I really recommend hiring someone. It won’t be free, but it will be worth it if something goes wrong.

Once you have an approximate idea on what you home is worth, you can better assess an offer from an investor. Some investors will tell homeowners that they’ll pay them the tax value for the home. Know that even though Mecklenburg County increased property assessments last year, this value is still below what a home would sell for on the market. Part of that is because the County struggles to move assessments up too quickly for fear of upsetting taxpayers and these assessments were done months or even years ago, so the value is outdated no matter what. Therefore, the tax value is artificially low and likely outdated, which is great for the investor and not great for the seller who would like to receive the best price.

If the investor is offering to purchase using cash that means that they can likely close quickly and they will not need to get approval from a lender. This means no bank appraisal to worry about and oftentimes a much smoother transaction. Because cash is so quick and much easier to close, they will often offer slightly below value. If you’re looking to close quickly without a lot of fuss, this can be well-worth the decrease in price.

Oftentimes, investors want to purchase a home ‘as is’ because they don’t really care what the condition of the home is. They have a team of people who will fix anything that comes up and quite honestly, they don’t want a homeowner making repairs that they could do cheaper and to their own specifications. This means a little more risk to the investor because they aren’t 100% sure what they’re buying, but it means no repairs to do and that the seller preserves their sale price by not having to compensate a traditional buyer in lieu of needed repairs.

At the end of the day, an investor offer is an offer and it’s important to weigh the pros and cons of the decision, and also to compare to other offers that may come through on the market if you were to list a home traditionally. Just because an offer knocked on your door (in this case, quite literally) doesn’t mean it’s the right one for you and your family. So remember to be as objective as you can in your evaluation, and do what’s best for you, your family and your particular circumstances when evaluating a market offer or an investor offer.

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Tax Time is Coming!

It can be daunting to figure out what documents you need to give your CPA or tax preparer in regards to your home, mortgage and real estate investment properties, so I’m here to make your preparation a little bit easier by answering some common questions I get.

Q: I own a house that I live in full-time as my primary residence, what are the basic documents you need each year?

If you have a mortgage, you should get a form 1098 from your mortgage lender showing the total interest that you paid during the year in Box 1. If your lender pays your property taxes on your behalf (aka you ‘escrow’ for your taxes) then your real estate taxes for the year should also be on this form (check out Box 10).

If you handle paying your own property taxes then you’ll also want to locate a copy of your tax bill. If you can’t find the original copy that was mailed to you around September, then you can look it up on the county website by your address.

Q: I bought or sold my house in 2020, do you need anything additional?

Yep! We’ll want a copy of the Closing Disclosure (CD) that you signed at the Closing Attorney’s office when you bought and also when you sold. Your costs to close on the home may be deductible on your taxes whether you are the buyer or the seller in the transaction. Also, depending on when during the year you purchased or sold the home there may be some information relating to the proration of property taxes that we’ll need to take into account when preparing your taxes.

If you sold your home we may ask you for a copy of the CD from when you originally purchased it. This can appear tedious, but please know that if we’re asking for this it’s very-very important. We’re calculating how much gain you earned on the sale of your home. If you sold your home for much more than you originally purchased it for, there are exclusions for the gain with the amount of the exclusion being tied to whether or not you’re married for tax purposes. We may also ask you for a listing of improvements you made to the house during the time that you owned it. These expenses can help to minimize how much of the gain you have to pay taxes on.

Q: I refinanced my house, how does this impact my taxes?

The costs you paid to close on the new loan may be deductible for tax purposes, so please provide a copy of the Closing Disclosure (same as above). If you took out a line of credit (also known as a second mortgage) on your home, the costs to set this up and the interest you pay might be deductible for taxes but only if you used the money to expand or substantially improve your home.

Did you take a LOC on your home to pay off credit card debt or something outside of home improvements? Then it’s not deductible on your taxes.

Q: I have a rental property, what do you need to include it on my taxes?

Assuming that you don’t own the rental property within another entity, the income and expenses will be included on your personal tax return. We’ll want a schedule showing all of your rental revenue and all of the related expenses you paid for the property during the year.

If you made any improvements or repairs that cost over approximately $500 and have a useful life greater than one year, (for example: a kitchen remodel, a new furnace, new roof, etc.) we’ll want a listing of those items and amounts paid as well. Instead of claiming the expense deduction all in one year, we will claim the expense ratably over the next few years that you theoretically use the improvement.

Q: I currently rent, does this impact my taxes?

Nope, renting does not give you any tax benefits. There are no writeoffs for renters like there are for people who own their home. This could be a really good reason to look into buying a home instead of dealing with increasing rental prices on a yearly basis.

Q: I have a question about real estate and taxes that you didn’t answer here. What do I do?

Reach out to your tax professional or shoot me an email at erincoffey@kw.com I will try to answer general questions as best I can. Please note that anything I say here is not to be construed as tax advice. If you have a question about your specific tax situation it’s best to reach out to someone who has all of your details, I’m only discussing general ideas and information here.

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The Realities of Rent-to-Own

Everyone has to live somewhere, so many find renting to be the best option due to low credit score, lack of funding for a down payment, and the general uncertainty of whether or not they’ll live in a home or an area long-term. Making the jump to homeownership can be difficult given the financial burden, so the idea of paying rent and having that money ultimately used towards your purchase of a home seems like a fabulous idea, but there’s more to it than that.

Every business transaction must be advantageous for both sides, otherwise, why would they enter into it? Let’s look at what each side is dealing with:

Seller

  • If a seller is listing a home for sale, they have the intent to liquidate their investment. They want to sell it, not continue to hold it and rent it out. There are risks and expenses associated with renting a home and many sellers aren’t looking for those responsibilities anymore.
  • If an owner is going to rent a home, they want to receive the market rate of rent. They’re not going to willingly accept less than properties that are similar based on condition and location, unless there’s a good reason.
  • In this market it is easy to sell a home, there are more buyers than properties available, so sooner or later the seller can offload their investment and walk away with cash (as long as they’ve priced it appropriately, of course).

Buyer/Renter

  • Wants to purchase a home, but doesn’t think they have enough funds available for a downpayment. This likely means that they don’t have additional funds to afford housing that is higher-priced than the market rate of rent.

How does rent-to-own work?

For this type of deal to work, the seller retains ownership of the home while the buyer becomes a long-term tenant. During this time the tenant normally pays more than the home would rent in the market. For example, if a home would rent for $1,800 monthly, the tenant may pay 2,000 or more each month. 1,800 of that payment would go to the seller as rent, the remaining portion of the payment would be held as “savings” towards the downpayment. This downpayment savings grows very slowly, and the buyer must pay an upfront fee to place this purchase option into effect, which often takes away the advantage of this transaction setup.

There’s also significant risk to the buyer and the seller. The seller is staying as the owner, which means they foot the cost of insurance and taxes. Also, the buyer is under no obligation to purchase the property at the end of the deal. They may lose some or all of their “savings” but again, that isn’t very much money to begin with.

These deals are more advantageous in a real estate market where there’s too much inventory and it’s difficult for a seller to offload a property. In that type of market environment there’s an advantage to renting the property in the hopes of selling at a later date than to let it sit vacant for long periods of time. This is the same market environment when we see sellers financing deals instead of requiring buyers to go and get their own loan from a traditional mortgage lender or bank.

In our current real estate market where buyers far outnumber available properties and home prices are increasing, you can still find rent to own properties advertised, but many (if not all) are scammers. So buyer (or tenant) beware!

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What happens after we’re under contract?

The time spent searching for your home can feel like an emotional and physical marathon, so once you have an offer accepted and have an executable contract it’s smooth sailing from there, right? Well… There’s more that goes into it than that.

Those who partake in the real estate close process often consider this to be where the real work beings! After both the buyer and the seller sign the contract to signify acceptance of the terms, two checks must immediately be written by the buyer: the due diligence fee and the earnest money deposit. Both of these amounts are agreed upon in the offer to purchase, and are credited against the purchase price of the property if and when the transaction closes. The due diligence amount is paid directly to the seller (usually as a personal check) and the earnest money deposit is sent to the closing attorney to be held in escrow until the day of closing.

Due Diligence period

Once a contract is accepted by both the buyer and the seller, the due diligence period begins. This is the amount of time you agree upon in the offer to purchase where the buyer has access to the property for inspections including: homeowners’ inspection, radon testing, termite inspection, appraisal, etc. This is also the period of time during which the buyer can elect to terminate the contract to purchase for any reason and lose only their due diligence fee. The amount of money that is held in escrow by the closing attorney will be released back to the buyer if termination of the contract occurs during this time.

After the end of Due Diligence

When the due diligence period ends there will still be time before the property closes and when the buyer takes ownership. During this time period the buyer is still able to terminate the contract, however they will lose their due diligence money and the earnest money deposit with the closing attorney. Both of these amounts will compensate the seller for the termination of the contract.

Prior to Closing Day

Once a transaction has been “cleared to close” by the lender and a closing date has been scheduled with the closing attorney, the last few preparation steps occur, which include: obtaining homeowners’ insurance and transferring all utilities into the buyer’s name, with the effective date listed as the date the property is scheduled to close.

Lastly, is the final walkthrough, which often occurs on the same day as closing. This is the time when the buyer and their agent walk through the property to ensure that there is no major damage to the home, that all of the seller’s belongings have been removed, and that all items that were agreed to convey along with the home are still present before the buyer closes on the home. Once the house is in satisfactory condition the buyer can become the new owner!

Hopefully this writeup helps to shed some light on the process after a home goes under contract. If you have any questions or know of anyone in the Charlotte, NC area that is ready to buy or sell real estate, please don’t hesitate to reach out.