Why Price Isn’t Everything

Charlotte’s real estate market is nutty right now and with very little inventory on the market the chances of a home going into a multiple offers situation is exponentially higher. Especially in price points under 350k, where first time homebuyers are up against investors with deep pockets, all-cash offers, homes on the market only a day (if getting on-market at all) and general real estate debauchery.

Multiple offers. Highest and Best. What does it all really mean for the average homebuyer? Maybe not quite what you think. There’s a lot that goes into a seller selecting an offer from a pile of eager buyers, and it’s not just who offers the highest price (but yes, that’s important too).

Type of Financing

The type of financing that a buyer has can have vast implications when it comes to getting the transaction through to the closing table. FHA and VA loans are guaranteed by the government, but they also require more stringent approval processes. And because they are government-backed these processes can move slower and be more difficult to navigate. Down payment assistance programs can be another caveat within the process. A buyer would be silly not to take free money, but when that money comes with strings and stress for the seller, it might be best foregoing that money with our current market.

Buyer Liquidity aka money in the bank

Buyer liquidity is a natural extension of financing. Certain financing is geared towards helping buyers that don’t have much money to put down on a home. For example, there are VA loans that are 100% financed loans, so the buyer is bringing no money to closing. That’s great for the buyer, but what if the home doesn’t appraise up to the purchase price that’s written on the contract? The lender is only going to lend up to the appraisal price (aka what the home is “worth” in the eyes of the lender) so if the seller knows that the buyers aren’t bringing money for a down payment (or aren’t bringing much) then the likelihood is high that buyers won’t have cash to bring to cover the difference in the appraisal and purchase price. If this can’t get figured out in a timely manner then the buyer will have to terminate the contract.

Which brings us to…

Due Diligence and Earnest Money Deposits

If a buyer needs to terminate a contract the money that they have on the line is their Due Diligence money and potentially their Earnest Money. Whether or not they lose Earnest Money is dependent on when they terminate the contract (during or after the due diligence period) and certain types of financing require the buyer to receive their Earnest Money back if the home does not appraise for the purchase price (I’m talking about FHA and VA loans here).

If any of these termination scenarios were to occur, would the DD and EMD received from the buyer really be enough to compensate for the lost time and the seller having to go back to square one in selling their property? Riskier financing means more DD and EMD is needed to entice the seller to take a chance on the buyer.

Closing Date

Depending on the moving situation that the seller may be in, they may want to move very-very quickly and be done with the sale or they may want to stay in the house a few extra days or weeks to make the move-out process smoother. This can also lead in to the discussion of seller possession after closing. If, for example, the seller needs to sell their home to put money towards a new construction home they’re building they may need to close soon but then they don’t have a place to live until their home is completed and ready for move-in. A closing with seller possession after closing, also known as renting back a house after the sale, may be very-very important to the sellers. There are liability issues with the seller staying in a home they do not own for a period of time, so if this is something you’re interested in doing or offering, make sure you understand what could go wrong.

Buyer and Agent Requests

For the buyer this means other things that are requested as part of the contract. Usually it’s requesting the seller to pay a portion of the buyer’s closing costs, leaving personal property behind like a fridge, washer or dryer, or paying for a one-year home warranty for the buyer.

Requesting closing costs reduces the overall amount of money that the seller receives from the sale, and sellers don’t really like less money. Also, such a request tells the listing agent that the buyer is likely already strapped for cash because they need help paying their closing costs. It’s important to note that closing costs can’t really be financed as part of your loan amount, someone needs to pay them at the closing table. If those expenses are already tough for the buyer to cover are they really going to have money to cover an issue if the home doesn’t appraise? Likely not.

Another thing that goes into decision-making is how the buyer’s agent conducts themselves. I know, it doesn’t sound fair to be judged by someone else’s actions, but if that person is representing you and they aren’t conducting themselves in a professional manner then that’s a problem. If a seller receives two largely identical offers but one has a knowledgeable, communicative, and courteous agent and the other has a trainwreck of an agent, I have to tell the seller because it could impact the buyer’s ability to get things done in a timely and accurate manner, which could cause the buyer to need to terminate the sale.

Seller Preferences. Maybe.

This is where things turn into a grey area. It’s common practice these days for buyers to write personal letters to the sellers explaining why they love the house and why they should choose their offer over any other. Depending on the seller these may work, or they may backfire, so if you’re the buyer be careful! I had a client going through a messy divorce and they got a ton of letters explaining how the buyers saw themselves building their family with their spouse in the home. It was hard to read knowing the circumstances of the seller, who had also planned to grow their family in the home, but life ended up much different than they had expected.

I had another client who got their offer accepted because both the buyer and the seller were veterans. The seller felt so strongly about supporting a fellow veteran that they took a more-difficult VA loan as opposed to a conventional loan.

Seller preferences can get sticky if their preferences could appear to be a violation of fair housing laws. Choices based on the buyer’s race, gender, family status, etc. are highly discouraged by real estate professionals so we’ll try to keep these details out of the discussion if at all possible. When I talk to a seller about selecting an offer and personal details about the buyer are invovled in the submission I forewarn the seller than I will remove photos or information that could violate fair housing. If this is a problem for the seller then we have another issue entirely.

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.

Housing Supply, Housing Demand and “The Corona”

The biggest unknown in any economic model is how we the consumers will act, and this rings true for Charlotte real estate as well. I had someone tell me that the “bottom fell out” of our real estate market and I had to take a step back to regroup before responding.

What market indicators were they looking at? Well, it turns out that they were looking at the economic indicator that reigns supreme above all others… their own gut feeling. No one feels comfy making large decisions in the midst of a global pandemic and yes, based on the Charlotte Region Weekly Market Activity Report from our local Realtor® association there have been some slowdowns. However, these slowdowns aren’t necessarily what you might think.

Pre-Corona Armageddon 2020 there was no disputing that the Charlotte real estate market is highly sought-after. There are tons of people moving here for all different reasons each and every day, and we have a booming economy and our job market is top-notch for people in professional industries. There’s so much opportunity here that we have to bring in job applicants from other cities and states because prior to the pandemic we had extremely low unemployment numbers for those working in traditional desk jobs. (No, the same cannot be said for those working in trades, customer service and labor positions, but the affordable housing crisis is a blog post for another day.)

Our biggest issue within Charlotte’s real estate market is and has been a supply problem. We have tons of qualified people and not enough housing to ensure that even the majority of buyers can find a suitable home. This in-turn drives up the prices for the homes that are available and creates the chaos and bidding wars we’ve seen for the last few years.

The changes that have been felt in our market are honestly, more of the same old story: too many buyers and not enough houses. Based on the Weekly Market Activity data the market is slowing down from the perspective of less homes are being listed for sale. So, in an already jammed up market people who would sell are afraid to sell. However, those that do venture into listing are being rewarded by receiving a higher percentage of their listing price at closing and their home being on the market an average of 38 days, that’s 19.1% LESS time than last year when the average days on market was 47 days.

If you’re looking to sell just remember: To the victor goes the spoils.  Get out there and get listed. If you’re a buyer waiting for the true “bottom” to fall out, it appears that you’ll be waiting a little longer than what a globally-debilitating economic crisis can offer up to impact our Charlotte slice of heaven.

What does it buy you?

According to the Charlotte Regional Realtors Association the average price of a home sold in the Charlotte area as of the close of January 2019 was $268,271. Over the course of a year this tends to fluctuate based on market factors, but tends to round out to somewhere between 250,000 and 300,000. So what does an “average” home in Charlotte look like? Well, depending on where in the area you’re looking to purchase that can look VASTLY different. So, which home works for you?

315 Arlington Avenue #605, Charlotte NC 28203

This gorgeous 1 bedroom, 1 bathroom condo unit is located in the sought-after South End neighborhood, convenient to the CATS light rail, Uptown Charlotte and with tons of dining and entertainment within a short walk. The building boasts a pool, dog run, rooftop terrace and 24 hr concierge. The home is listed at 269,000 for 720 sqft of heated living area (priced at 373.61 per square foot). HOA fees (monthly) are listed at $321.

3112 Kemptown Square, Waxhaw NC 28173

3 bedrooms and 2.5 bathrooms awaits you in this airy 1,328 sqft condo within a mile of downtown Waxhaw NC. The community has a pool, clubhouse, fitness center and walking trails. Enjoy your own private patio and one car garage. This home is listed at 235,000 (176.96 per sqft) with monthly HOA dues listed at $181.50.

13602 Kensal Green Drive, Charlotte NC 28278

This home is already under contract, but I’m still going to count this Steele Creek 4 bedroom, 2.5 bathroom single-family home. This home has 2,968 sq ft of heated living area on just over a half-acre lot (0.6 acres according to the listing) with a two-car garage. This home is listed at 290,000 (97.71 per sqft) and has quarterly HOA fees of $85.

1907 Savannah Hills Drive, Matthews NC 28105

You can call this 3 bedroom 3.5 bathroom home in Matthews yours for the list price of 299,900. This 2,995 square foot home sits on 0.2 acre corner lot and has an updated kitchen including custom cabinetry and hardwood floors in the kitchen, dining area and large living area. The home is currently priced at 100.13 per square foot.

427 Steel Gardens Boulevard, Charlotte NC 28205

Want a townhome near the NODA Arts District? This 2 bedroom 2.5 bathroom end-unit in the Steel Gardens community has just over 1,400 sqft of heating living area, a two-car garage and a fenced back patio area for you to enjoy! This home is currently priced at 295,000 (200.68 per square foot) and has HOA fees monthly of $425.

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!