Tag: homebuying

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Condos and Townhomes: What’s the difference?

For anyone that isn’t quite ready for all of the responsibilities that come along with a stand-alone home, a great first-step into homeownership can be either a condominium or a townhome. While many people use these terms interchangeably, there are distinct differences between the two mostly stemming from where a homeowner’s liability ends and the homeowners association liability begins.

Put more precisely… Who owns the land and the structure of the building?

In a condo, the homeowner owns their particular unit but they do not own the building structure or the land that the unit sits on. This can also be described as owning the “airspace between the walls”; the condo owner has the right to the unit and can make changes to the fixtures and colors but they can’t take down walls or otherwise alter the structure.

With a townhome, the homeowner usually owns the exterior of the building and the land underneath the unit. This means that they must maintain all of these areas, not just the interior of the unit. Of course, this maintenance can be handled by the HOA on behalf of the owners, but that is dependent on how the HOA is set up and what they choose to cover for the monthly owners assessment fee.

With the difference in ownership comes some additional positives and negatives, including overall price of the home and the cost to insure it. Condos are usually a bit less expensive because you have a low-level of ownership> This can impact the overall purchase price of the unit and the cost to insure the property. If there is a complete loss for insurance purposes, a condo association’s master policy would cover the rebuilding of the structure while the owner’s policy would cover the upfitting of the unit itself (flooring, cabinets, light fixtures, etc.)

If the property was a townhome then the homeowner’s insurance policy would cover the entire interior and exterior of the building structure along with all upfitting. While the HOA would still have a master insurance policy in place, the area of coverage would likely be restricted to community areas such as a neighborhood pool, clubhouse, playgrounds, etc. So, if there is a complete loss in a townhome community the owners and their insurance are on-the-line for more of the overall expenses.

It’s always important to keep in-mind that these are general guidelines between what constitutes a condo and what is a townhome. At the end of the day, it’s up to the specific community, how the HOA was set up including governing documents, and what laws govern the state that you’re in.

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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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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.

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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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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.