Appraisals in rising price markets

• Home appraisals are based on recent sales prices of comparable properties.  And in rising price markets, those sales prices might not be high enough to support new home sale prices.  Here are some ways sellers can improve their home appraisal.

• Make sure the appraiser knows the neighborhood.  Sellers can request that the lender send a local appraiser; if that still doesn’t happen, owners should supply as much information as possible about the quality of the neighborhood.

• Provide your own comparables. Sellers should provide the appraiser with at least three solid and well-priced comparable properties.  This will save the appraiser some work, and ensure that he or she is getting price information from homes that really are similar to the one being appraised.

• Document home improvement projects. Sellers should provide before and after photos, along with a well-defined spreadsheet of what was spent on each renovation, which should persuade an appraiser to turn in a number that far exceeds what he or she first called out. It’s important to highlight all-important structural improvements to electrical systems, heating and cooling systems – which are harder to see, but can dramatically boost an appraisal.  Showing receipts also may be helpful.

Home values rise 6% nationwide in 2012

U.S. home values ended 2012 up 5.9 percent compared with 2011, marking four consecutive quarters of national home value appreciation, according to Zillow’s Home Value Index. The Index rose to $157,400 in the fourth quarter, up 2.5 percent over the third quarter, according to the fourth quarter Zillow Real Estate Market Reports. 

The 5.9 percent annual appreciation rate far exceeded yearly rates of appreciation typically associated with healthy markets and represents the largest annual gain since August, 2006 – near the peak of the housing bubble. Historically, housing markets can expect annual home value appreciation of roughly 3 percent on average, according to Zillow research. Looking ahead, the Zillow Home Value Forecast shows home values increasing by 3.3 percent in 2013, a yearly appreciation rate more in line with historic norms.

As home values rose in the fourth quarter, foreclosure activity abated, with 5.22 of every 10,000 homes nationwide facing foreclosure during December 2012. That was down 2.2 homes per 10,000 year-over-year and down 1.2 homes from the previous quarter. Foreclosure re-sales stood at 12 percent of the market, down 4 percent from the end of 2011 and down 0.3 percent from the third quarter.

In the rental market, national rents fell 0.6 percent in the fourth quarter compared with the third quarter, but ended 2012 up 4.2 percent year-over-year. The Zillow Rent Index stood at $1,274 at the end of December.

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Higher Taxes in 2013

A 92 Year-Old Solution for Real Estate Investors Facing Higher Taxes in 2013:

1031 Exchanges Offer Full Deferral of the New 3.8% Medicare Surtax Tax and 20% Capital Gain Tax

 

 

 

 

The familiar adage, “It’s not how much you make, but how much you keep” rings truer than ever for real estate investors in 2013. Not only have capital gain taxes increased significantly for high earners, but many investors below the top tax bracket face an additional 3.8% surtax on passive investment income like capital gains. Fortunately, IRC Section 1031, a provision which has been in the tax code since 1921, provides critically needed tax relief.

Under the American Taxpayer Relief Act of 2012, the top capital gain tax rate has been permanently increased to 20% (up from 15%) for single filers with incomes above $400,000 and married couples filing jointly with incomes exceeding $450,000. In addition, the new IRC Section 1411 3.8% Medicare surtax on net investment income, which includes capital gains, results in an overall rate for higher-income taxpayers of 23.8% -- a staggering 58% increase from 2012 tax rates!

 

Four Steps Involved in Determining Capital Gain Taxation

 

Absent the tax deferral benefits of a 1031 exchange, below is a summary of the four ways investors will be taxed on the sale of an investment property:

 

1)      Depreciation Recapture: Taxpayers will be taxed at a rate of 25% on all depreciation recapture.

 

2)      Federal Capital Gain Taxes: Investors owe Federal capital gain taxes on the remaining economic gain depending upon their taxable income. Since a new higher capital gain tax rate of 20% has been added to the tax code, investors exceeding the $400,000 taxable income threshold for single filers and married couples filing jointly with over $450,000 in taxable income will be subject to the new higher tax rate. The previous Federal capital gain tax rate of 15% remains for investors below these threshold income amounts.

 

3)      New Medicare Surtax Pursuant to IRC Section 1411: The Health Care and Education Reconciliation Act of 2010 added a new 3.8% Medicare Surtax on “net investment income.” This 3.8% Medicare surtax applies to taxpayers with “net investment income” who exceed threshold income amounts of $200,000 for single filers and $250,000 for married couples filing jointly. Pursuant to IRC Section 1411, “net investment income” includes interest, dividends, capital gains, retirement income and income from partnerships (as well as other forms of “unearned income”).

 

4)      State Taxes: Taxpayers must also take into account the applicable state tax, if any, to determine their total tax owed. Some states have no state taxes at all, while other states, like California, have a 13.3% top tax rate.

 

Acquire, renovate and resell in 90 days

FHA says flip away -- within limits

Temporary waiver of 90-day 'anti-flipping' rule extended through 2014

By Ken Harney, Monday, December 3, 2012.

Inman News®

Foreclosure sale image via Shutterstock.

Good news for single-family home investors, rehabbers and buyers seeking to use low down payment FHA financing: The temporary waiver of FHA's 90-day "anti-flipping" rule was extended last week through 2014.
The waiver, which facilitates purchases of homes from sellers who have held title to their properties for less than 90 days, continues a policy first adopted by the Obama administration in 2010.
Starting in 2003, FHA had imposed the 90-day standard as part of an effort to rein in rampant quick-flips of houses where investors made minimal or no improvements to rundown, foreclosed or abandoned houses, then sold them days or weeks later at high price markups with the help of inflated appraisals to purchasers using FHA loans.
Those flips frequently involved collusion and fraud by teams of mortgage loan officers, realty agents and appraisers -- even straw buyers who defaulted and disappeared without making a single payment -- and racked up significant losses to FHA's insurance fund. Neighborhoods suffered because the properties remained empty and in bad physical condition, depressing values of houses in the immediate vicinity.

Since 2011, FHA has made annual extensions of its waiver. This year, an FHA official told me Friday, the agency opted for a two-year term in order "to provide greater levels of certainty" for lenders and buyers, removing questions about whether, and for how long, the waiver would be continued. Since the first waiver in 2010, according to the official, FHA has successfully insured $11 billion worth of mortgages on 65,250 homes where the seller had held title for less than 90 days.
In a Federal Register notice Nov. 29 announcing the extension, Acting FHA Commissioner Carol J. Galante said the objective is to increase "the availability of affordable homes for first-time and other purchasers, helping stabilize real estate prices as well as neighborhoods and communities where foreclosure activity has been high."
Among the key requirements that will continue during the latest waiver:

• All transactions must be arm's-length, with no identity of interest between the buyer and seller or other participants. Lenders are required to ensure that the seller actually holds title to the property. (In earlier flipping schemes, buy-sell transactions sometimes moved so fast that the seller never acquired legal title.) There should be no "pattern" of previous flips of the property during the 12 months preceding the transaction.
• In cases where the sales price of the resold property is more than 20 percent more than what the seller paid for it, there must be documentation showing the renovations and repairs that justify the markedly higher resale price. A second appraisal may be used to substantiate the increase in value, but the second appraiser must be selected from FHA's roster. When no significant renovations occur and the price is 20 percent higher than acquisition, the appraiser must provide "appropriate explanation" for the sudden increase.
• Inspections are required of all the key components of the building structure and systems when price jumps exceed 20 percent. The inspection report must be provided to the purchaser before closing. If the inspection reveals structural or "health and safety" defects, repairs must be completed before the closing and a final inspection performed to ensure that the repairs have been made.

Real estate professionals and others involved in single-family investment activities welcomed the latest extension and its two-year time span. Kevin Kim, an agent with Windermere Preferred Living in Brea, Calif., said "this definitely benefits my investors, but it's also good for communities" where high rates of foreclosure have left properties sitting around in deteriorating conditions.
Kim said most of his investor clients do not exceed the 20 percent price-increase threshold -- "typically it's more like 10 to 12 percent" -- but they virtually all try to acquire, renovate and resell in less than 90 days.
Cathy Bureau, broker-owner of Green Home Realty in San Antonio, Texas, who specializes in the central areas of the city, says FHA's two-year extension assures investors that there will be takeout financing for buyers, thereby cutting costs on the "hard money" line of credit financing they use to acquire their houses. At interest rates of 14 to 16 percent, "every day costs money," she said, so for investors the ability to sell quickly after completing repairs is crucial.

Do No Harm to Housing

Call for Action: Do No Harm to Housing

The REALTOR® Party needs your urgent help to protect the stability of the American housing market and the American economy. By now you have seen numerous news reports concerning the “Fiscal Cliff.”

Many of these reports speculate that a change to the long-standing policy that allows homeowners to deduct mortgage interest payments from their income taxes could be part of a “Fiscal Cliff” deal. 

REALTORS® need to “remind” Congress about our position on any proposed changes to the mortgage interest deduction.

NAR's position is that the mortgage interest deduction is vital to the stability of the American housing market and economy and we will remain vigilant in opposing any future plan that modifies or excludes the deductibility of mortgage interest.

Please send this short message to your Senators and Member of Congress to remind them where we stand and that we will be watching to see who stands with us.

---

Message Subject: Do No Harm to Housing

Dear [Decision Maker],

I am writing to you, as a constituent and as a member of the National Association of REALTORS®, concerning an issue of critical importance to the United States housing market and the economy.
As my elected official, it is imperative you remain vigilant in opposing any plan that modifies or excludes the deductibility of mortgage interest.The mortgage interest deduction is vital to the stability of the American housing market and economy.

I am sending this message to ask you to stand with 70 million American homeowners. I will be watching to see who stands with us.

Sincerely,
Patrick E. Rosenthal

GET A MORTGAGE RATE UNDER 4%

Mortgage experts weigh in on six ways you can get an interest rate near the record-setting lows.

Photo: Thinkstock

Low mortgage rates: everyone wants them, but not everyone can have them. And with rates dropping to record-setting lows, it's no wonder why they're such a hot commodity.
Mortgage rates hit record-setting lows at well under the 4-percent mark in the first week of October 2012. That's when Freddie Mac, the government-sponsored home financing corporation, reported the average 30-year fixed-rate mortgage (FRM) average dipped to 3.36 percent.
Unfortunately, not everyone will be able to take advantage of these low interest rates.
Why not? According to Brownie Stanisch, a senior loan consultant from Sherman Oaks, Calif., the qualifying guidelines for loan approval are tougher than ever due, in part, to the rising amounts of home foreclosures.
"Every time a property is foreclosed, lenders look at what caused the foreclosure," Stanisch says. "If they look at 10 property foreclosures and eight of them were homes (purchased by borrowers) with low credit scores or a low down payment, lenders feel they have got to be more stringent."
Want to find out if you could score a 4 percent mortgage rate or less? Consider these six key factors that mortgage experts say could help you get a low rate.

Factor #1 - Good Credit

Nothing moves the needle in terms of an interest rate more than a borrower's credit rating, mortgage experts say.
"Good credit is mandatory," says Laura Hertz, a loan officer based in Sherman Oaks, Calif. "People think no credit is good credit, but no credit is no credit."
A primary form of determining one's credit "rating" in the eyes of lenders is a borrower's FICO score, a numerical calibration of one's credit risk (invented in the 1960s by a company called Fair Isaac).
[Got a good credit score? Click to compare mortgage rates now.]
According to myFICO, the consumer division of Fair Isaac, lenders use your credit score to determine how much money you can borrow and at what interest rate. FICO scores range from 300 (on the bad end) to 850 (on the great end).
"It's important to maintain good credit," Hertz says. "A score of 640 is an OK credit score, but 740 and above will get you the best rates."
To review your credit report, the Federal Reserve System, which oversees national monetary policy and the banks, suggests ordering a copy from www.annualcreditreport.com.

Factor #2 - Good Down Payment

Getting an interest rate under 4 percent truly is a game of percentages. The mortgage rate you receive is likely to be inversely proportional to your down payment - that is, the more you put down, the lower your interest rate tends to be, according to Hertz.
"To get the very best rate, you have to have a 30 percent down payment," Hertz says. "A 20 percent down payment is good, and that can be worked with for a better rate."
[Are you able to put down a good down payment? Click to compare mortgage rates now.]
But is a 20 percent down payment the starting point for interest rates under 4 percent? Not necessarily.
Hertz says down payments of 10, 5, or even 3.5 percent are good amounts, too, but borrowers might have to pay additional fees or purchase private mortgage insurance (PMI) to offset risk issues such as poor credit.
The Mortgage Insurance Companies of America defines PMI as a measure lenders use "for protection in case the homeowner fails to make his or her (mortgage) payments."
Borrowers with a low down payment, according to Hertz, might have to include PMI with their loan package in order to get an interest rate under 4 percent.
"If you do 20 percent down, you don't end up with high PMI," Hertz says.

Factor #3 - The Right Lender

Getting a loan with an interest rate below 4 percent depends heavily on finding a lender or broker who has your best interest at heart. But how can you find the right lender?
For starters, you need to shop around and consider recommendations from people you trust, Hertz says.
"Listen to your realtor," Hertz says. "Get different business cards and different references. Almost every one of my clients is a referral from somewhere else."
[Ready to shop around? Click to compare mortgage rates now.]
You also must be prepared to ask lenders questions about their track record and performance levels, Hertz says. Among the questions you might consider asking include:

• How quickly do your loans close?
• Do you have references from people in the area I can call?
• Does your company have a good rating?
• How much experience do you have?
• Are you in communication with the underwriter (the person who approves or rejects loan requests)?

The answers to these questions will hopefully help you find a lender that can improve your chances of getting an interest rate below 4 percent.
"You have to find a lender who has the time and patience to deal with any issues you might have," Stanisch says. "They need to be able to advise you on whether you can do anything to improve your pricing conditions, so don't wait until you find a house to start the process."

Factor #4 - Stable Job History

How is your employment history? If you have been off and on the job for an extended period of time, that could affect whether your interest rate will find itself near the record-setting low marks, mortgage experts say.
Even with a good income, you'll still need to prove that your job history bodes well for your future employment, thus enabling you to borrow at a lower interest rate. The key word here: documentation.
"Lenders will definitely decline loans if you can't provide documentation or back up what you are telling them," Hertz says. "They don't take things at people's word unless they can be backed up."
[Think you have what it takes to land a low mortgage rate? Click to compare mortgage rates now.]
Hertz says you can expect lenders to ask you to sign a Form 4506 from the Internal Revenue Service to request a transcript of your tax return. You'll likely also be asked to provide pay stubs and bank statements to verify your income and assets.
People who are self-employed, receive other types of taxable income, or earn substantial commissions or bonuses have to be diligent in keeping track of their salary history, according to Hertz. Lenders tend to scrutinize job history the way Sherlock Holmes works a case, leaving no stone unturned.
Hertz recommends having the following documentation in good order to show lenders:

• Two years of tax documentation
• Any bonus check stubs from the previous year
• The most recent month of pay stubs
• Two forms of legal identification
• Two months of bank statements

"If your work hours are not guaranteed, that's a big problem," Hertz says. "If you're somebody who has a big part of their income that's a bonus or a sales rep whose income is decreasing, they might not qualify for the loan. You have to show your income is increasing or staying the same."

Factor #5 - Few Liabilities

The amount of debt you owe can play a significant role in whether you get an interest rate near the record-setting lows. If your financial liabilities or debts are too much in comparison to how much income you make, lenders might balk at giving you a rate below 4 percent.
The Federal Housing Administration (FHA), the government-sponsored mortgage financing entity, describes these debt ratios as loan requirements based on whether potential borrowers are "in a financial position that would allow them to meet the demands that are often included in owning a home."
A debt ratio is an indicator that measures the proportion of debt an individual has compared to their assets.
[Are you ready to score a low mortgage rate? Click to compare rates from multiple lenders now.]
For people with a lot of credit card debt, for example, Stanisch says you want to pay off balances or get them as low as possible before you attempt get a home loan with an interest rate under 4 percent.
Here are some other ways Stanisch and Hertz say you can improve your debt-to-income ratios:

• Lower your liabilities or debts, such as paying off a car
• Increase your income, perhaps by getting a second job
• Some combination of both lowering debt and improving income

Factor #6 - Loan Type

Choosing a loan type could spell the difference between getting an interest rate that's well below 4 percent and one that hovers high above it. So which way do you go - a conventional loan or one that's financed by a government-sponsored program?
Depending on your situation and the loan terms, Hertz says you might get a better rate with a government-backed loan.
"The FHA's actual rate can be a bit lower than a conventional loan," Hertz says, "but the mortgage insurance is often higher than a conventional loan."
[Shop around for the best mortgage loans and rates. Click to get started.]
Hertz says it's important for borrowers to be aware that getting an FHA loan can require an upfront insurance premium and another monthly premium based on the loan amount. But if having an interest rate under 4 percent is important to you, paying the additional premiums might be worth it.
"The upfront mortgage insurance and monthly (premiums) are aversions, but most Fannie and Freddie loans are under 4 percent," Hertz says.

Home sales climb 2% in October