|This article was published on: 03/01/2006|
COVER FEATURE: The List Issue 2006
Need to Know
10 structural red flags
No home is perfect. “Owners have reported to us that two-thirds of home inspections uncovered problems,” says Dan Steward, president of home inspection company Pillar To Post, Tampa, Fla.
That’s why many sellers decide to have a pre-sale inspection. “For any homeowner, repairing problem areas prior to putting the house on the market can maintain or increase the home’s value and avoid unpleasant surprises during the sales negotiation or at time of closing.”
At the same time home buyers need to understand what’s normal and what’s not, says H. Alan Mooney, president of Criterium Engineers, a consulting engineering firm that specializes in building inspections. “Most foundations have cracks, and 90 percent are normal,” he says.
Help your buyer clients understand the biggest problems:
If seller clients are required to make repairs before a closing, advise them to get three recommendations and bids before proceeding. If work was previously done, tell buyer clients to check permits to ensure the work was performed in compliance with local regulations.
Sources: H. Alan Mooney, Criterium Engineers, Portland, Maine; Diane Saatchi, The Corcoran Group, East Hampton, N.Y.; Dan Steward, Pillar To Post, Tampa, Fla.
8 loan products — and whom they’re perfect for
Helping buyers find the perfect loan involves more than matching a mortgage product to their income and risk profile. It also requires educating buyers about the options. Although the 30-year fixed rate may still be the mortgage of choice, here are some of the alternatives available from top residential mortgage lenders.
1. If the buyer needs a lower rate to buy but is scared of rising interest rates: Consider a 10-year interest-only loan that then automatically transfers into a 20-year fixed loan at the same rate, suggests Paul Fein, senior vice president, southeastern division with GMAC Mortgage. “Our loan gives people the chance to build some equity through appreciation before they have to start making larger payments, yet they get the stability of a fixed rate,” he says.
2. If your client is buying from a builder: Consider a loan with a longer interest-rate guarantee, suggests Fein. Homes are now taking longer to build, so the traditional six-month cap is now being replaced by loans such as GMAC Mortgage’s Builder Power, which offers 12-month rate protection.
3. If the buyer needs a year or two of breathing room before making full payments: Consider a fixed-rate loan with an initial interest buy down, suggests Joe Rogers, executive vice president and national sales manager at Wells Fargo. “Our Flex/Fixed program allows customers to take advantage of lower mortgage payments for one to three years. This temporary buy down can produce an interest rate lower than that of an ARM for a short period,” he notes.
4. If the buyer is in a high-appreciation market and expects to move in 10 years or less: “Consider an interest-only ARM loan with a longer amortization period, perhaps a 10/1 ARM,” says Rogers. Buyers will receive the benefits of rates lower than an amortized loan for a longer period than a 3/1 or 5/1 ARM can provide if interest rates are on the rise. However, Rogers cautions, home buyers need to make sure they give careful thought to their individual financial picture, since with an interest-only loan, you’re not building equity. That can be risky, especially if prices drop.
5. If cash flow is as important as building equity: Consider the option of seven- or 10-year adjustable ARMs, especially the flexible option ARMs that allow owners to make interest-only payments in months when they need extra cash. Consumers today are much more savvy about using their home as another financial management tool, says Tony Meola, executive vice president of home loan production at Washington Mutual. Although these intermediate-length ARMs may have slightly higher interest rates than shorter-term ARMs, their rates are very competitive with fixed loans under current yield spreads, he adds.
6. If you’re representing an investor who’s buying a four-plex: Consider an Alt-A mortgage, which offers loans at rates between prime and subprime for borrowers whose loan needs don’t neatly fit into Fannie Mae or Freddie Mac guidelines, says Meola. Now that a secondary market for these loans has been established, mortgagors are more willing to lend to investors who surpass the $400,000 agency loan limit, those with income and asset verification issues, and other borrowers who can’t easily qualify for conforming loans.
7. If the buyer is a firefighter, teacher, or police officer, or has an income at or below the area’s median: Consider the Neighborhood Champions, Community Commitment, or Acorn programs from or with Bank of America. These loans feature low or no down payments and flexible credit guidelines including consideration of undocumented income. In the case of Community Commitment and Acorn, the loans also offer interest rates at below market for the term of the loan. The programs aren’t new, but they have been tweaked with lower down payment options in response to consumer needs, says Mike Bradshaw, senior vice president and home ownership service executive at Bank of America.
8. If the buyer wants a traditional fixed rate but needs a lower payment: Consider newer fixed mortgages that run for 40 years, suggests Bradshaw. Equity builds more slowly, but the rate is secure. Bradshaw predicts that lenders will soon be offering more flexible terms that aren’t just 15 or 30 years.
• Caution: Buyers need to be aware that some specialty mortgages come with added risk, such as large payment increases that come at the end of an introductory period. To learn more, read “Shopping for a Mortgage? Do Your Homework First,” developed by the NATIONAL ASSOCIATION OF REALTORSŪ and the Center for Responsible Lending. Order copies of the brochure, or download a free PDF version (in English or Spanish), at REALTOR.org.
6 deadly deal busters — and how to beat them
You work hard to get the purchase contract signed, but you can’t relax even then. Deal busters are lurking. Be ready.
1. Property appraisal is too low.
Response: If buyers don’t have enough cash to make up the difference in the loan amount and the purchase price, work with the sellers to see if they’ll take back a second mortgage. Make sure the existence of seller financing is disclosed and won’t affect the buyers’ ability to qualify for the first mortgage.
2. Repairs required in the contract haven’t been completed.
Response: Head off the problem by including a clause in the purchase contract that the seller will deduct an agreed-upon estimate of repairs rather than getting the work done.
3. Sellers say they can’t make the move-out date.
Response: If the buyers have the flexibility to stay put, suggest that the sellers agree to pay rent for the period they’ll remain in the house.
4. Buyers can’t qualify for a large enough mortgage to buy the home.
Response: Insist that all buyers be prequalified before showing them homes.
5. The buyer purchases a new car two weeks before closing.
Response: Explain to your buyer clients that big-ticket purchases before the loan is finalized can jeopardize their credit score and endanger the mortgage approval.
6. The inspector finds mold in the home’s crawl space.
Response: Many buyers want to run at the first sign of mold, but most types of mold are benign for everyone except people with severe mold allergies, according to the U.S. Environmental Protection Agency. Urge the buyers to get a mold specialist to assess the type of mold, its extent, and the cost of any remediation before backing out of the deal.
5 ways to give less to Uncle Sam
Diane Kennedy, author, with Dolf de Roos, of The Insider’s Guide to Real Estate Investing Loopholes (John Wiley & Sons Inc., 2005 revised), offers these tips on reducing your tax obligations.
1. Go corporate. By incorporating your business as a subchapter S corporation instead of operating as a sole proprietorship, you avoid self-employment tax and pay taxes on income at a far lower rate. It will cost you between $500 and $1,000 plus state filing fees to incorporate as an S corporation. Because you’ll have less earned income under this structure, your later Social Security benefits could be less, depending upon what you’ve paid into the system.
2. Minimize your business income by classifying a portion of your depreciable real estate as personal property. Since personal property can be depreciated over five to 15 years, as opposed to 27.5 to 39 years for real estate, you will get higher deductions, thereby lowering your taxable income.
3. Deduct a chunk of your vacation costs by looking at real estate investments during your trip. The key is how many days you spend on your real estate investments during the trip. Every business day that you spend all your time looking at properties, you can deduct 100 percent of your travel and hotel rooms and 50 percent of meals. You don’t have to buy anything during a particular trip, but if the IRS questions your return, you’ll need to prove you’re a serious investor by showing you’ve made offers on property or have a track record of prior investments.
4. Open a Roth 401(k) in 2006. This form of retirement savings account not only lets you withdraw funds tax free when you retire but also allows you to contribute up to $15,000 annually, regardless of your income. You can also use funds in a Sole Roth 401(k) to invest in real estate.
5. Take a deduction for your home office. Many real estate professionals avoided this deduction in the past because the portion of the home used for the office didn’t qualify for the capital gains exclusion when the home was sold. However, since 2002, this restriction no longer applies, although, when you sell, you still have to recapture any depreciation you’ve taken.
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Sources: About.com and The Real Estate Solutions Guide 2005, published by Florida REALTORŪ
10 signs there may be fraud
The Federal Bureau of Investigation reports that pending mortgage fraud cases increased by 47 percent between 2003 and the second quarter of 2005. In its white paper, The Detection, Investigation, and Deterrence of Mortgage Loan Fraud Involving Third Parties, the Federal Financial Institutions Examination Council of Arlington, Va., suggests these red flags as indicators that fraud may be taking place.
At REALTOR.com, you can find books, library resources, and more devoted to these important, need-to-know topics. Many, including the REALTORŪ Magazine Online Risk Management Tool Kit are free to you as a benefit of membership.
THE LIST ISSUE