Overlooked Recordkeeping

Homeowners are familiar that they can deduct the interest and property taxes from their income tax returns. They also understand that there is a substantial capital gains exclusion for qualified sales of up to $250,000 if single and $500,000 for married filing jointly. However, ongoing recordkeeping tends to be overlooked.

New homeowners should get in the habit of keeping all receipts and paperwork for any improvements or repairs to the home. Existing homeowners need to be reminded as well, in case they have become lax in doing so.

These expenditures won't necessarily benefit in the annual tax filing but may become valuable when it is time to sell the home because it raises the basis or cost of the home.

For instance, let's say a single person buys a $350,000 home that appreciates at 6% a year. Twelve years from now, the home will be worth $700,000. $250,000 of the gain will be exempt with no taxes due but the other $100,000 will be taxed at long-term capital gains rate. At 15%, that would be $15,000 in taxes due.

Assume during the time the home was owned that a variety of improvements totaling $100,000 had been made. The adjusted basis in the home would be $450,000 and the gain would only be $250,000. No capital gains tax would be due.

Some repairs may not qualify as improvements but if the homeowner has receipts for all the money spent on the home, the tax preparer can decide at the time of sale. Small dollar items can really add up to substantial amounts over many years of homeownership.

You can download a Homeowner's Tax Worksheet that can help you with this recordkeeping. The important thing is to establish a habit of putting receipts for home expenditures in an envelope, so you'll have it when you are ready to sell.

Costs More - Takes Longer

The one experience that homeowners can agree upon after completing a remodeling project is that it costs more and takes longer than expected. It doesn't really matter that you researched, planned, and received multiple bids, it will, invariably, cost more and take longer than you originally anticipated.

Replacing floorcovering or painting is a project that a homeowner can easily get bids and contract with the workmen directly. A new level of complexity occurs when the project involves more specialized contractors, like plumbers, electricians, carpenters, counters, and others.

Now, a homeowner is faced with dealing with one general contractor who will run roughshod over the sub-contractors or make the decision to do it themselves. Typically, you'll pay more for a general contractor, but the trade-off is that they have the contacts and experience to make things go smoothly.

Subs are notorious for wanting to finish their "part" of the project and move onto to the next job. Sometimes, they're not interested in the "big picture" enough to consider doing things in a way that are best for the overall outcome.

When you start tearing out some things, you find out that there may be unexpected expenses involved. Another common occurrence is that during the project, you get a new thought about changing something else "since it is already torn up anyway." This will add time and money to the job.

There can be the situation that the homeowner doesn't even know the right questions to ask or what to consider when trying to coordinate the different workers. The most detailed timetable can be thrown off track if one set of workers don't show up or finish on time. At best, it delays the project for a few days. At worst, it can delay it for a few weeks because the individual workers may have committed to other jobs that don't allow them to reschedule.

Once the work is done in a professional manner, you're probably going to live with it for years. If it is something you've wanted to do and it will allow you to enjoy your home more, it is worth doing. Just be patient and enter this adventure with the understanding that it will cost more and take longer than you expect.

Case Study - Housing Decision During Retirement

A couple is planning to tour the United States in a travel trailer during their first few years of retirement. They are going to sell their current home now and purchase another home when they finish their travels.

An interesting exercise is to determine the optimum time of selling the home: now or when they're ready to buy their replacement home.

If they intend on traveling for more than three years, then, it may be a good decision to sell prior to the sojourn to avoid paying taxes on the gain in their home. IRS allows for a temporary rental of a principal residence while still keeping the $250,000/$500,000 capital gains exclusion intact. A homeowner must own and use a home for two out of the previous five years which means that it could be rented for up to three years, but it would need to be sold and closed before that three-year window expires.

If the travel will be less than three years, there is an option of selling now or later. Using the example below, the homeowner sold the home, paid their expenses and invested the proceeds in a three-year certificate of deposit until the replacement home was purchased.


As an alternative, if the homeowner rented the home, not only would they have income, the home would continue to appreciate and the unpaid balance would go down resulting in larger net proceeds. Based on a 5% appreciation and continued amortization of the mortgage, the net proceeds could easily be $40,000 more.


Obviously, there are a lot of considerations that affect the decision to sell now or later but in an appreciating real estate environment, being without a home for several years could affect the financial position of the owner in the replacement property. It is certainly reasonable to look at various alternatives before making a decision. Call me at (973) 307-0023 to help you look at the different possibilities and talk to your tax professional.

Waiting Period After Distressed Sale

"How long do we have to wait to qualify for another mortgage" is the question concerning people who've had a foreclosure, short sale or bankruptcy. The loan types for the new loan will differ in amounts of time to heal credit scores based on the event.

The following chart is meant to be a general guide for how long a person might have to wait. During this waiting period, it's important that the person be current on all payments and maintains a history of good credit.

A recommended lender can give you specific information regarding your individual situation and can make suggestions that will improve your ability to qualify for a mortgage. This process should be started before looking at homes because of the time constraints listed here can vary based on current requirements and possible extenuating circumstances of your case.

We want to be your personal source of real estate information and we're committed to helping from purchase to sale and all the years in between. Call us at (973) 307-0023 for lender recommendations.

Waiting Will Cost More

With the first quarter of 2018 in the books, the 30-year fixed rate mortgage is nearing what Freddie Mac predicted it would be in the second quarter. If this pace continues, rates will exceed the five percent mark expected by the end of the year.

The Fed has had its first of an expected three raises for this year and two more are expected in 2019. While these rates are not directly related to mortgages, they certainly have an effect.

Delaying the decision to purchase or refinance could be an expensive missed opportunity. A $270,000 mortgage at 4.44% has a principal and interest payment of $1,358.44 per month. If the rate were to rise one-percent in the next twelve months, the payment would be $1,522.88.

The $164.44 increase would cost a homeowner an additional $13,812.97 in seven years and close to $60,000 over the full term of the loan.

The question facing people is "what would you spend $164.44 each month if you had acted sooner to get the lower rate?"

If you're curious to know what your "missed opportunity" could be costing you, try this Cost of Waiting to Buy calculator . Use 0% increase on price change if you are refinancing a home you already own.

FHA Advantages

The Federal Housing Administration, operating under HUD, offers affordable mortgages for tens of thousands of buyers who may not qualify for other types of programs. They are popular with both first-time and repeat buyers.

The 3.5% down payment is an attractive feature but there are other advantages:

• More tolerant for credit challenges than conventional mortgages.
• Lower down payments than most conventional loans.
• Broader qualifying ratios - total house payment with MIP can be up to 31% of borrower's monthly gross income and total house payment with all recurring debt can be up to 43%. There is a stretch provision taking it to 33/45 for qualifying energy efficient homes.
• Seller can contribute up to 6% of purchase price; this money must be specified in the contract and can be used to pay all or part of the buyer's closing costs, pre-paid items and/or buy down of the interest rate.
• Self-employed may qualify with adequate documentation - two year's tax returns and a current profit and loss statement would be required in addition to the normal qualifying and underwriting requirements.
• Liberal use of gift monies - borrowers can receive a gift from family members, buyer's employer, close friend, labor union or charity. A gift letter will be required specifying that the gift does not have to be repaid.
• Special 203(k) program for buying a home that needs capital improvements - requires a firm contractor's bid attached to the contract calling for the work to be done. The home is appraised subject to the work being done. If approved, the home can close, the money for the improvements escrowed and paid when completed.
• Loans are assumable at the existing interest rate with buyer qualification. Assumptions are easier than qualifying for a new mortgage and closing costs are lower.
• An assumable mortgage with a lower than current rates for new mortgages could add value to the property.

Finding the best mortgage for an individual is not always an easy process. Buyers need good information from trusted professionals. Call (973) 307-0023 for a recommendation of a trusted lender who can help you.

2018 Spring Housing Update for New Jersey

2018 Spring Housing Update for New Jersey

With Q1 coming to an end, here are the latest updates and predictions for the 2018 New Jersey Real Estate Market.

Overall Outlook

• More NJ homes were sold in 2017 than in any year on record, and that trend is expected to continue throughout 2018.
• It is 10 years after the worst recession since the Great Depression.  The next recession is predicted to be at least 2-3 years away.
• While Tax Reform changes are causing the Spring Market to lag, an acceleration is expected as people come to understand their individual impact.  
• Rising Interest rates will have the biggest impact on the housing market.
• Unsold inventory is near record lows. It is down 53% from the peak and 11% year over year.

Employment and the Economy:

• 2017 was the 7th straight year with 2MM+ job gains nationwide which means more people are working and incomes are on the rise.
• We are currently in the 2nd longest economic growth period on record.
• Unemployment is currently at 4.1%.  The last time we saw a number that low was 18 years ago.
• The Fed is predicting that GDP will have a 5.4% growth rate which we haven't seen since 2003.  
• The Northeast is at a competitive disadvantage because of higher business and living costs.

Home Prices:

• New Jersey home price index is underperforming the US by 21% due to taxes and the high cost of living. Despite that, home prices are slowly rising.  
• Last year was the largest price increase in NJ since the Great Recession.  Prices overall in NJ are projected to increase 3.5%. Direct train line towns will see larger increases.  I can provide exact percentage projections for a particular town if you are interested in getting that information.  
• Mortgage delinquency is normalizing and is mainly found in urban and distant rural areas in New Jersey.

Home Sales and Inventory:

• Home sales in New Jersey increased by 5% in 2017 with a over 115,000 residential properties being sold.  It is the highest increase since the housing crash.
• January 2018 homes sales were the highest in 13 years.  Note:  those homes were under contract before the tax reform laws were passed.
• Residential transaction volume grew 10% in 2017 with $38.3 billion dollars of residential real estate sold in 2017 statewide. 
• Sales increased for all price ranges year over year.  In the <$600,000 range, sales increased by 5%.  From $600K to $1M, sales increased by 7%.  In the $1M to $2.5M range, sales increased 8%.  In the luxury market ($2.5M +), sales increased by 11% which is the biggest gain in years.
• Inventory is still historically low.  There are 27,000 fewer homes on the market than the peak in 2007.  That is 53% down from the peak and 11% yoy.  One reason is that home building never recovered. There were less than 10,000 new home building permits requested in 2017 compared to 22,000 in 2005.
• The top 5 counties with the lowest absorption rate (number of months it would take to sell out of current inventory) are:

1.     Middlesex – 3.2 Month Supply

2.     Hudson – 3.4 Month Supply

3.     Union – 3.4 Month Supply

4.     Monmouth – 3.9 Month Supply

5.     Essex - 3.9 Month Supply

            

Note:  A balanced market is 5-7 months.  Anything over 7 months is a buyer’s market.  Anything lower than 5 months is a seller’s market.

• Going forward, 95% of all home sale transactions will be millennials buying and baby boomers selling.

Interest Rates:

• Interest rates will continue to rise in 2018 due to economic growth.  
• For every 1% rise in interest rate, a homebuyer needs to reduce their purchase price by 9%.  Buyers who have been on the fence need to move forward.  If buyers wait and interest rates go up, their second choice house will be more expensive.  Sellers can expect that by the end of 2018, buyers will be able to afford less than today.

Investment Opportunity - Residential and Commercial Rental Units

• Multi-family units and commercial apartment buildings are attractive due to rising rent prices.  
• Newark is still evolving and is a great place to invest in residential and commercial rental units.
• Direct train line towns will provide rental opportunities due to easy access to NYC and Philly.

Initial 2018 Forecast:

• The Economy continues to be strong.
• The 2018 home market will be sluggish at first, but we should see steady increases in sales transactions later in 2018 and into 2019 and 2020.
• Interest rates rise by 1%.
• There is a strong demand for commercial real estate.
• Mid-term elections could create volatility toward year-end.
• Rental Rates will rise as new buyers can no longer afford the house/town they want because of rising interest rates and home prices. This is a great opportunity for investors with multi-family units.

This is intended as a brief update.  For a complimentary home evaluation, buying consultation or investment discussion please contact me at:  973-307-0023 or cheryl@thedarmaningroup.com.  

If you know anyone that would like to buy or sell real estate in New Jersey or around the globe, I can help!  Please pass along my information!