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Blog/News - important must read information
1. Writing the Winning Home Purchase Offer (multiple offers)
2. Loan Pre-Approved is not Loan Pre-Qualified
2-a. A fully underwritten loan pre-approval wins and allows quick close
3. Looking Beyond The Distressed Sale For A Deal In Today’s Real Estate Market
4. Why are short sales so long and drawn out?
5. 5 keys to buying a bank-owned property
6. The Benefits of Buying a New Home vs. a Foreclosure
7. The Fuzzy Math of Home Values (automated valuation models)
8. Home sweet homeowner Tax Breaks
1. Writing the Winning Home Purchase Offer (multiple offers)
How can you increase your chances of winning against competing home buyers?
The winner is usually the most qualified home buyer with the best price and the fewest strings attached; the winning purchase offer may include;
- All cash, or
- A large cash down payment (20% and higher), and
- A loan pre-approval letter from a reputable direct lender (if you use a mortgage broker, ask him to have the direct lender he works with issue you the pre-approval letter);
- The listing price or higher (you can renegotiate the price later based on the appraisal or inspections results);
- Few contingencies (conditions that must be satisfied in order for the sale to go through). Typical contingencies include financing, appraisal, inspections and the sale of another home. Put yourself ahead of the crowd by limiting as many conditions as possible before presenting your offer, however, do not forego important things;
- The Earnest Money Deposit (a photo copy of your check for the initial down payment, made out to the escrow/title office; if your offer is accepted, you will have 3 days to deposit the funds with that office);
- Proof of funds (a photo copy of your bank statement showing you have the cash to complete the transaction; don't forget to black-out your account # and SS #);
- A cover letter about you and why you would love to live in the house. Some sellers are influenced by emotional appeal, particularly if they're looking at multiple similar offers.
[Note: Before we begin showing you properties, please email us a loan pre-approval letter and proof of cash funds.]
2. Loan Pre-Approved is not Loan Pre-Qualified
[Some lenders will issue you a loan pre-approval letter but it is really only a pre-qualification; know the difference and assure your lender pre-approves you, and
your letter details the specific items that have been analyzed and verified (e.g. employment, income, tax return, credit report, cash down-payment, etc.) and those remaining to be verified (e.g. the property, appraisal, etc.)]
October 26 2007 | Investopedia
Getting pre-qualified is the initial step in the mortgage process, and it's generally fairly simple. You supply a bank or lender with your overall financial picture, including your debt, income and assets. After evaluating this information, a lender can give you an idea of the mortgage amount for which you qualify. Pre-qualification can be done over the phone or on the internet, and there is usually no cost involved. Loan pre-qualification does not include an analysis of your credit report or an in-depth look at your ability to purchase a home.
The initial pre-qualification step allows you to discuss any goals or needs you may have regarding your mortgage with your lender. At this point, a lender can explain your various mortgage options and recommend the type that might be best suited to your situation.
Because it's a quick procedure, and based only on the information you provide to the lender, your pre-qualified amount is not a sure thing; it's just the amount for which you might expect to be approved. For this reason, a pre-qualified buyer doesn't carry the same weight as a pre-approved buyer who has been more thoroughly investigated.
Getting pre-approved is the next step, and it tends to be much more involved. You'll complete an official mortgage application (and usually pay an application fee), and then supply the lender with the necessary documentation to perform an extensive check on your financial background and current credit rating. (Typically at this stage, you will not have found a house yet, so any reference to "property" on the application will be left blank). From this, the lender can tell you the specific mortgage amount for which you are approved. You'll also have a better idea of the interest rate you will be charged on the loan and, in some cases, you might be able to lock-in a specific rate. With pre-approval, you will receive a conditional commitment in writing for an exact loan amount, allowing you to look for a home at or below that price level. Obviously, this puts you at an advantage when dealing with a potential seller, as he or she will know you're one step closer to obtaining an actual mortgage.
The other advantage of completing both of these steps - pre-qualification and pre-approval - before you start to look for a home is that you'll know in advance how much you can afford. This way, you don't waste time with guessing or looking at properties that are beyond your means. Getting pre-approved for a mortgage also enables you to move quickly when you find the perfect place. When you make an offer, it won't be contingent on obtaining financing, which can save you valuable time. In a competitive market, this lets the seller know that your offer is serious - and could prevent you from losing out to another potential buyer who already has financing arranged.
Once you have found the right house for you, you'll fill in the appropriate details and your pre-approval will become a complete application.
The final step in the process is what's called a "loan commitment", which is only issued by a bank when it has approved you, the borrower, and the house in question. This means the home should be appraised at or above the sales price. The bank may also require more information if the appraiser brings up anything he or she feels should be investigated (i.e. structural problems, accessibility issues, outstanding liens or litigation in progress). Your income and credit profile will be checked once again to ensure nothing has changed since the initial approval.
A loan commitment letter is issued only when the bank is certain it will lend, so the commitment date on your purchase contract should be closer to closing than to the date of your offer. (The seller can ask to see that letter as soon as the date has passed, so beware of anyone who tries to put an early commitment date into your contract).
2-a. A fully underwritten loan pre-approval wins and allows quick close
Mortgage broker: John Holmgren, Holmgren & Associates
Property type: Single-family home in Upper Rockridge
Loan amount: $608,000
Purchase price: $760,000
Loan type: 30-year fixed
Loan rate: 4.625 percent with 0 points
Backstory: Holmgren's clients had made a number of offers and lost to all-cash offers and frenzied overbidding from competing homebuyers.
To make his clients more competitive, Holmgren got their loan request fully underwritten by his underwriting department. This meant their agent in Montclair, was able to offer a two-week closing period.
This, along with the fact that their pre-underwritten approval eliminated the underwriting surprises home sellers and listing agents fear most, made them competitive with four all-cash buyers and moved them ahead of other prospective buyers who needed longer escrow periods. Since Care had arranged for the home to be pre-inspected, once the offer was accepted the appraisal was done the next day, meaning the file moved into the closing stage and enabled an on-time close.
During this period, interest rates were moving upward due to market fears about Fed monetary policy. Holmgren recommended locking the rate on a specific day early in the process, right before rates briefly spiked to more than 5 percent. Rates did not return to the level obtained by the buyers until after the closing date, so timing here was critical.
See his website; http://www.mortgageholmgren.com/ [he is a direct lender and mortgage broker]
See additional lending sources; direct lender and mortgage broker or direct lender
There are many other lenders to choose from, and the lender is your choice to make.
3. Looking Beyond The Distressed Sale For A Deal In Today’s Real Estate Market
June 21, 2011 / Realtor.com
Foreclosure and short sales can be very tempting for the buyer looking for a great deal but Realtor® Erin Kutnick of Landmark Realtors of San Juan Capistrano, California points out that there are great deals outside the ‘distressed sale’ area of the marketplace:
One of the biggest challenges in today’s market is faced by the ‘equity seller.’ The equity seller is one who has to move or has decided to move and now must compete with bank-owned foreclosures and short sales. Is it possible? The simple answer is yes!
Everyone wants a ‘deal’ in today’s market but ‘distressed’ doesn’t always equal ‘discounted.’ Sometimes a standard sale can be a better deal and the ‘distressed’ sale can cost you more than you bargained for. Short sales and foreclosures now make up close to 50% of the homes sold in today’s market. The average sale price of foreclosed homes was 32% lower than the average sale price of non-foreclosed homes, at last count. However, it’s not always the case that foreclosed homes or short sales offer the buyer the best discount.
With so many distressed properties and homes with depressed values on the market, in many areas, the individual, non-distressed home sellers who are putting their homes up for sale right now are those who are very motivated to sell. And they are more likely to be flexible with a buyer on everything that is negotiable, from contingency and escrow periods, to price, repairs and even personal property included in the sale.
Because most ‘distressed’ sales are exactly that, it’s critical that the equity seller have their home in tip-top condition. When buying a distressed property you can encounter all types of unknown repairs and for some buyers it’s simply not worth it. There are still plenty of buyers that want to purchase a house that is fully upgraded, clean as a whistle and ready to move into. This is where the equity seller has a huge leg up on their competition.
Long story short: you can sometimes negotiate a better deal with an individual seller on a standard sale than with a bank on a distressed home sale. So, don’t limit your search to foreclosures and short sales, if you’re looking for a good deal on your next home. More than ever before, hiring the right real estate professional, who is trained and experienced, to represent you is critical to make sure that your best interests are protected.
4. Why are short sales so long and drawn out?
It's understandable that lenders would want to squeeze as much money as possible from a deal in which a home is being sold for less than what is owed on it, but turning short sales into an ordeal is discouraging potential buyers.
The housing market may be on the ropes, but Curt Beck was ready to come out swinging. He offered $385,000 for a three-bedroom house in Acton. The seller was happy with the terms. But it was unclear if the mortgage holders would allow the deal to go through.
Beck, 56, is typical of many would-be home buyers trying to navigate what's known as a short sale — when a property is sold for less than the outstanding mortgage (or mortgages).
Real estate experts say this can be a particularly challenging process, complicated by lenders trying to squeeze as much money as possible from a transaction, even though a failed deal often results in the property being foreclosed on.
The situation has grown so problematic that the California Assn. of Realtors recently ran ads in newspapers statewide saying more needs to be done to assist homeowners on the verge of foreclosure by expediting the short-sale process.
"Horror stories abound from potential home buyers and Realtors forced to wait 90 or more days for a response to a purchase offer or being required to fax short-sale applications or other paperwork as many as 50 times," said Beth Peerce, president of the organization.
"These delays discourage potential home buyers from considering a short-sale purchase and undermine the process for those who short sales are intended to benefit — the hundreds of thousands of families facing foreclosure," she said.
April home sales in Southern California fell 9.2% from a year earlier, according to market researcher DataQuick. The figure was 25.4% below the month's average since record-keeping began in 1988. The median price paid for a home in the region fell 1.8% from a year earlier to $280,000.
Meanwhile, 21% of homes in the Los Angeles metropolitan area are now underwater, according to the real-estate website Zillow.com. That's another way of saying their mortgages are greater than what the homes are currently worth.
Lenders aren't acting nefariously in most short sales. They're going to take a bath no matter what by allowing a home to be sold for less than is owed for the property. It's understandable they'd want to minimize their loss as much as possible.
But Beck's experience illustrates how a home buyer may feel he's getting the runaround when entering into a short sale.
Beck, of Santa Clarita, had been eyeing the Acton house for months. According to real-estate listings, the house had been offered for $479,000 in October and then pulled from the market a few weeks later.
It was listed again in February for $399,000. In March, the asking price was cut to $374,000.
Wendy Ann Moore, the agent representing the property owner, said no offers were received at the higher prices. But when the house was listed for $374,000, a motivated buyer came forward.
The three lenders holding about $500,000 in loans on the property — GMAC Mortgage, Bank of America and Specialized Loan Servicing — each agreed to the terms of the short sale.
But Moore said the deal fell apart during the escrow process after the buyer lost his job. It was at this point that Beck stepped in.
He told me that as soon as the house returned to the market, he offered to pay the full list price with no contingencies. In other words, he was ready to buy the house as-is.
"My wife and I liked everything about it," Beck said. "We liked the house. We liked the land. We liked the neighborhood."
A few days after making his offer, though, the primary mortgage lender, GMAC, countered that now it wanted $400,000 for the house.
Beck wasn't pleased.
"If they wanted $400,000, they should have told the owner to list it at $400,000," he said. "But it was still listed at $374,000."
After much consternation, Beck reluctantly raised his offer to $385,000. But he felt as if he was being taken advantage of.
"It just seems like they're trying to get more money out of us because they've looked at our credit file and think they can get it," Beck said.
Moore, the real estate agent, said she's been down this road more times than she can count.
"It's very, very frustrating," she said. "It just doesn't seem like banks want to work with buyers and sellers."
Like I say, I get that lenders want to cut their losses in a short sale. But considering that banks filed 68,239 notices of default on California residents during the first quarter, according to DataQuick, you'd think lenders would be eager to avoid repossessing additional properties.
In Beck's case, there's a happy ending. He said GMAC told him the other day that it's willing to accept the $385,000. The other mortgage holders will probably follow GMAC's lead.
But thousands of other home buyers are still struggling to get short sales approved.
Colleen Badagliacco, who heads the California Assn. of Realtors' distressed properties task force, said many lenders don't get serious about short sales until a property owner starts missing mortgage payments. By that time, however, foreclosure proceedings can be imminent.
"This is crazy," Badagliacco said. "You would think they'd work to sell the property before people start missing payments."
The housing crunch won't last forever. We shouldn't be going out of our way to prolong the pain.
5. 5 keys to buying a bank-owned property
A Real Estate Owned property (REO) is a property that has reverted to the mortgage lender after an unsuccessful foreclosure auction. REOs are a large part of the housing market these days. In September 2010, distressed properties -- many of them REOs -- accounted for nearly 48 percent of home-purchase transactions, according to the Campbell Inside Mortgage Finance Survey.
Many banks have an entire department set up to sell REOs. Bank-owned properties can offer great deals for buyers, as they often sell for less than a typical resale home, but there are several things you need to know before investing in an REO property.
Even though REOs can be a bargain, that doesn't mean you should jump in with your eyes closed. "REO buyers need to do their homework so they understand the property, the market, the neighborhood, and the process," says Tom Kelly, a spokesperson for Chase Bank.
Here's what you need to know as a potential buyer of REO property in today's market.
How to find REOs
Real estate agents can pull up REO offerings for you. Most mortgage lenders want their REO properties listed on the multiple listing service (MLS) so that any real estate agent can show them to potential buyers. Many banks also have websites specifically dedicated to their REO listings (go to a bank's website and look for links).
Get your own appraisal
Discounts on REOs vary greatly, depending on whether the homes are severely damaged and where they're located in the country. Although damaged REOs might sell for a relatively minor discount -- 5 percent to 7 percent off comparable private sales of non-damaged homes -- some might offer as much as a 30 percent discount.
But being listed as an REO doesn't mean that a property will automatically be a bargain. Banks are in business to make money, so of course they're going to price homes as competitively as possible. This is why it's important to always ask for an appraisal on the home you plan to purchase, advises Cliff Roe of Cliff Roe Realty, an REO specialist in Seminole, Florida. But keep in mind that an appraisal is going to cost you a few hundred dollars.
Get it inspected
REOs are sold "as-is," and that's why you need a home inspection before committing to a purchase. A thorough inspection is even more important for an REO than for a standard property.
"REOs tend to be sitting for six months to two years," says Roe, "so while you're getting a bargain on price, it's just compensation for the work you'll have to put back in."
A good home inspection should only cost you a few hundred dollars and can save you a lot of heartache. (Find a home inspector online at the American Society of Home Inspector's website, http://www.ashi.org.) An inspection might turn up minor damage and neglect, such as stains, missing appliances, or an unkempt yard. It may also uncover the need to address larger problems, such as holes in walls or major leaks.
The good news: According to Roe, only a small percentage of REO homes have major damage, and many repair issues are apparent as soon as you walk in.
Be financially savvy
"We encourage potential buyers to get prequalified for a loan so that the seller knows the borrower will be able to close," says Kelly.
If you want to buy an REO property, will you have trouble getting a mortgage? If the property you're considering is in good condition, you shouldn't have more trouble qualifying simply on the basis of the home being REO, and likewise, you won't pay higher mortgage rates just because the lender knows you want to buy REO.
However, a significantly damaged property may close off some options for financing, because few mortgage financing programs exist for these types of homes.
"Federal Housing Administration (FHA) has 'purchase and rehab' mortgages available, and Fannie Mae was offering a 'HomeStyle' mortgage, which was similar," says Keith Gumbinger, vice president of HSH.com. If the damage to the REO property rules out some options, you may need to come up with cash or finance your purchase through hard money loans.
Closing may take awhile
Bidding on an REO isn't quite like making an offer on a privately-owned home, where you hear back from an owner fairly quickly. Instead, you'll submit your bid then you'll wait for a response with a counteroffer. Since a bank is a business, you may end up dealing with more than one person or department, and it can take awhile to get all of the paperwork processed.
"The process can be frustrating and take more time," says Gumbinger. On the other hand, because the home is an REO, the bank will already have taken care of any liens on the property, so your title search should be a breeze.
It's possible to turn a fixer-upper into your own personal castle, as long as you are patient and don't expect that an REO listing means an automatic windfall.
6. The Benefits of Buying a New Home vs. a Foreclosure
A common misconception among homebuyers is the idea that the best home values in today's market are foreclosures. While there are some good deals on homes in foreclosure, for most buyers, buying a new home is actually the better value.
Robert Burton, vice president of sales and marketing at The Hofmann Company, a renowned homebuilder that has built over 30,000 homes throughout northern California since 1959, shared his insights on the market and explained the advantages of buying a new home over a property in foreclosure.
What makes buying a new home a better value?
For starters, when you purchase a new home you are protected by a warranty. As Burton points out, "If anything goes wrong, the home is covered by the builder's one-year limited warranty on workmanship and materials, as well as a ten-year structural warranty." You have peace of mind knowing there won't be any unanticipated out-of-pocket repair costs to absorb.
Another benefit of buying a new home is the special incentive programs many builders currently offer to assist buyers. Some of these incentives, such as below market financing or help with closing costs, can save you thousands of dollars and make it easier for you to qualify for your home purchase.
If you're after a quick response to your offer, a new home is a smart way to go. In most cases, you're dealing directly with the builder, which ensures a prompt reply. "As long as the home is ready for occupancy, you can also count on closing escrow in a timely manner," Burton notes.
Of course, the ultimate benefit of buying new is having the opportunity to purchase your dream home. You are the first owner and everything is pristine, sparkling, and brand new. In many cases you'll be able to customize the home, selecting items like cabinetry, countertops, and flooring. Rather than making due with someone else's choices, you have the advantage of living in a home and a neighborhood that truly reflects your taste, lifestyle and personality.
Are you prepared to roll the dice on a foreclosure?
Most buyers don't realize there are a variety of risks associated with buying a foreclosure. Perhaps the biggest concern for any potential buyer should be the fact that properties in foreclosure are sold "as is." This means there's no warranty protection and more importantly, as Burton states, "there's no stipulation on disclosures on the property."
By law, conventional sales on new or resale homes require full disclosure of any details or drawbacks on the property. The seller can be held liable if a problem arises as a result of an issue that wasn't fully disclosed at the time of the sale. With foreclosures, it's always "let the buyer beware." When you purchase a foreclosure you have no recourse against the seller if there are construction defects, environmental hazards, or problems of any kind with the home.
Additionally, when you purchase a foreclosure you can't always be sure of the condition of the home. Many homeowners stop taking care of the property when they realize they will be losing the home. Often, maintenance issues are not immediately visible, for example, having the water turned off for a long period of time can result in problems with seals and plumbing fixtures throughout the home. Buyers are forced to come out of pocket to bring the home up to an acceptable standard of living.
Then there's the issue of price. Burton notes, "You may be surprised to discover that the below market listing price is not what the property actually sells for." Foreclosure properties often attract multiple offers, with professional investors stepping in and bidding up the prices of many below-market foreclosure listings. What initially looks like an incredible deal ends up selling at a significantly higher price. Keep in mind that many foreclosure properties may also require a substantial additional investment after the sale to replace damaged fixtures, missing appliances, stained or worn-out carpets and dead landscaping.
Another factor to consider is you won't receive incentives like those builders offer on financing and closing costs. In terms of financing, you're on your own when you purchase a foreclosure. In most cases, you'll need to have your financing in place before bidding on a foreclosed property.
Finally, for many, there's still a stigma attached to buying a foreclosure-a feeling of buying someone else's problems or benefiting from another family's misfortune. Those who practice Feng Shui may fear the negative energy in the house could impact their family and cause bad luck.
What about short sales?
A short sale occurs when homeowners who want to avoid bankruptcy or foreclosure proceedings gain lender approval to sell the home for less than they owe. In a short sale situation, you are at the mercy of the lender. Even if the owner accepts your offer, the lender has the final say. Obtaining lender approval is a time consuming process, which can take upwards of thirty to sixty days. Short sales require patience and may result in disappointment since lenders frequently reject offers that are below market value.
The bottom line is peace of mind
The reality is it's a great time to be a homebuyer. Prices are down, interest rates are extremely attractive, and the selection of available homes couldn't be better. If you're a risk taker, a foreclosure or even a short sale could be right for you. For the rest of us, Burton concludes, "When making an investment as significant as a home purchase, the bottom line is peace of mind." Buying a new home from a trusted builder in today's market promises the best of both worlds-outstanding value and peace of mind.
7. The Fuzzy Math of Home Values
SmartMoney Magazine: The calculations behind online estimates is adding confusion to an already tricky housing market.
Jason Gonsalves worked hard to turn his 6,500-square-foot stucco-and-stone home in the suburbs of Sacramento into the ultimate grown-up party pad. Inside are the game room, home theater and custom wine cellar. Outside, there's the recently added piece de resistance -- a wood-burning pizza oven, kegerator and searing station, all flanking an infinity-edge pool that overlooks the lapping waters of Folsom Lake. A spread like that doesn't come cheap, of course, so when interest rates fell recently, Gonsalves, who runs a lobbying firm, looked into refinancing his $750,000 mortgage. That's when he got some startling news -- even as he was putting the finishing touches on his home, it had dropped more than $200,000 in value over a seven-month stretch.
Or at least, that's what one popular real estate website told him. Another valued Gonsalves's pad at a jaw-droppingly low $640,500. And these online estimates left him all the more confused when a real-life appraiser, assessing the house for the refi loan, pinned its value at $1.5 million. "I have no idea how those numbers could be so different," Gonsalves says.
Right or wrong, they're the numbers millions of consumers are clamoring for. In a housing market that's been mostly a cause for gloom, so-called home-valuation technology has become one of the few sources of excitement. After years of real estate pros holding all the informational cards in the home-sale game, Web-driven companies like Zillow, Homes.com and Realtor.com are offering to reshuffle the deck. They've rolled out at-your-fingertips technology via laptop and smartphone to give shoppers and owners an estimate of what almost any home is worth. And people have flocked to the data in startling numbers: Together, four of the biggest websites that offer home-value estimates get 100 million visits a month, and one, Homes.com, saw traffic jump 25 percent in the three months after it launched a value estimator in May. "Consumers used to use us for home buying and move on," says Jason Doyle, vice president of Homes.com. "Now we can stay engaged with them."
Real estate voyeurism aside, the stakes are high for many of the sites' visitors. Homebuyers use the estimates to get a feel for what's on the market and, later on, to figure out whether their bid will entice a seller to play ball. Vigilant homeowners like Gonsalves check their values to help decide whether it's worth the hassle of refinancing, while others who are ready to sell use them to gauge if they're priced right for the market. Real estate agents, meanwhile, say they're increasingly resigned to spending more time answering questions -- or arguing -- about the estimates. "It's an evolution for consumers," says Gary Painter, director of research at the Lusk Center for Real Estate at the University of Southern California. Banks and other lenders are piggybacking on the trend as well, with some even showcasing the upstarts' estimates on their own websites. While lenders say they don't use the estimates to make final decisions about loans, they say Zillow in particular has become a go-to tool for their preliminary research on homes. "I use it every day," says Zach Rohelier, a mortgage banker at LendingTree.
But for figures that carry such weight, critics say, the estimates can be far rougher than most consumers realize. Indeed, if the websites were dart throwers, they'd seldom hit the bull's-eye, and they'd sometimes miss the board entirely: Valuations that are 20, 30 or even 50 percent higher or lower than a property's eventual sale price are not uncommon. The estimates frequently change, too, for reasons that aren't always easy for homeowners to discern. According to the companies themselves, some quotes have swung by hundreds of thousands of dollars in as little as a month as new data gets plugged into the algorithms the sites rely on. (Those algorithms also change, as happened this summer when Zillow made adjustments that affected all of the 100 million homes in its database.) And while the sites say it's probably rare that individual homeowners (or real estate agents, for that matter) game the system, they do acknowledge that people can enter information that might push estimates higher. Put it all together, say pros, and you've got numbers that have become head-scratching legends in one community after another: a Hollywood Hills aerie losing 47 percent of its value in one month (with no earthquakes or mud slides to explain the drop); a century-old home in Louisville, Ky., that, according to local lore, served as the inspiration for Daisy's home in The Great Gatsby, quadrupling in value over 30 days; and one townhouse in Brooklyn, N.Y., listed now for $5 million, valued at a whopping $31 million in the midst of the real estate crash -- at least according to Zillow.
Zillow says the Brooklyn valuation was an error that it subsequently corrected. And make no mistake, all of the competitors go out of their way to make it clear their numbers are guesstimates, not gospel. "A Trulia estimate is just that -- an estimate," says a disclaimer on that site's new home-value tool. Zillow deploys similar language and goes a step further, publishing precise numbers about how imprecise its estimates can be. And every major site urges home-price hunters to "always consult with a real estate agent or house appraisal specialist," in the words of Homes.com. Indeed, these sites say they have strong relationships with the real estate business in general; they get a significant share of their revenue from the industry, in the form of advertising and subscriptions.
But when the real estate version of Pandora's box is opened, homeowners don't necessarily pay attention to disclaimers. Consumers and pros alike say many Web surfers put enough faith in the estimates to sway the way they shop and sell. "I'm constantly explaining to clients that those numbers don't come from a person," says Mindy Chanaud, a real estate agent in Greenwich, Conn., who launched into what she calls her Zillow spiel when shown a Zestimate of one of her listings. Frank and Sue Parks, former owners of the Gatsby house in Louisville, watched as the site put a $331,000 value on the dwelling in May; by July it had climbed to $1.5 million. (Zillow says the lower estimate reflected errors in its statistical model.) The couple got some potential buyer referrals from the site, but they had to fend off a stream of lowball offers before they sold their place this fall. They're convinced that the estimate roller coaster accounted for some of that. Says Sue, "It really affected our ability to move the place."
For most of real estate history, of course, determining a home's value has been an appraiser's job. Appraisal involves gathering data on recently sold homes in the area and comparing them with the "subject property" on matters like size, condition and characteristics, before coming up with an estimate of the home's worth. If the property has, say, a swimming pool, but most recently sold homes don't, the appraiser might add a premium to the sale value. Still, the exercise involves as much art as science, as appraisers acknowledge. The more unique or luxurious a property, the harder it is to accurately value. "Imported marble and a view of the ocean are going to be more or less valuable depending on market conditions," says Susan Allen, a vice president at CoreLogic, a data and analysis provider in California. And critics have accused a few appraisers of inflating the value of properties or rubber-stamping other people's estimates to ensure that deals went through.
The response, beginning in the late 1980s, was the rise of the machines. Economists started developing automated valuation models, or AVMs; instead of having a person visit the property and crunch calculations, these computer models sync the math with data about comparable sales, square footage, number of bedrooms and the like, all in a matter of seconds. Rob Walker, a managing director at AVM purveyor Lender Processing Services, says the models sped up the approval process for second mortgages and home-equity loans; indeed, for years, the tools were mostly reserved for in-house nerds at lending banks. It wasn't until 2006 that Zillow took them to the masses, with its Zestimate. The company runs data on more than 100 million homes through its own algorithms that recognize relationships between property characteristics, tax assessments and recent transactions. "Humans don't make these decisions," says Stan Humphries, chief economist at Zillow.
Scores like these have helped build successful business models for some companies -- Seattle-based Zillow, for one, just raised $69 million in an initial public offering. And they've become weapons in the arsenal of consumers like Terence Avella, an attorney in Eastchester, N.Y. After he and his wife became enamored of a four-bedroom Victorian with an asking price of $650,000, Avella consulted Zillow, finding a much lower valuation: $510,000. He says the Zestimate reinforced his belief that the house would need extensive renovations -- and he put up a lowball bid. By the time the process was over, Avella had settled on an offer of just $580,000 (though the negotiations later fell through). Indeed, in a market where listing prices often reflect hope more than reality, some agents and consumers say that online tools are a useful reality check. Simms Jenkins, an Atlanta marketing executive, says he's recently relied on sites like these to both buy and sell homes. "I can't imagine 25 years ago, when people would just go out and spend their entire Saturday looking at homes," Jenkins says. "You don't have to do that now."
But what's a godsend to Jenkins is an ongoing mystery to Mike Battaglia. Battaglia lives in a Frank Lloyd Wright inspired mansion in Louisville, on a historic street, across from a lush park. But his neighborhood is decidedly eclectic -- homes like his sit near much smaller starter homes -- making it a challenge, local appraisers and agents say, to figure out how much each home is worth. Among the online estimates, that difficulty plays out in real time. Homes.com valued the manor at $761,700, but that figure dropped $85,000 in a month. Zillow pinned its worth at $1.1 million in December 2010, then posted no Zestimates at all for several months -- only to peg its value at $327,000 in May, a 70 percent haircut. By fall, it was back up to $1 million.
Battaglia, a business consultant, says he knows the numbers are only estimates, but he still thinks that notion doesn't register with people: "It's the perception of value that affects people's psychology." Zillow says its wide range of estimates was a result of volatility in the local market. Homes.com's Doyle declined to comment specifically on Battaglia's house, but says that a home in a neighborhood like his could definitely be vulnerable to inaccuracies. "If there's a transaction next door and someone just gave away a house, it will throw off the model," Doyle says.
Indeed, appraisers and real estate consultants say that those models veer off target with alarming frequency. Typically, data for valuation models come from two sources: records from tax assessors and listing data for recent sales. Middleman companies -- the dominant ones are CoreLogic and Lender Processing Services -- gather this data from more than 3,000 U.S. counties and license them out to the Web sites and other model-builders. Collection is itself a challenge, because not every county tracks properties the same way. In North Carolina's high-tech Research Triangle, anyone can get data directly from the Wake County website, while in rural Wright County, Mo., tax rolls are available only on paper. The size of a home could be reported by square footage or by the size of each bedroom and bathroom, so data companies must "scrub" the data to make it uniform. Even then, the data isn't always useful in the field, say real estate pros. County assessors often use AVMs in newer subdivisions where floor plans don't vary much. But with custom homes or neighborhoods going through gentrification, the models can go haywire. "You cannot use a computer model in certain areas and expect the value to come out right," says John May, the former assessor of Jefferson County, Ky.
Some properties' data can be too tough a nut for any computer model to crack. On a quiet street in one of Brooklyn's grander old neighborhoods stands the brownstone that, according to Zillow, was worth $31 million in 2007. "I don't even know if there's ever been a home in Brooklyn worth that much," says a spokeswoman for The Corcoran Group, the agency that now lists the property on the market, for $5 million. Zillow declined to discuss why its earlier estimate was so high, but a look at the house's records suggests one potential reason for the enormous spread: Although the address is a two-family townhouse, the current owners use the entire house, giving them square footage that's off-the-charts big by New York City standards.
Public records are hardly the only problem. Automated models aren't designed to account for the unique details that often make or break a deal -- something their designers readily acknowledge. AVMs usually can't capture data that determines the condition of a property, such as whether there's been a ton of wear and tear. Is a home right next to the railroad tracks or a golf course or a landfill? AVMs can't always answer those questions, say industry pros, though GPS technology is improving things on that score. Models also can't decipher the motivations of a buyer or seller, says Leslie Sellers, a past president of The Appraisal Institute. A couple who's going through a nasty divorce, for example, may have taken the first offer that came along just to unload the property. For all these reasons, says Lee Kennedy, managing director of AVMetrics, a firm that audits and tests industrial-grade AVMs, the models that banks use often add a "confidence score" to their value estimates, with a low score signaling that it's best to send in a human appraiser.
Consumers, however, don't get to see a confidence score; instead, they get disclaimers, some of which are eye-opening. Zillow surfers who read the "About Zestimates" page find out that the site's overall median error rate -- the amount the estimates vary from the actual fair value -- is 8.5 percent, and that about one-fourth of the estimates wind up being at least 20 percent off the properties' eventual sale price. In some places, the numbers are far more dramatic: Gibson County, home of the West Tennessee Strawberry Festival, has a 57 percent error rate; in Hamilton County, Ohio, where the Cincinnati Bengals play, it's 82 percent. Site users are always one click away from this data, but agents say few homebuyers read it (on Zillow's homepage, the font for the "About Zestimates" link is slightly smaller than the main home-data type -- and quite a bit fainter).
The sites argue that, over time, edits and corrections will help them perfect their numbers -- and many of the corrections will come from their customers. On Homes.com, for example, anyone who knows certain specifics, like a homeowner's surname and the year the home was last purchased, can edit the details to reflect, say, a sprawling two-bedroom addition. Zillow also allows site visitors to modify its property details, and in four years, it has accepted revisions on 25 million homes -- perhaps the strongest testament to how seriously consumers take the estimates. Today, Zestimates are helpful enough, says the site, to give consumers an accurate sense of any home's value. In the meantime, says Humphries, the company's economist, "We're always tweaking the algorithm or building a new one."
But in the eyes of some skeptics, that tweaking only increases the potential for off-base estimates. Steve Levine, a real estate agent in Shrewsbury, Mass., says he recently changed his home description on one site, adding the fact that he has a finished basement. Over the next six months, his home rose from $516,000 to $558,000 -- a healthy 8 percent -- while a neighbor's nearly identical home sank in value. Levine says he has no way to tell how big an impact his update made, "but being able to change the facts is one more tool for manipulating the system." The sites say they believe intentionally wrong changes are rare, but acknowledge they can only go so far policing those tweaks. "It's not 100 percent bulletproof," says Homes.com's Doyle.
In the end, some critics say, the sites' business models may pose a bigger problem for consumers than their algorithms. Even their flaws help to sustain the buzz around the estimates, drawing curious visitors. The online firms earn significant revenues from advertising, and the more traffic they get, the greater that ad revenue is. Zillow says 57 percent of its revenue comes from display ads from the likes of home-supply store Lowe's, realty franchisor Century 21 and builder KB Home. Realtor.com's parent company, Move Inc., generates 42 percent of its sales from listings by local agents, while Homes.com says advertising is its fastest growing revenue area. Trulia expects its traffic to grow now that it has launched a beta version of an online estimator, says head of communications Ken Shuman; after all, he adds, "consumers asked for it." As long as they keep asking, say industry insiders, stumbles in reliability aren't especially important. "It's not about being accurate or precise; it's about being sticky," says Kennedy, of AVMetrics. For their part, the sites say stickiness matters to their business plans, but that they take the estimates very seriously; otherwise, as a Zillow spokesperson put it, "we wouldn't have a team of Ph.D.s trying to make them better all the time." They depict the estimates as an ongoing experiment that is likely to achieve a very high degree of accuracy -- someday. (At least for now, one site is deferring to agents in the home-value game: Realtor.com says it removes its estimates from homes once they actually go on the market.)
In the future, of course, homeowners may look at today's estimates the way they look at those enormous console televisions from the 1940s -- as an awkward early phase for what became a ubiquitous, reliable technology. But in the meantime, many are content to use them, flaws and all, whether in earnest or as entertainment. In an exurb outside Phoenix, Mike Lang, a commercial-property manager, has seen his home jump almost 20 percent in value on Zillow in the past few months -- he's not sure why. Though he's not moving any time soon, he's enjoying his time at the top of the real estate heap. "I've got the most expensive house in the neighborhood," Lang says.
8. Home sweet homeowner tax breaks
By Kay Bell • Bankrate.com / updated 1/29/14
With the housing market improving in some regions of the country, many people are becoming new homeowners.
If you're among the new property owners, congratulations. You've just taken another step up the American-dream ladder and are a homeowner. Along with the joy of painting, plumbing and yard work, you now have some new tax considerations.
The good news is you can deduct many home-related expenses. These tax breaks are available for any abode -- mobile home, single-family residence, town house, condominium or cooperative apartment.
And most homeowners enjoy tax breaks even when they sell their residence.
The bad news is, to take full tax advantage of your home, your taxes will likely get more complicated. In most cases, homeowners itemize. That means you're not living on "EZ" Street anymore; you've moved to Form 1040 and Schedule A, where you'll have to detail your tax-deductible expenses.
For many homeowners, the effort of itemizing is well worth it at tax time. Some, however, might find that claiming the standard deduction remains their best move.
If you do find that itemizing is best for your tax situation, here's a look at homeowner expenses you can deduct on Schedule A, ones you can't and some tips to get the most tax advantages out of your new property-owning status.
Your biggest tax break is reflected in the house payment you make each month since, for most homeowners, the bulk of that check goes toward interest. And all that interest is deductible, unless your loan is more than $1 million. If you're the proud owner of a multimillion-dollar mortgaged mansion, the Internal Revenue Service will limit your deductible interest.
Interest tax breaks don't end with your home's first mortgage. Did you pull out extra cash through refinancing? Or did you decide instead to get a home equity loan or line of credit? Generally, equity debts of $100,000 or less are fully deductible.
What if you're the proud owner of multiple properties? Mortgage interest on a second home also is fully deductible. In fact, your additional property doesn't have to strictly be a house. It could be a boat or RV, as long as it has cooking, sleeping and bathroom facilities. You can even rent out your second property for part of the year and still take full advantage of the mortgage interest tax deduction as long as you also spend some time there.
But be careful. If you don't vacation at least 14 days at your second property, or more than 10 percent of the number of days that you do rent it out (whichever is longer), the IRS could consider the place a residential rental property and ax your interest deduction.
Did you pay points to get a better rate on any of your various home loans? They offer a tax break, too. The only issue is exactly when you get to claim them.
The IRS lets you deduct points in the year you paid them if, among other things, the loan is to purchase or build your main home, payment of points is an established business practice in your area and the points were within the usual range. Make sure your loan meets all the qualification requirements so that you can deduct points all at once.
A homeowner who pays points on a refinanced loan is also eligible for this tax break, but in most cases the points must be deducted over the life of the loan. So if you paid $2,000 in points to refinance your mortgage for 30 years, you can deduct $5.56 per monthly payment, or a total of $66.72 if you made 12 payments in one year on the new loan.
The same rule applies to home equity loans or lines of credit. When the loan money is used for work on the house securing the loan, the points are deductible in the year the loan is taken out. But if you use the extra cash for something else, such as buying a car, the point deductions must be parceled out over the equity loan's term.
And points paid on a loan secured by a second home or vacation residence, regardless of how the cash is used, must be amortized over the life of the loan.
The other major deduction in connection with your home is property taxes.
A big part of most monthly loan payments is taxes, which go into an escrow account for payment once a year. This amount should be included on the annual statement you get from your lender, along with your loan interest information. These taxes will be an annual deduction as long as you own your home.
But if this is your first tax year in your house, dig out the settlement sheet you got at closing to find additional tax payment data. When the property was transferred from the seller to you, the year's tax payments were divided so that each of you paid the taxes for that portion of the tax year during which you owned the home. Your share of these taxes is fully deductible.
Property taxes must be deducted as an itemized expense on Schedule A.
When you sell
When you decide to move up to a bigger home, you'll be able to avoid some taxes on the profit you make.
Years ago, to avoid paying tax on the sale of a residence, a homeowner had to use the sale proceeds to buy another house. In 1997, the law was changed so that up to $250,000 in sales gain ($500,000 for married, filing jointly) is tax-free as long as the homeowner owned the property for two years and lived in it for two of the five years before the sale.
If you sell before meeting the ownership and residency requirements, you owe tax on any profit. The IRS provides some tax relief if the sale is because of a change in the owner's health, employment or unforeseen circumstances. In these cases, the tax-free gain amount is prorated.
A ruling by the IRS in late 2002 could put more dollars in homeowners' pockets when they must sell before they qualify for the full tax break. The Treasury has defined the unforeseen circumstances that often force homeowners to sell and under which they now can get some tax relief.
Divorce or legal separation.
Job loss that qualifies for unemployment compensation.
Employment changes that make it difficult for the homeowner to meet mortgage and basic living expenses.
Multiple births from the same pregnancy.
A partial exclusion can be claimed if the sale was prompted by residential damage from a natural or man-made disaster or the property was "involuntarily converted," for example, taken by a local government under eminent domain law.
Second home sales also can provide some tax benefits, but not as much as they did in the past, thanks to a law that took effect in 2008. Previously, you could move into your vacation property, live in the home as your primary residence for two years and then sell and pocket up to $250,000 or $500,000 profit tax-free. Now, however, you'll owe tax on part of the sale money based on how long the house was used as a second residence.
Foreclosure tax troubles
Unfortunately, thousands of Americans over the past few years have seen their homeownership dream crumble.
Many lost homes to foreclosure.
Others disposed of their homes via a short sale to prevent more drastic lender action. In a short sale, the mortgage lender allows you to sell the property for less than the outstanding loan balance and cancels the remaining loan balance.
At best, struggling homeowners were able to restructure their mortgage terms so they could keep their homes under more favorable loan terms.
All of these cases, however, generally carry tax costs. The lender's forgiveness of the existing home's mortgage, in full or in part, is known as canceled debt and that amount is taxable income.
Because so many homeowners were facing cancellation of debt, or COD, tax bills, the Mortgage Debt Relief Act of 2007 was enacted to provide some relief. Under this law, homeowners who were foreclosed, completed a short sale or had their home debt reduced by mortgage restructuring do not have to count the canceled debt as taxable income.
Up to $2 million of forgiven debt, or $1 million for married taxpayers filing separately, qualified for the tax exclusion.
However, this law expired on Dec. 31, 2013. It is part of a larger group of tax breaks known as extenders that are expected to be reconsidered by Congress sometime in 2014, but there is no guarantee that the Mortgage Debt Relief Act, which was last extended in 2009, will be renewed again.
What's not tax deductible
While many tax breaks are available to a homeowner, don't get too carried away. There are still a few things for which you have to bear the full cost.
One such expense is insurance. If you pay private mortgage insurance, or PMI, because you weren't able to come up with a large enough down payment, that's a cost you probably won't be able to deduct -- unless you meet the requirements of a special PMI law. Under this law, some homeowners can deduct on Schedule A their PMI payments on loans originated or refinanced between Jan. 1, 2007, and Dec. 31, 2013, and which meet certain loan amount limits.
Note the 2013 expiration date. The PMI-as-interest tax break, like the COD law, expired last year and may or may not be revived by Congress in 2014.
The other big home-related insurance cost, property hazard insurance premiums, still remains nondeductible for all, even though the coverage generally is required as part of the home loan and is included as a portion of your monthly payment.
Other nondeductible residential expenses include homeowners association dues, any additional principal payments you make, depreciation of your home, and general closing costs and local assessments to increase the value of your neighborhood, such as construction of new sidewalks or utility connections.
What about all those repairs that seem to crop up the day after you move in? Surely, they're tax-deductible. Sorry. While they'll make your house much more comfortable, you're on your own here, too.
But hold on to the receipts. Some longtime homeowners may find their property has appreciated beyond the $250,000 ($500,000 for married couples) amount the IRS will let you keep tax-free when you sell. If that happens, the records of property improvements could help you establish a higher basis for your house and reduce your taxable profit.
Realty & Mortgage. Americarealtyonline.com
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