Things Have Changed

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The soothsayer in Shakespeare’s Julius Caesar issued his famous warning “Beware the Ides of March.” Who knew that in 2020, around the middle of March, the world, as we knew it, would force such dramatic changes on us from the Coronavirus.

In America, it has brought our economy to its knees as we sheltered in place for over four months. During this time, changes have affected our lives and many of those changes could be permanent.

Previously, smaller homes were becoming the trend for not only efficiency but upkeep so owners would have more time to do things including travel. Now, travel is minimal and our world, in some respects, is reduced to our home.

For families with children, their home has become a school. With so many people working from home, it has become our office or store or studio. If there is more than one working adult in a home, it needs to have space for each party to work. The home fitness industry is experiencing record sales in exercise equipment so the home can become a gym.

Since we’re all spending more time at home, it is also the place to recreate. We’re cooking more; a larger kitchen and dining area would be nice. We want to enjoy the yard, garden, pool or balcony and our current home may not even have them or we’d like to upgrade.

People are wanting and needing more space to do all of these things at home. Many experts are anticipating that these changes we thought were temporary may be part of the new normal even after a vaccine and cure have been discovered.

If you have had any of these thoughts and would like to know more about how to buy or sell a home in our current market, we would love to tell you about the many options available while being responsible to stay safe. Whether it is buying for the first time, moving up or moving on, I would like to help. Call me at (303) 880-5585.

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Do you like to negotiate?

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Whether you like to or not, buying and selling a home involves negotiation at all stages of the process. It is not like the retail world where once you decide to purchase, you pay the price. It is easily the most expensive purchase or sale that most people experience and emotions get involved that could affect the negotiations adversely.

The word “home” by itself conjures up emotions and selling a home you’ve lived in for a while could even complicate things more. A real estate professional can separate their emotions from the process to be able to help the one they are representing.

The price of the home, the type of financing and concessions, closing costs, personal property, closing dates and possession are just a few of the many things that can be negotiated in a contract. Since the seller wants to get the most for their house and the buyer wants to pay the least, their objectives are diametrically opposed.

Even after the contract is signed, removing the contingencies can cause considerable negotiations. The appraisal, the inspections or the repairs could be a source of reevaluating the terms and provisions of the contract.

Negotiating the sale or purchase of a home is a competition; for one person to get something, someone has to give something up. If you don’t feel comfortable with this, it is important to work with an agent who can bring their skills to the table on your behalf. As your advocate, they can champion your position.

I enjoy the process of negotiation and guiding you through the alternatives. I’d like to share how my skills, training and experience can benefit you in a sale or purchase. Call me at (720) 989-6768.

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Who Decides Value?

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The seller can put a price on the home but the value is ultimately, determined by the buyer. Individually, a buyer could pay over market value because they love the location, or the elevation of the home or the proximity to something that is important to them. The shortage of available homes resulting in increased competition among buyers could drive the value higher.

Most experts agree initially pricing it properly will generally result in the highest sales price. If a home starts out too high, it could actually sell for a lower price after it has been on the market for a while. It gives the impression that there must be something “wrong” with the house because it didn’t sell immediately.

So, how does a seller determine what price to put on the home? It has nothing to do with what the seller needs to get out of it. Nor does the price the seller paid for it make any difference now. Even if the seller made considerable improvements, they may not affect the value of the home.

There are three common sources for a seller to determine market value: an appraisal, a broker price opinion or an automated value model found online.

AVM, automated value models, are mathematical estimates that analyze limited public record data to determine a value. While this process can easily compare square footage, age, number of bedrooms as objective data, it is much more challenging to make adjustments for subjective data like appeal, quality of construction, floorplan and updating. Zillow Zestimates are the most common AVMs but there are many others providing similar services.

Appraisals can only be made by a licensed appraiser. Most mortgages require an appraisal as part of the underwriting process to verify that there is ample collateral to secure the mortgage in case of default by the borrower. FHA, VA, FNMA, Freddie Mac and USDA as well as most private lenders require an appraisal especially for high loan-to-value mortgages. In some situations where the risk is lower, some lenders may use an AVM.

An appraisal requires the appraiser to visit the property, perform a visual inspection, analyze the property considering three approaches to value and accurately report the property information that is verifiable.

Broker Price Opinion, BPO, as the name indicates, is a price opinion on a property made by a licensed real estate agent. The determination of whether the estimate accurately reflects the market will depend on the experience of the agent with that type of property and market area. It is possible that a BPO could be more sensitive to the actual market because it will consider homes currently for sale and recently expired properties as well as comparable sales.

While all three methods, used recent, comparable sales to arrive at a value, the appraiser and the real estate professional can make a series of adjustments for the differences in the comparables. While the appraiser is highly trained in this technique, the real estate professional also adds credibility to this process based on their experience in how the buying public might react to specific features and the home in general including positive and negative influences.

Current condition of the property is very important for a number of reasons. In some price ranges, a buyer may only have the necessary down payment and closing costs but is not able to make improvements like paint, floor coverings, appliances or other major items. In this situation, a buyer would have to live with the house in its current condition until they could afford to make wanted improvements.

Investors may not be deterred by making an additional investment in the home after purchasing it but will probably be motivated to do so only if it will increase the potential profit to be made.

An AVM can be a tool that a homeowner, prospective buyer, mortgage officer, appraiser or real estate agent can use to get a quick idea of price but there are inherent limitations that can only be considered by personal examination balanced with experience in the market place.

Experience and understanding of the subject property and the marketplace are critical to having confidence that a value is accurate. Any person could go through the same steps to arrive at a value but an experienced, well-trained professional is far more likely to assess all of the variables more accurately. If you are curious what your home is worth, call (303) 880-5585 or email Pete

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Good Decision for a Second Opinion

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You’ve done your homework, contacted a mortgage company and believe you are pre-approved. That part of the process is finished and you can concentrate of finding a home and moving…or can you?

Pre-qualified and pre-approved are two different things but some people, including some in the business, use the terms interchangeably. Pre-qualified is an opinion of likelihood that a borrower will be approved based on preliminary information about their income and credit. Whereas, in a pre-approval, the borrower’s credit report is updated and pulled, income and assets verified and involves pre-underwriting.

Even when you have a highly qualified loan officer, the real decision maker is the underwriter who can commit the lender. Generally speaking, a person who has been pre-approved receives a written letter stating the terms and conditions of the commitment.

A second opinion from a different lender can be a comforting thing for a borrower. It will either confirm that the first lender was correct and that the rate and terms being offered are competitive or it will reveal that there could be differences that would warrant more investigation.

Mortgage money is a commodity and while competition usually keeps lenders close to each other in the rates and terms they offer, you won’t know for sure unless you shop around. The cost for being pre-approved is usually a nominal amount and when you are considering the size of the mortgage you’ll be borrowing for up to thirty years, it makes sense to get a second opinion.

Occasionally, during the process of being pre-approved, an unexpected credit problem may be discovered. It is better to learn about it early so you’ll have time to correct it before you have contracted on a home.

Your real estate professional, Pete Doty, will be able to recommend lenders who are active, experienced in the area and can share their experience with you regarding previous loans they have made. The benefits far exceed the time and effort it takes. You’ll be looking at the right priced homes; getting the best loan, rate and terms; have increased negotiating power with the Seller and can close quicker because many of the verifications have already been made.

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Prepaying Your Mortgage

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Paying off your mortgage can provide peace of mind and is a worthy goal but is it the best thing for you to do at this time.

Do you have higher interest rate debt currently? If you have credit card debt with double-digit rates or personal, car or student loans, you’ll probably save more money from interest by paying these things off before you pay off your mortgage which is usually one of the lower rates on debt.

Many financial advisors recommend funding your annual retirement contribution before paying down a mortgage. If your company offers matching funds for your contribution, you would be leaving money on the table by not making the contribution to your retirement. For instance, you would be getting a $10,000 value by putting $5,000 into your retirement if your company matches it.

Creating an emergency fund is another favorite of financial advisors. When the rainy day arrives and you need funds, it may be difficult to get money from the equity of your home, especially if you have lost your job. Six months’ worth of living expenses is a good target to have available should you need it and a year’s worth would be even better.

Children’s college funds may be another priority that takes precedent overpaying off the mortgage. Whether you’re saving or investing to pay for their education, it is going to cost more than it did when you were in school.

When you are ready to start paying off your mortgage, decide on the best way to do it. Regular principal contributions on a monthly basis are very predictable and will get the job done. Setting up an automatic bill pay with your bank will assure that you don’t re-prioritize that extra amount every month because there is always going to be something else to do with extra money.

It is important to be sure that the lender applies the additional payment amounts to the principal and not to the escrow account.

Use the Refinance Analysis to see what extra amount you’d have to pay to retire your mortgage in a certain time frame or by making a specific additional amount each payment, you can find out when the loan will be paid. Regardless of which way you go, prepaying a loan will save interest, build equity and shorten the term on a fixed-rate mortgage.

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Lower Your Cost of Housing

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Homeowners still have considerable advantages from the amortization of the mortgage and the appreciation enjoyed by most homes even with taking the standard deduction instead of itemizing to take the interest and property tax deduction.

There is an adage, “Rent or buy, you pay for the house you occupy.” You either pay for it yourself or for your landlord. The people who have job security, sufficient income, good credit and the funds for the down payment and closing costs can enjoy the many financial and emotional benefits of homeownership.

Looking at a $350,000 home purchased with an FHA mortgage with 3.5% down payment at 3.25% interest for 30-years, the total payment would be $2,420 a month. During the first year, the average monthly principal reduction is $573 a month which build the owner’s equity in the home.

At an estimated 3% appreciation, this home would increase in value at the rate of $875 a month during the first year which again builds the owner’s equity in the home.

Even if you consider the buyer will now be responsible for repairs and possibly homeowner’s association fees, the monthly net cost of housing in this example is $1,122 or less than half the monthly payment. The difference goes to equity which a tenant does not benefit from.

If the buyer were paying $2,750 monthly rent, they would be paying $1,628 more each month to rent than to own. In a year’s time, they would lose $19,500 of equity by continuing to rent. The down payment in this example is only $12,250 which would leave $7,000 to pay for buyer’s closing costs.

Purchase Price $350,000
Down Payment $12,250
Total Monthly Payment (PITI + MIP) $2,420
Less Monthly Principal Reduction (average first year) $573
Less Monthly Appreciation (average first year at 3% annually) $875
Plus Estimated Maintenance & HOA $175
Net Cost of Housing $1,122

The equity for the homeowner in this example at the end of seven years would be almost $140,000 based on the appreciation and amortization of the mortgage. Whether you rent or buy, you pay for the house you occupy.

Use this Rent vs. Own to plug in your own numbers for the price home you’d like to buy. If you need help with it, contact me and we can do it over the phone at (303) 880-5585 or in an online meeting.

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Annual Advisory

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Homeownership is a privilege and a responsibility. Even after decades of owning a home, you may still need some help to handle some of its challenges by focusing on the three “M”s of homeownership: maintenance, minimizing expenses and managing debt and risk.

While many people recognize the benefits of annual wellness, financial, vehicle and equipment maintenance visits, an important checkup that you may not have considered is an annual homeowner advisory or real estate review. Why would you treat the investment in your home with less care than you treat your car or your HVAC system?

Consider exploring the following:

  • Do you know the current value of your home? (You can, by obtaining a list of comparable sales in your immediate area, as well as what is currently on the market for sale.)
  • Have you compared your assessed value for tax purposes to the fair market value in order to possibly reduce your property taxes?
  • Even if you’ve refinanced in the last two years, can you save money and recapture the cost of refinancing in the length of time you plan to remain in your home?
  • Have you considered reducing your mortgage debt with low-earning cash reserves that will not be needed soon?
  • Do you have a record of the improvements you’ve made to your home since you purchased it? Do you know what items can be included?
  • Have you considered investing in rental homes in good neighborhoods to increase your yields and avoid the volatility of the stock market?
  • When was the last time you updated your home inventory of personal belongings? Do you have pictures as well as written documentation?
  • Do you need recommendations of repairmen and other service providers?

This service is part of my point of difference as a real estate professional to provide information to help homeowners not only when they buy and sell but all the years in between too. My goal is to create lifelong relationships with our customers as their “go to” person whenever they have a real estate question.

My strategy is to provide reliable, consumer-based information about homeownership on a regular basis through email and social networking. If it benefits you by helping you be a better homeowner, maybe you’ll consider us your real estate professional.

When you don’t know the answers to real estate questions, you know where to get them.

We’re always here to serve your real estate needs. By helping you with the three “M”s of homeownership, we can earn your confidence and trust for the next time you move or a friend of yours needs a recommendation.

If you’d like to have a list of the market activity in your area or any of the other information mentioned, please contact me at (303) 880-5585 or Pete

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Why homebuying begins with the agent

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It takes a team of professionals to buy a home like the lender, the appraiser, the inspector, the property insurance agent, the title officer, and others but the real estate professional may play the most critical role.

Baking bread seems so simple. There are only four ingredients: flour, salt, yeast, and water; yet, there are steps that should be followed as well as a certain sequence to get the proper results. Some people mix all of the dry ingredients before adding the hot water to activate the yeast. Other people will activate the yeast in the warm water first to allow it to “bloom.”

Both methods can achieve satisfactory results but one knowledgeable person needs to be in charge of the bread instead of having multiple people to be concerned with just their one ingredient or contribution like mixing, kneading, fermentation, benching, shaping, proofing or baking.

Similarly, in a home purchase, the buyer’s agent can be the one who puts things in the proper order and sees that no steps are missed. The buyer’s agent coordinates between the other professionals with the common goal of getting the home closed on time according to the terms agreed in the sales contract.

Even if a buyer has been through the process before and possibly, multiple times, the buyer’s agent will most likely have far more experience because it is their job. They perform their job on a daily basis and are not personally or emotionally involved like a buyer is.

Your agent understands what and when the various steps should be done and by whom. They have worked with enough of the other professionals to know who is good at their job and can offer recommendations. They have seen the things that make a transaction go smoothly and what can derail one.

Experience is a great teacher, but the lesson does not have to be learned by going through it by yourself. Take the luxury of using your real estate professional’s experience acquired through years of study and practice. Allow your agent to advise you and coordinate the efforts to achieve the results you are expecting and deserve.

Learn more about the process and different steps by downloading the Buyers Guide

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Rethinking Home

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The last two months of the new normal stay at home has led many homeowners to rethink the way they live in their home. It has now become an office for working at home; a school for children; a gym to stay in shape; and a place for recreation.

The repurposing has people evaluating whether their home still meets their needs or if some changes are necessary. In some cases, adult children have moved back home, and, in others, there are parents who have moved in for the first time.

Staying at home and sheltering in place is necessary but how much togetherness can one family take and how long is it going to last? Temporary is stretching into longer than expected and even when vaccines and treatments are discovered, will things really go back to the way they were?

A home is a place to call your own; to raise your family, share with your friends and to feel safe and secure. Covid-19 has changed the scope of feeling safe and secure at home and may now be considered a sanctuary of safety more than ever before.

Many of the chief economists in the country feel that real estate will likely lead the country out of this recession. The housing market is experiencing low inventory and has for almost a decade. Building has not kept up with demand and prices of existing homes have continued to go up; 8% over last year.

With 30-year mortgage rates at close to 3.25% and prices expected to continue to rise, an investment in a home can fit your needs and show returns in satisfaction, comfort, enjoyment, and monetary value.

If you are going to be spending more time in your home for all the reasons mentioned, maybe now is the time to consider finding a home that better suits your needs. It can be done in a responsible and safe manner using an online meeting with your real estate professional. Find out what is available and what the process entails to protect you and your family.

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Mortgage Forgiveness

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During the mortgage meltdown that caused the Great Recession a decade ago, some homeowners lost their homes to foreclosure or constructed a short sale to get out from under the debt. In most of the cases, the lenders forgave all or part of the debt owed them.

Similarly, in the early 90’s after the failure of the Savings & Loans in the U.S., thousands of homeowners lost their homes in the same way but back then, the policy of the IRS was to consider the forgiven debt as income. Today, it is still considered income which means that a homeowner could lose their home because they could not afford to pay for it and to make matters worse, they would owe income tax on the debt relieved.

The good news is that in 2007, Congress passed the Mortgage Forgiveness Act and it has continued to be extended with its current expiration of 12/31/20.

The amount forgiven for income tax purposes may not be the same amount owed to the lender. Mortgage forgiveness has a limited exclusion for discharged home mortgage debt for a principal residence only; it does not include second homes or investment properties. Only the amount of mortgage debt that can be treated as acquisition indebtedness in included.

In the example below, a homeowner purchased a home and refinanced the home five years later at 80% of the market value. The new loan proceeds were used to payoff the original mortgage and make $30,000 of new capital improvements. The revised acquisition debt is the acquisition debt at the time of refinance plus the capital improvements made with the loan proceeds.

The new $400,000 loan produced $39,417 of home equity debt which is not considered acquisition debt. Home equity debt is money borrowed on a home and can be used for any purpose, but it may not be tax deductible or considered acquisition debt. Acquisition debt is money borrowed to buy, build or improve a principal residence subject to a $750,000 limit.

Assume that the borrower never made a payment on the new loan. If the new loan went through foreclosure while the Mortgage Forgiveness Relief Act is in effect, the forgiveness would be limited to the acquisition debt of $360,583 and the remaining amount of $39,417 would be considered income and subject to tax.

This article is meant to inform homeowners of liabilities associated with foreclosures and possible remedies that may be available. This example is meant to illustrate the portion of a loan that could be forgiven. Taxpayers should always consult their tax professional regarding their specific situation and the way the law would apply to their situation. For more information, see IRS Publication 4681.

Example
Purchase Price … 5 years ago $400,000
Mortgage at time of purchase … Acquisition Debt $360,000
Fair Market Value … Today, 5 years later $500,000
Refinanced 80% – Loan to Value $400,000
Replaced unpaid balance – current acquisition debt $330,583
Capital improvements made with loan proceeds $30,000
Revised acquisition debt $360,583
Home equity debt … difference in refinanced amount and acquisition debt $39,417
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