Wednesday, September 02, 2009

First-Time Homebuyer Credit? You May Be Too Late!

The Federal Government and the I.R.S. want to write you a check for $8,000, but you need to act now, if you haven't already missed out.

Earlier this year, Congress passed legislation to provide a tax credit of up to $8,000 for first-time homebuyers who close on the purchase of a new home by November 30. The trick is, the whole nation is going to be competing for space at the title offices at the end of that period of eligibility, which by the way, is a Monday. The Thursday and Friday before? Thanksgiving. As you may imagine, title companies will be under-staffed and over-booked. I'm advising all of my clients to plan to close no later than Friday, November 13.

But Jason, that's 2 1/2 months away. Good point, but how long does it take to buy a home?

These days, the average time from contract to close is about 45 days (six weeks). That leaves you four weeks to speak to your Realtor about finding appropriate properties, talk to your lender about getting a pre-approval, scheduling and viewing properties, writing and negotiating an offer, and getting through the attorney review period (in Illinois, and other states with a similar process). That's not a lot of time!

If you're interested in a short sale, it's too late. Lenders can take up to six months to approve a short sale, and then when they do, it still isn't a guarantee it will close. And foreclosure property purchases? That may be a crapshoot, depending on which broker is listing the home, which corporation owns it, and which attorney represents it.

The best advice? Start today, and use that $8,000 to buy your Realtor something nice! :)

Friday, June 19, 2009

Should I Rent or Should I Sell?

To paraphrase the Clash - "if you sell it may be trouble, if you rent it could be double!"

Recently a number of my clients have come to me with this question - "Shouldn't we just rent our home for a year or two, rather than try to sell it in this market?" The answer to the question, of course, depends on your specific situation, but for the vast majority of homeowners ready to move on, the answer is an overwhelming 'no'.

There are a number of considerations for determining if renting your home is your best choice, some of them financial and some of them psychological.

Playing 'Landlord' for 4 years would only result in a 4% increase in your current home value.

The most obvious reason to rent your home is to avoid "taking a loss" when selling in this market, and in the meantime collecting rent to offset the monthly mortgage payment. Some of my clients have even used the expression "we want to wait until the market returns to normal." I've got news for you, the market has returned to normal.

What isn't normal is double-digit home value appreciation year-over-year. We've faced an adjustment from over-inflated home prices, brought on my unsustainable lending practices and a desire to "make a great investment" (which has clearly back-fired).

So you need to be a landlord for 5 years?!

If you decide to rent your home for the price to come back up, you need to be prepared to be a landlord for a longer haul than you might think. You want to chase rent for a year or two and then sell for a great price improvement? It ain't happening, and yesterday's Housing Report at agrees.

The short explanation is that home prices won't begin to climb again until 2012. Overloaded home inventories will continue to put pressure on home prices for the next 2-3 years, potentially even dragging prices down before they begin to perk up again. If unemployment continues on a poor trend, there will be more mortgage defaults, and inevitably, more foreclosures and short sales. At the same time, mortgage rates don't have much room to go down, but they've shown a willingness to trend up!

We've seen about a 10% decrease in home prices in many Chicago neighborhoods in the last 6-9 months, Business Week estimates that national prices could decrease as much as 17% in 2009. Does that mean we'll see another 7% drop in Chicago? I don't believe it does, but it isn't looking great for a bump up either.

Home values historically have climbed 4-5% a year on average. If those prices drop or stay steady until 2012, and then begin a slow climb again in 2012, aren't we looking at 104% of current prices in 2013 at best? 108%ish in 2014? Where will you be in 2014?

Your money can be put to better use. Your mind can be at ease!

Are you going to play landlord on your $300,000 home until 2014 so that you can sell it for $324,000? Couldn't you do something with that money for the next five years, maybe even something that makes better than 1.6% a year? Heck, you could put it in a renewable 24-month CD for 5 years and it'd be worth at least $335,000.

If you did sell now, and put the money somewhere better (perhaps even into your new home), here's what you'd miss:
  • Finding renters for your place now.
  • Finding renters for your place next year, and again, and again, and again...
  • Paying your mortgage, monthly assessment, property taxes, and homeowners insurance in the months that you're collecting rent, and worse, when your place is vacant.
  • Making collection phone calls for your delinquent renters.
  • Answering the phone at 2 in the morning because the toilet is over-flowing, or your renters are locked out - again!
  • Cleaning the toilets, re-painting the walls, and repairing broken items when your first renters move out and the next move in.
  • Doing all that again when the next renters move out.
  • Updating your home 5 years from now, when it is time to sell, because your granite and stainless no longer say "upgraded", but instead say "standard" or even "over the hill" and buyers expect a deal on a worn home.
  • Making the choice of sustaining several months with no rental income when you decide it is time to sell, or worse, trying to sell a home that's full of renters who don't care to de-clutter, sanitize, and stage in anticipation of showings to prospective buyers. You didn't think they'd make it as beautiful as you do, did you?
  • Get that dreaded call from the Condo Association - "we're going to levy a special assessment to repair the roof/tuck-point the building/rebuild the back stairs. You can just write us a check for $5,000".
You don't want to miss out on the joys of landlording, do you?

Taking my own advice.

My wife and I were faced with this same decision in the last several months, and we decided NOT to be landlords. The downside and the unquantifiable risk overwhelmed the idea of picking a stronger market in which to sell. What's more, we performed this same analysis and discovered that although we might even be cashflow positive with prevailing rental rates, the correct financial decision was to remove the condominium from "our books" and put that money to greater use.

In the end, we actually sold our home for a little more than we paid 4 1/2 years ago, we eliminated the stress, and we recaptured our equity to put in a more favorable investment. Even if we had "lost money" on our sale (quotes intended!), it still would have been a overwhelming net positive decision.