To say there are a lot of real estate websites is like saying there are a lot of grains of sand on North Avenue Beach. How do you tell the difference, and how do you know you're not wasting your time or being misled with bad information?
Probably the first big consumer RE website to pop up was Zillow. Zillow got big by tantalizing everyone with a "Zestimate," an automated value of their home, during a time when everyone in the nation just could not get enough of seeing the value of their home. (Whether that "Zestimate" or any other automated value calculator is worth the pixels it occupies on your screen is a topic for a different post.) Those days passed, to put it lightly, and at some point Trulia became the next rising star. Based on inquiries from my web advertising, Trulia is probably tied for the most popular consumer RE website at this time. Realtor.com is the other top competitor.
So what's good about these websites, and why are they so popular? Simply put, they have attempted (and on some levels succeeded) in making themselves a "one-stop shop" for real estate needs. Not only can people view homes for sale and recently sold, but they can find information about real estate agents, school districts, crime data, mortgages, and other info that people buying or selling would like to see.
If I ask you to think of an example of a "one-stop shop" for any other product or service, likely one of the most popular answers would be Walmart. Walmart is the epitome of one-stop shop, and it holds a lot of value to meet many needs. If you're looking to shop for a wide variety of items in the same place, nothing beats it. Where else can you check out with a cart containing a vacuum, jeans, a garden hoe, an iPod, prescription ointment for that rash, a gun, a kitchen sink and a gallon of milk? Definitely nowhere but Walmart. If you're looking for a set of golf clubs, you could absolutely throw a set in the cart at Walmart while you're there checking off the rest of that list. But if you're really interested in getting a good set of golf clubs, clubs that will provide a good value and will be durable, accurate, and comfortable, are you really doing well for yourself by conducting your search at Walmart?
The one gap that consumer RE websites will never be able to close is the completeness, real-time pace, and most importantly the objectivity of housing data found in your local multiple listing service (MLS). Think about it: All of these consumer RE websites are free. They're paid for by a barrage of advertising that hits you like a Foot Locker salesman at the mall. Ads fill every side of the screen. Advertising dollars skew which search results you see and the order in which you see them. Advertising dollars put an agent's face next to a listing that may not be theirs, even though the impression is that it is, so you aren't really contacting the person you think you are. And properties are advertised while they're under contract, even though they're no longer available, because the agents whose advertising dollars fund the site want as many leads as possible.
As a matter of full disclosure, I pay for Enhanced Listing status for all my listings on Trulia. It may not be the most objective source of information, but if I intend to do the best job for my sellers I have to do everything possible to make their listings stand out in the fray.
In order to gain direct access to your local MLS (your agent can set up a client access account for you), not only must you hold an active real estate license, but you must be a member in good standing of the local real estate board (here, over $400/yr), and pay more fees ($340/yr right now) for MLS access. It's exclusive, it's expensive, but it's the best. Here's why:
- Completeness of information. All the info you see on consumer RE websites and then some. Photos, tax and assessment info, room sizes and floor coverings, detailed lists of equipment/amenities, school district maps and info, governing body maps, flood plain maps, down payment assistance information, sale history, "walkability" ratings, virtual tours, open house scheduling... You get the point. Your agent can also build a recurring search for you with a level of precision that far exceeds the search capabilities of the consumer RE websites. In your MLS search I can exclude short sales, require a master bath, cap taxes at a certain amount, or freehand an area on the map where you want to live. On consumer websites, you can search by bedrooms, bathrooms, and price, and that's about it.
- Real-time information. What defines the moment when the real estate community is notified of a new listing? When it goes live in the MLS. The moment the listing agent clicks the proverbial red button, the listing pops up on other agents' screens and in all client searches whose criteria the property meets. Instantly. But Realtor.com and Trulia.com won't display the new listing info and photos for another 24-72 hours. In today's market, if a hot listing hit the market 72 hours ago, you may already be too late. The same thing happens when a property goes under contract. My clients know the minute a listing is marked "under contract" because it either shows up as such the moment the listing agent clicks the button, or it disappears from their page (depending on their preference). The status won't change on the consumer websites for 24-72 hours, and once it does, you'll have to really look for the tag to determine it's no longer available.
- Objectivity of information. This may be the most important. Our local MLS rules state that nothing in the listing description or photos can indicate who the listing company or agent is. There are watchdogs on patrol to locate errors or falsifications, and agents can incur fines if such errors are not corrected. There is no advertising, no manipulation of the order in which search results are displayed, no different status of any kind conferred on any listings. Thus, you can compare listings apples-to-apples, and do it in peace without interruption from advertising messages.
Browse all you want if you're just curious or you really get a kick out of looking at pictures of houses, but when it comes time to start considering selling or buying a valuable asset, the first matter of shopping you need to take care of is finding a good real estate agent. They can set you up with a client account on MLS, which will save you a lot of time and should go a long way towards establishing your peace of mind.
Tuesday, May 21, 2013
Friday, April 27, 2012
FHA Financing and HUD Foreclosures
First off, HUD is the U.S. Department of Housing and UrbanDevelopment. FHA is the Federal Housing Administration,
an agency administered by HUD. For our purposes, they are one and the same.
An FHA mortgage is a mortgage made by any lender for which
FHA is the mortgage insurance company (for more info on mortgage insurance, see this article). There are
three types of FHA mortgages. All are available only to owner occupants, not
investors.
203(b): This is the standard FHA loan. Borrowers may qualify
with credit scores as low as 580, debt ratios as high as 56%, and down payments
as low as 3.5%. The property can be any house, townhouse, 1-4 unit multifamily
building, or FHA-approved condominium (more on this later). The property must
also be in 100% livable condition with all systems functioning properly, no safety hazards, no mold, etc. It can be ugly as sin, as long as it works.
203(k): This is the "rehab mortgage" version of
FHA financing. It allows the buyer to finance the purchase and rehab costs of a
home. Rehab costs must exceed $5,000. Example: A house is currently worth
$50,000 and is in need of extensive repairs. After those repairs it will be
worth $150,000. The buyer makes a down payment and purchases the house for
$50,000. The buyer's mortgage is $125,000, with the difference being
held in an escrow account. As the repairs are made by licensed contractors who
bid the project out before the closing, the contractors are paid out of the
escrow account. Work is completed, the borrower moves in with a mortgage of
$125,000, and the house is worth $150,000. The 203(k) loan is good because it
allows for a great deal of flexibility, but it is a long and complicated
process relative to a 203(b) and many lenders don't offer it. More info here and here.
203(k) Streamline: This is what it sounds like - a quicker,
easier version of the 203(k) rehab loan. The buyer can finance rehab costs up to
$35,000 into the loan, but money cannot be used for structural work. For more
info, click here, then click on the "HUD Mortgagee Letter" link.
FHA-approved condominiums: Aside from any restrictions
mentioned above, any type of FHA financing can only be used on a condo if the
condo project (development, building, complex, whatever you want to call it)
has been approved for FHA financing. The condo association needs to gather all
of their legal and financial documents and submit an application to FHA, who
will then review the file and determine if the association meets their
criteria. These criteria include a minimum amount of cash held in reserve,
maximum concentration of FHA loans in the complex, maximum number of rented
units, and maximum number of units delinquent on assessments, among others.
Once the project is FHA approved, buyers can use FHA financing to purchase
there. Beware - many homes that appear to be townhomes are legally condos,
which must be approved. Most people don't know there's a very easy way to verify whether an association is FHA-approved: the HUD database.
HUD REO: You already know what HUD is. REO stands for
"real estate owned," and that's how banks refer to their foreclosed
inventory. HUD REO refers to property that was mortgaged with an FHA loan that
foreclosed; the property is now owned by HUD. HUD allows some extra leeway in
financing their REO, and they provide more information than any other bank or
seller pertaining to the property's value and condition.
Run a search in your state and ZIP code on HUD's REO website. Click on the property case number for one of
the listings to pull up the details. Photos are shown at the far left; basic
property attributes are shown in the middle; and on the right you will see some
listing dates and deadlines and then the "As-is Value." HUD already
had the property appraised in its current condition, and this number is the
appraised value as of the "Appraisal Date" shown in the middle
column.
Below the as-is value, you'll see "FHA Financing:"
followed by one of three codes.
> IN (Insured): Property condition meets FHA 203(b)
standards.
> IE (Insured Escrow): Property condition ALMOST meets
203(b) standards. Repairs of $5,000 or less are needed. Buyer can use 203(b) by
posting a repair escrow (see below).
> UI (Uninsured): Property needs more than $5,000 of
repairs to comply with 203(b) standards and is therefore not eligible for
203(b). Buyer must use 203(k) or Streamline if eligible (see below).
The next line down shows if the property is eligible for
203(k) loans. This almost always says "Yes," but it will say
"No" if the property is a condo in a complex that is not currently
FHA approved.
Keep moving down and you'll see the line "Repair
Escrow" followed by an amount (if the status was IE). If the buyer wishes
to use a 203(b) loan, they must post this amount into an escrow account at the
closing, have the necessary repairs done to bring the property into compliance,
and complete a compliance review before the escrowed funds are released back to
them.
Below the repair escrow amount, you will see "Review
PCR for Repair Escrow Items." Click on the "Addendums" tab. You
will see a few links; the one you want is the PCR or Property Condition Report.
Click the link and download the PDF. A HUD contractor tested various components in
the property, including all the major mechanicals, and this report shows the
results. Another file on this same page, usually titled Escrow report or PCR summary, shows the contractor's estimate of the repair costs and the total amount that must be escrowed.
In the Addendums tab you may also see a link for HUD's
"$100 down payment" program. This means a buyer purchasing this
property with any type of FHA financing can qualify for a $100 down payment
instead of the usual 3.5%, during special promotional periods.
How cool is that? They tell you the appraised value, what's
wrong with the property, and how much it will cost to fix. Find me another
institutional seller (or any seller, for that matter) who will do that!
Bidding on HUD property is a different conversation, but
unlike some bidding sites an offer can only be input by a HUD-registered
broker. If you’re reading this article then you know a HUD registered broker,
so check the website out, then talk to me!
How to use the MLS mortgage calculator
When considering buying or refinancing a home, affordability is often the most important factor - not the amount financed, but the amount of the payment. The concept of $300,000 isn't something we can easily grasp in everyday terms, but the payment we make every month is immediately applicable to our lives. I often quote estimated payments to home buyers to help them evaluate their decisions, because figuring a mortgage payment isn't exactly simple math. But better than giving you a fish is teaching you to fish, so here's a step-by-step guide on how to calculate estimated mortgage payments using the MLS mortgage calculator.
Depending on whether you're talking about a house or a condo/townhouse, and depending on what type of financing you're using, there are going to be three to five different parts of the payment. The first part is the principal and interest, which is the mortgage itself and is calculated just like a big, long, car note. You'll also be escrowing your property taxes and homeowners insurance, which means you pay your mortgage company 1/12 of the annual cost of each of those expenses every month, they hold it in a separate account (escrow), and when the bills come due the mortgage company pays them. If you're putting less than 20% down, you'll also be paying mortgage insurance. And if the property is part of an association with a monthly fee, such as a condo or townhouse association, you'll also have to figure in the monthly association fee. Although this fee is paid directly to the association, not to your mortgage company, mortgage companies include it as a part of the payment for qualification purposes and you should include it when determining how much you can afford.
Check out the screenshot below; this is the blank slate. We'll start with the simplest calculation and then add the other moving parts.
Example #1: $200,000 purchase, 20% down payment. Property taxes of $5,000/yr, and homeowners insurance of $720/yr. Here we will only have principal & interest, property tax escrow, and homeowners insurance escrow. Enter the purchase price, $200,000. Enter the down payment as a percent (20%), and the $ field will auto-populate. Enter the interest rate: As of today I'm entering 4.25%, but the day will come when that will seem utterly outrageous. Leave the Number of Years at 30 unless you're pursuing a 15yr mortgage or other term. Enter the annual property taxes of $5,000. Enter the ANNUAL mortgage insurance of $720 and click the ANNUAL radio button, or if you're premium was quoted as a MONTHLY amount, enter that number and leave the MONTHLY radio button selected. Click Calculate, and voila:
The calculator separates out the principal & interest amount, then provides the total estimated payment including taxes and insurance. Toy around with the interest rate and the price to see how the payment changes - for instance, how much will a .25% increase in the interest rate change the payment? How much will the payment change if you get the house for $195,000 or $190,000 instead of $200,000?
Example #2: Same as Example #1, except now let's say you're getting a 5% down conventional mortgage. So you'll change the down payment to 5%, and you'll have to add mortgage insurance. (For more info on what mortgage insurance is and how it's figured out, read this article.) Today I'm using .85% for mortgage insurance, but this rate will vary depending on the borrower's credit score, amount of down payment, and market conditions. Enter .85% into the PMI / MIP field, which stands for "private mortgage insurance / mortgage insurance premium."
The calculator has also separated out the monthly mortgage insurance amount here. What a nice mortgage calculator.
Example #3: Now imagine the property in Example #2 is a condo with a monthly association fee of $150. Just enter $150 into the Association Fees field, make sure the MONTHLY radio button is selected, and the calculator will include this amount in the total estimated payment. I won't bore you with a screenshot of this one, you get the point.
Example #4: And for the grand finale, we will use an FHA loan. (For more information on what an FHA loan is and why it's different for this purpose, read this article.) Use the same information from Example #2, except change the down payment to 1.75%, and change the PMI rate to 1.25%. The minimum FHA down payment is actually 3.5%, however there is an upfront mortgage insurance premium for FHA loans (separate from what is paid monthly) that can be rolled into the loan as opposed to being paid at the closing. With interest rates so low, it's extremely common in today's market to roll the upfront MIP into the loan. The upfront MIP rate is currently 1.75% of the loan amount, so in order to account for adding that amount to the loan balance, we're taking it off the 3.5% down payment. Here's the result:
So you can see, when comparing Examples #1, #2, and #3, the difference in the affordability of the payment depending on the amount of your down payment and the type of financing you're using.
Hopefully this article allows you to figure out what you can afford when looking at a purchase or refinance. Of course, you'll still need me to set you up with an MLS account and a good loan officer to fill you in on the latest changes in interest rates, mortgage insurance rates, and financing programs available - but this is a start!
Depending on whether you're talking about a house or a condo/townhouse, and depending on what type of financing you're using, there are going to be three to five different parts of the payment. The first part is the principal and interest, which is the mortgage itself and is calculated just like a big, long, car note. You'll also be escrowing your property taxes and homeowners insurance, which means you pay your mortgage company 1/12 of the annual cost of each of those expenses every month, they hold it in a separate account (escrow), and when the bills come due the mortgage company pays them. If you're putting less than 20% down, you'll also be paying mortgage insurance. And if the property is part of an association with a monthly fee, such as a condo or townhouse association, you'll also have to figure in the monthly association fee. Although this fee is paid directly to the association, not to your mortgage company, mortgage companies include it as a part of the payment for qualification purposes and you should include it when determining how much you can afford.
Check out the screenshot below; this is the blank slate. We'll start with the simplest calculation and then add the other moving parts.
Example #1: $200,000 purchase, 20% down payment. Property taxes of $5,000/yr, and homeowners insurance of $720/yr. Here we will only have principal & interest, property tax escrow, and homeowners insurance escrow. Enter the purchase price, $200,000. Enter the down payment as a percent (20%), and the $ field will auto-populate. Enter the interest rate: As of today I'm entering 4.25%, but the day will come when that will seem utterly outrageous. Leave the Number of Years at 30 unless you're pursuing a 15yr mortgage or other term. Enter the annual property taxes of $5,000. Enter the ANNUAL mortgage insurance of $720 and click the ANNUAL radio button, or if you're premium was quoted as a MONTHLY amount, enter that number and leave the MONTHLY radio button selected. Click Calculate, and voila:
The calculator separates out the principal & interest amount, then provides the total estimated payment including taxes and insurance. Toy around with the interest rate and the price to see how the payment changes - for instance, how much will a .25% increase in the interest rate change the payment? How much will the payment change if you get the house for $195,000 or $190,000 instead of $200,000?
Example #2: Same as Example #1, except now let's say you're getting a 5% down conventional mortgage. So you'll change the down payment to 5%, and you'll have to add mortgage insurance. (For more info on what mortgage insurance is and how it's figured out, read this article.) Today I'm using .85% for mortgage insurance, but this rate will vary depending on the borrower's credit score, amount of down payment, and market conditions. Enter .85% into the PMI / MIP field, which stands for "private mortgage insurance / mortgage insurance premium."
The calculator has also separated out the monthly mortgage insurance amount here. What a nice mortgage calculator.
Example #3: Now imagine the property in Example #2 is a condo with a monthly association fee of $150. Just enter $150 into the Association Fees field, make sure the MONTHLY radio button is selected, and the calculator will include this amount in the total estimated payment. I won't bore you with a screenshot of this one, you get the point.
Example #4: And for the grand finale, we will use an FHA loan. (For more information on what an FHA loan is and why it's different for this purpose, read this article.) Use the same information from Example #2, except change the down payment to 1.75%, and change the PMI rate to 1.25%. The minimum FHA down payment is actually 3.5%, however there is an upfront mortgage insurance premium for FHA loans (separate from what is paid monthly) that can be rolled into the loan as opposed to being paid at the closing. With interest rates so low, it's extremely common in today's market to roll the upfront MIP into the loan. The upfront MIP rate is currently 1.75% of the loan amount, so in order to account for adding that amount to the loan balance, we're taking it off the 3.5% down payment. Here's the result:
So you can see, when comparing Examples #1, #2, and #3, the difference in the affordability of the payment depending on the amount of your down payment and the type of financing you're using.
Hopefully this article allows you to figure out what you can afford when looking at a purchase or refinance. Of course, you'll still need me to set you up with an MLS account and a good loan officer to fill you in on the latest changes in interest rates, mortgage insurance rates, and financing programs available - but this is a start!
Wednesday, April 25, 2012
Pricing in a Declining Market
That's the title I give to a discussion I have with sellers before listing their home for sale. I long for the day when I can skip that discussion, but for the time being it is a crucial part of selling a home. Sellers commonly take the approach of, "Let's see how much I can get first, then we can drop the price." I can absolutely relate to the thought process that produces that statement as I have sold property myself and thought the same thing. As a real estate professional, however, I can tell you that statement is downright dangerous. There are three reasons sellers are hurting themselves by taking that approach, backed up by mountains of data.
Reason #1: The first three weeks on the market are the most precious. That's a known fact in the real estate community, and although it's founded in buyer psychology it's statistically proven. This is when all the buyers who have been searching for a home see your listing come on the market. If they look at the listing or perhaps schedule a showing and determine the home is overpriced, you've most likely lost that buyer for good. Because no matter how many times they see your listing pop up, such as with every price drop, they will always see it as that overpriced house they looked at awhile back. You remember that old adage about first impressions, right? If you lose the buyers who are already looking at the time you list, then you have to wait for new buyers to enter the market and hope one of them notices your listing. Would you guess there is a greater number of buyers currently searching for homes in your area than the number of new buyers who will enter the market in your area in the next month? If you guessed yes, you guessed right. Best to capitalize on that opportunity as a well-priced new listing.
Reason #2: As your market time ticks up and you repeatedly drop your price, your home becomes less appealing to buyers and you lose negotiating leverage. What do you think are two of the most common questions asked by buyers during a showing? How long has it been on the market, and how much have they dropped their price. In fact, buyers don't even need to ask anymore because that information is now visible to buyers on the MLS listing. Which of these two identical houses do you think generates more interest and urgency in a buyer:
Reason #3: If you're not priced right when you list and the median value of homes in your area is still declining, you are faced with the challenge of dropping your price at a faster rate than the rate of market decline. The primary problem with that is that we don't know at any given point how quickly the market is declining. Contract prices are private until the sale closes, at which point 30 to 90 days have passed since the buyer made their buying decision. Since then, your toughest competition has lowered their asking prices. That means in a declining market, even if you price your home for exactly the amount the identical home next door just sold for, you are priced too high because you're at a "three months ago" price.
Consider the graph below. This shows a [hypothetical] listing that comes on the market for $149,900 at a time when it was actually worth $125,000. They drop their price $5,000 here, $10,000 here, wincing each time at the money they're losing. Meanwhile, the market has continued to decline. At the end of 12 months, there will be a very frustrated seller and an unsold house. They have dropped their asking price by 20% since they listed, but to no avail because the market value of the house has fallen by the same rate over the same time period and they started above the curve. Even with slightly more aggressive price drops they may not have caught up - they would have had to drop from $149,900 to $129,900 within 60 days of listing in order to have a shot at being "priced right," and I don't know too many people who are ready to stomach a perceived loss of that size, that quickly.
By contrast, consider the next graph as an example of how it SHOULD look:
Here, the seller actually gets more for their house than they would have in the first example - they sell for about $125,000 now, instead of being stuck with the house for a year until it's worth only $100,000. Just like with Reason #2, pricing too high will result in selling your home for less.
As I mentioned before, the primary problem with this whole scenario is that nobody knows exactly where that green curve is until three months later, at which point value has already been lost. We do have information about how declining markets work, though, so if we (seller + broker) take that information seriously and adopt an aggressive approach to pricing, you can beat your competition and sell your home for the highest possible price.
Reason #1: The first three weeks on the market are the most precious. That's a known fact in the real estate community, and although it's founded in buyer psychology it's statistically proven. This is when all the buyers who have been searching for a home see your listing come on the market. If they look at the listing or perhaps schedule a showing and determine the home is overpriced, you've most likely lost that buyer for good. Because no matter how many times they see your listing pop up, such as with every price drop, they will always see it as that overpriced house they looked at awhile back. You remember that old adage about first impressions, right? If you lose the buyers who are already looking at the time you list, then you have to wait for new buyers to enter the market and hope one of them notices your listing. Would you guess there is a greater number of buyers currently searching for homes in your area than the number of new buyers who will enter the market in your area in the next month? If you guessed yes, you guessed right. Best to capitalize on that opportunity as a well-priced new listing.
Reason #2: As your market time ticks up and you repeatedly drop your price, your home becomes less appealing to buyers and you lose negotiating leverage. What do you think are two of the most common questions asked by buyers during a showing? How long has it been on the market, and how much have they dropped their price. In fact, buyers don't even need to ask anymore because that information is now visible to buyers on the MLS listing. Which of these two identical houses do you think generates more interest and urgency in a buyer:
- House A, which has been on the market 125 days and has dropped their price from $199,900 to $164,900, or...
- House B, which just came on the market 8 days ago and is asking $164,900?
Reason #3: If you're not priced right when you list and the median value of homes in your area is still declining, you are faced with the challenge of dropping your price at a faster rate than the rate of market decline. The primary problem with that is that we don't know at any given point how quickly the market is declining. Contract prices are private until the sale closes, at which point 30 to 90 days have passed since the buyer made their buying decision. Since then, your toughest competition has lowered their asking prices. That means in a declining market, even if you price your home for exactly the amount the identical home next door just sold for, you are priced too high because you're at a "three months ago" price.
Consider the graph below. This shows a [hypothetical] listing that comes on the market for $149,900 at a time when it was actually worth $125,000. They drop their price $5,000 here, $10,000 here, wincing each time at the money they're losing. Meanwhile, the market has continued to decline. At the end of 12 months, there will be a very frustrated seller and an unsold house. They have dropped their asking price by 20% since they listed, but to no avail because the market value of the house has fallen by the same rate over the same time period and they started above the curve. Even with slightly more aggressive price drops they may not have caught up - they would have had to drop from $149,900 to $129,900 within 60 days of listing in order to have a shot at being "priced right," and I don't know too many people who are ready to stomach a perceived loss of that size, that quickly.
By contrast, consider the next graph as an example of how it SHOULD look:
Here, the seller actually gets more for their house than they would have in the first example - they sell for about $125,000 now, instead of being stuck with the house for a year until it's worth only $100,000. Just like with Reason #2, pricing too high will result in selling your home for less.
As I mentioned before, the primary problem with this whole scenario is that nobody knows exactly where that green curve is until three months later, at which point value has already been lost. We do have information about how declining markets work, though, so if we (seller + broker) take that information seriously and adopt an aggressive approach to pricing, you can beat your competition and sell your home for the highest possible price.
Sunday, March 4, 2012
New Down Payment Assistance Program in Park Forest, Chicago Heights
The Illinois Housing Development Authority (IHDA) is piloting a new housing assistance program called Illinois Building Blocks to help stabilize communities hit hard by the foreclosure crisis. The program has three parts:
1. Providing financing to local developers to purchase and rehab 10-15 homes to be resold to to low- and moderate-income families. In Park Forest this will be focused in the "W" and "M" streets. Starting this summer.
2. Providing a $10,000 gift as down-payment and closing cost assistance to home buyers earning less than $84,000/yr (for 1-2 person househould) to $104,000 (for households of 3+). Starting 3/1/12.
3. In conjunction with KeepYourHomeIllinois.org, providing foreclosure counseling, loan modifications, and financial assistance to homeowners unable to pay their mortgages due to unemployment or underemployment.
The communities involved in the pilot program are Park Forest, Chicago Heights, Riverdale, South Holland, Maywood, and Berwyn.
1. Providing financing to local developers to purchase and rehab 10-15 homes to be resold to to low- and moderate-income families. In Park Forest this will be focused in the "W" and "M" streets. Starting this summer.
2. Providing a $10,000 gift as down-payment and closing cost assistance to home buyers earning less than $84,000/yr (for 1-2 person househould) to $104,000 (for households of 3+). Starting 3/1/12.
3. In conjunction with KeepYourHomeIllinois.org, providing foreclosure counseling, loan modifications, and financial assistance to homeowners unable to pay their mortgages due to unemployment or underemployment.
The communities involved in the pilot program are Park Forest, Chicago Heights, Riverdale, South Holland, Maywood, and Berwyn.
Thursday, February 23, 2012
Your Home Is Not An Investment
I spoke with a new buyer yesterday, and one of the first questions I asked was, "Are you looking to purchase a home or investment property?" The buyer said, "Both." She wasn't talking about buying two houses - she wanted one house to serve both purposes. Anyone else see something wrong with this picture?
I had to get a little more specific by asking the buyer whether she intended to live in the property or not, at which point we determined she was, in fact, looking for a home. The difference is if you live in it, it's your home. If you bought it with the intent to flip it or rent it out - strictly for potential financial reward - it's an investment. But her attitude that her home ought to be equal parts "place to live" and "investment vehicle" has become increasingly common if not prevalent among current and prospective homeowners.
The wild fluctuation in prices and market conditions throughout the recent real estate boom and bust has perverted mainstream America's idea of the purpose a home serves in our lives. Many of us have been fooled into believing our home is an investment account, a commodity to be bought and sold based on market fluctuations. Your home doesn't have a stock ticker symbol, it's not traded on the NYSE, and it is a very illiquid asset. While it's true your home may gain or lose value over time, the primary purpose of owning a home is not - or at least shouldn't be - to make money.
I've had a number of seller clients close recently for just about the same price they bought the house for, 10+ years ago. After you factor in selling costs, which are substantial, on paper it's a financial loss. But those clients have enjoyed their homes for over a decade, created lasting memories, molded the home to fit their lifestyle, and yes, reaped some financial benefit in the form of tax deductions too. They may not have come out ahead on the resale of the property, but ask them if they gained in other ways from living there and I'll bet their answer is yes.
People have historically bought and sold homes as a lifestyle decision. That means you buy a home when your family's needs change. That includes upsizing and downsizing, marriage and divorce, having children and emptying the nest, bringing in or kicking out extended family, retiring, relocating, or simply looking for a place to settle down. Obviously there ARE financial implications to owning a home, but we would do best to get away from the mindset of putting those implications above our families' needs. Especially now that most experts are predicting a relatively flat market for the foreseeable future, if you're buying or selling a home with dollar signs at top of mind, I'd recommend you reconsider.
Tuesday, February 21, 2012
How Is My Property Tax Bill Calcuated?
Property taxes in Illinois, besides being levied at exorbitant rates compared to most other states, are dizzyingly complicated. It's even worse for homeowners in the most populous county in the state, Cook County. I've always said the Illinois property tax system could be sufficiently explained in a 3-credit hour college course, but since most of us care but not THAT much, I'm breaking it down to what you as a current or prospective homeowner need to know.
Timing
Property taxes in Illinois are paid one year in arrears. So the taxes everyone is paying in 2012 are the taxes levied against the property from the calendar year 2011. The county treasurer sends out the bills in the spring (exact date depends on which county) and the bill is due in two installments, such as half on June 2 and half on September 2. The only exception, of course, is wonderful Cook County where the first installment bill is estimated based solely on the prior year's bill, sent out in February(ish), due March 1 (usually), and the actual tax amount is not figured out until they get their act together in the fall, when they send out the second installment bill which is due in November...ish.
Property taxes in Illinois are paid one year in arrears. So the taxes everyone is paying in 2012 are the taxes levied against the property from the calendar year 2011. The county treasurer sends out the bills in the spring (exact date depends on which county) and the bill is due in two installments, such as half on June 2 and half on September 2. The only exception, of course, is wonderful Cook County where the first installment bill is estimated based solely on the prior year's bill, sent out in February(ish), due March 1 (usually), and the actual tax amount is not figured out until they get their act together in the fall, when they send out the second installment bill which is due in November...ish.
In Illinois we have a quadrennial reassessment schedule (triennial in Cook), which means every four years (three in Cook) each property is re-evaluated individually (supposedly) for changes in value. This is supposed to be more accurate than the generalization method they use in the "off" years. All assessment schedules are available on your assessor's website - check my Links page to find yours.
Who's Who?
The determination and collection of property tax is divided among a number of government bodies. The township assessor determines your property's value. The county assessor compiles all the information from the township assessors. The treasurer determines the tax rates, issues the bill and collects the money. The clerk takes over collection efforts on unpaid taxes and handles any tax sales.
The determination and collection of property tax is divided among a number of government bodies. The township assessor determines your property's value. The county assessor compiles all the information from the township assessors. The treasurer determines the tax rates, issues the bill and collects the money. The clerk takes over collection efforts on unpaid taxes and handles any tax sales.
Valuation
All property taxes start with the assessor's estimate of your property's value. They gather data from recently sold properties and apply that information in a very general fashion to arrive at their estimate. This is referred to as your "Estimated Market Value." This can be (and often is) inaccurate, so you are given a window of time after your assessment letter is mailed to you during which you can appeal your assessed value for that tax year. Keep in mind when you receive an assessment letter you're looking at the assessor's estimated value of your property as of January 1 of the billing year. So the 2012 assessment letter shows what they think your property was worth as of January 1, 2012. It's based on comparable sales from the calendar year 2011, going as far back as three years if more sales data is needed. If you think your property was worth less than they do as of that date, you can appeal.
All property taxes start with the assessor's estimate of your property's value. They gather data from recently sold properties and apply that information in a very general fashion to arrive at their estimate. This is referred to as your "Estimated Market Value." This can be (and often is) inaccurate, so you are given a window of time after your assessment letter is mailed to you during which you can appeal your assessed value for that tax year. Keep in mind when you receive an assessment letter you're looking at the assessor's estimated value of your property as of January 1 of the billing year. So the 2012 assessment letter shows what they think your property was worth as of January 1, 2012. It's based on comparable sales from the calendar year 2011, going as far back as three years if more sales data is needed. If you think your property was worth less than they do as of that date, you can appeal.
Rates
The overall tax rate levied against your property is a cumulative total of all the taxing districts in which the property is located - everything from the village, school district, water reclamation district, library district, mosquito abatement district (seriously), etc. Each taxing body determines how much money they need for that year and turns that number in to the treasurer, who adds everything up, determines the tax rates, and issues the bills. Overall tax rates vary widely, from the lowest at around 6-7% (Orland Park, Cook County) to the highest at 18% (Park Forest, Cook County) or more. As for what that percentage means...
The overall tax rate levied against your property is a cumulative total of all the taxing districts in which the property is located - everything from the village, school district, water reclamation district, library district, mosquito abatement district (seriously), etc. Each taxing body determines how much money they need for that year and turns that number in to the treasurer, who adds everything up, determines the tax rates, and issues the bills. Overall tax rates vary widely, from the lowest at around 6-7% (Orland Park, Cook County) to the highest at 18% (Park Forest, Cook County) or more. As for what that percentage means...
Formulas
Your actual tax bill is calculated by multiplying your overall tax rate by your equalized assessed value (EAV). In most counties, EAV is calculated by taking the estimated market value, dividing by three, and subtracting any exemptions (more on that in the next section). So if your estimated market value is $100,000 and your overall tax rate is 9%, it would look like this:
Your actual tax bill is calculated by multiplying your overall tax rate by your equalized assessed value (EAV). In most counties, EAV is calculated by taking the estimated market value, dividing by three, and subtracting any exemptions (more on that in the next section). So if your estimated market value is $100,000 and your overall tax rate is 9%, it would look like this:
Estimated Market Value / 3 = Assessed Value
Assessed Value * Tax Rate = Tax Amount
Assessed Value * Tax Rate = Tax Amount
100,000 / 3 = 33,333
33,333 * .09 = $2,999.97
33,333 * .09 = $2,999.97
If the property is your primary residence, you are eligible for a Homeowner Exemption which is knocked off of the Assessed Value before applying the tax rate:
100,000 / 3 = 33,333
33,333 - 6,000 = 27,333
27,333 *. 09 = $2,459.97
33,333 - 6,000 = 27,333
27,333 *. 09 = $2,459.97
In this example, the homeowner exemption saves the owner about $500/yr. There are other exemptions including for seniors, people with disabilities, etc. The higher the tax rate, the larger the impact your exemptions will have.
Cook County, the ever-exception, does things differently. There, the formula looks like this:
Estimated Market Value / 10 = Assessed Value
Assessed Value * Equalization Factor = Equalized Assessed Value
Equalized Assessed Value - Exemptions = Taxable EAV
Assessed Value * Equalization Factor = Equalized Assessed Value
Equalized Assessed Value - Exemptions = Taxable EAV
100,000 / 10 = 10,000
10,000 * 3.3 = 33,000
33,000 - 6,000 = 27,000
27,000 * .09 = $2,430
10,000 * 3.3 = 33,000
33,000 - 6,000 = 27,000
27,000 * .09 = $2,430
For a more detailed explanation about the Equalization Factor... Don't bother. Really, just don't bother. It's complicated, confusing, and there's nothing you can do about it.
Appeals
As I mentioned, you can appeal the assessor's estimate of your market value. This is something best left to the pros because of the complexity of the tax code. This is the one area in which it's GOOD to be in Cook County. Their appeal process is much easier, so there are tons of attorneys who specialize in property tax appeals and will represent you on a contingent fee basis, meaning they are paid a percentage of the reduction amount. As of this year, you can even appeal your assessment online. But in all the other counties, the appeal process is painstaking if the assessor disagrees with your case, and you're probably on your own since it generally isn't worth an attorney's time to put in all the work that would be required. But regardless of what county you're in, you can appeal the taxes based on overvaluation (meaning comparable sales indicate a value lower than the amount the assessor assigned), lack of uniformity (meaning other similar properties are assessed at lower values), vacancy (if the property is uninhabitable), and a number of other reasons. You can also file a certificate of error if you did not receive an exemption to which you were entitled, even after the bill in question has been paid.
As I mentioned, you can appeal the assessor's estimate of your market value. This is something best left to the pros because of the complexity of the tax code. This is the one area in which it's GOOD to be in Cook County. Their appeal process is much easier, so there are tons of attorneys who specialize in property tax appeals and will represent you on a contingent fee basis, meaning they are paid a percentage of the reduction amount. As of this year, you can even appeal your assessment online. But in all the other counties, the appeal process is painstaking if the assessor disagrees with your case, and you're probably on your own since it generally isn't worth an attorney's time to put in all the work that would be required. But regardless of what county you're in, you can appeal the taxes based on overvaluation (meaning comparable sales indicate a value lower than the amount the assessor assigned), lack of uniformity (meaning other similar properties are assessed at lower values), vacancy (if the property is uninhabitable), and a number of other reasons. You can also file a certificate of error if you did not receive an exemption to which you were entitled, even after the bill in question has been paid.
Buying and Selling Property
There are special concerns with regard to property taxes when transacting property. When buying, it's important to look at the tax amount on the listing sheet of each property you're considering. One twelfth of that amount will be collected by your mortgage company with your mortgage payment each month, deposited into an escrow account, and used to pay the bill when it comes due. So the tax amount has a direct impact on the amount of your payment. When looking at the tax amount, keep in mind that the number and size of any exemptions held by the previous owner may be different than the exemptions for which you will qualify. The listing should indicate any exemptions applied, but as usual there can be errors and this information should be verified by looking up the property on the county treasurer's website.
There are special concerns with regard to property taxes when transacting property. When buying, it's important to look at the tax amount on the listing sheet of each property you're considering. One twelfth of that amount will be collected by your mortgage company with your mortgage payment each month, deposited into an escrow account, and used to pay the bill when it comes due. So the tax amount has a direct impact on the amount of your payment. When looking at the tax amount, keep in mind that the number and size of any exemptions held by the previous owner may be different than the exemptions for which you will qualify. The listing should indicate any exemptions applied, but as usual there can be errors and this information should be verified by looking up the property on the county treasurer's website.
Because taxes are paid a year in arrears, some math has to be done at the closing table to square up the buyer and seller. For instance, assume a house is scheduled to close on July 1, 2012. The 2011 tax bill is $3,000, and the owner has paid the first installment ($1,500) which was due June 1, 2012. The buyer will own the property when the second installment of 2011 taxes comes due on September 1, but that tax bill is from 2011 when the seller owned the property. So the seller gives the buyer a credit for that amount ($1,500) - meaning the amount of money the seller takes from the closing will be reduced by $1,500, and the amount of money the buyer brings to the closing will be reduced by the same amount. Further, the seller has owned the house for six months of 2012, so they have to settle up with the buyer for another half-year of taxes. The 2012 tax bill won't be issued until almost a year after this closing, so they estimate the 2012 bill by taking the 2011 bill and adding 5-10% (this is a point of negotiation during the offer stage), and a credit is given to the buyer. For this reason, the amount of money a buyer needs to bring to the closing is often less than what they expected, and the amount a seller takes from the closing may be less than they expected too. Remember that as a seller, you have a balance in your lender's escrow account which is earmarked for taxes, and those funds should be released to you or applied toward your closing costs.
It's been said that the two things you can never avoid are death and taxes, and in this case that statement is certainly true. Any unpaid property taxes will turn into a lien on the property that will bump any other liens (including mortgages) into second place. So make sure you pay your taxes, but more than that, pay attention to make sure you're not paying too much!
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