Category Archives: Financial Decisions

Quickly Estimating the Value of Your Home

You want to know what your home is worth but you are not ready to sell. You may be considering whether to upgrade your kitchen or move. You may be completing a financial statement for the bank. Or, you may just be curious. But, you do not know a Realtor and do not want to go to a lot of trouble. Automated Valuation Models (AVMs) produce answers which may be useful to you.

AVMs use tax records which include information such as location, square feet, number of bedrooms and bathrooms, and property tax valuations. They also use sales prices where available.

Nationally, AVMs are most accurate where the creator of the model has the most information, where home prices are lower, and in newer subdivisions where few homes have been updated. They are less accurate where less information is available, more expensive or custom homes are involved, and in older neighborhoods where significant differences exist because of remodeling and updating.

Inspecting the Home

Inspecting the Home

Historically, AVMs were used by industry insiders such as mortgage companies. However, more recently some national home search sites provide these tools as part of their effort to supply useful information to consumers and leads to Realtors. The most famous sites are Zillow and Trulia. However, if you search on the internet, there are other sites that advertise their services. I found a product from Chase using an internet search. I have paid for a proprietary AVM for over a year. And, because I am a Realtor, I have access to another AVM provided by the National Association of Realtors.

Of primary importance with these products is accuracy. In my review, Zillow was most transparent about accuracy. See their comments here. The “Los Angeles Times” recently produced an article discussing the issues with accuracy at Zillow. The other AVMs use price ranges or disclaimers or both. Homes in Texas present a unique issue in that the sales price of a home is not public information. So, while Realtors have access to this information through the MLS, the public is generally not aware of sales prices. This also means the local taxing authorities do not have access to this information and may not have access to information on remodeling if the remodeling is not done in a taxing authority where building permits may not be required (e.g., outside a city limit.) So, for example, the taxing authorities may not be aware of a pool or a completely remodeled kitchen and bathrooms. Both taxing authorities and the AVMs may become aware of sales prices and updating if the owners or Realtors input or provide the information to the AVM (e.g., Zillow or the Harris County Appraisal District – HCAD.) However, most owners and Realtors do not provide this information. As a result, the accuracy of AVMs is compromised.  In the Zillow accuracy disclosure, Zillow indicates their accuracy for Houston is one star out of four stars.

However, even with those limitations, based on my testing for my own home and recent transactions, AVMs may provide useful information, especially if taken in combination with information from other AVMs and HCAD. And, it may be fun or interesting to search these sites and others for the values. I have not identified specific AVM sites with my results because they all can be close or nowhere near right depending on the properties. My home is more difficult to value for an AVM, even if it were not in Texas, because it is an older home in a 1950s neighborhood that has new houses, extensively remodeled homes and homes that have had no major work since the 1950s. My results were:

Price per HCAD is within 20% of my market value.

Site 1 produced a range that was 19% below to 9% above my market value.

Site 2 produced a price that was more than 40% below market.

Site 3 produced a price that was 5% below market.

Site 4 produced a range that was 30% below market to 6% below market.

Site 5 produced a range that was 14% below to 11% below market.

I also looked back at my most recent transactions representing buyers and sellers. Using one of the AVMs, the actual sales price differed from the value estimated by from 14.8% lower to 27.0% higher, averaging a 12.8% difference.

Of course, these sites should not be used if you plan to sell your home. The best answer if you plan to sell your home is to find a Realtor who can use information from the MLS about prior sales and insight into the current market to help you come to an accurate estimate of the value. I would be happy to provide valuation information for your home without any obligation.

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Buying a Condo

There are many advantages to buying a condo, including: security, amenities, views, social community and included maintenance. However, there are also some potential negatives to consider before deciding to buy a condo. Some of the matters on which to focus as you consider a condo are discussed below.

Ownership Interest – Instead of owning the building and the land as one would in a single family home, the ownership interest is the space inside the condo and an undivided interest in the building and common areas. As a result, the condo owners will share substantial costs to maintain and insure the building and common areas, and others will have a say in the operation of your home outside your owned space.

Condo Owners Association – Similar to a homeowner’s association, the condo association will be responsible for enforcement of bylaws and collection of fees. However, because of the greater importance of a common building, maintenance, and amenities; the Condo Owners Association will likely have more “intrusive” rules and significantly higher fees. One will want to ensure the bylaws are in line with their expectations of the level of Association control. In addition, one will want to review minutes to ensure there are no issues, and the board functions in a professional manner.

Houston SkylineCommon Areas – Common areas include the land, floors, lobbies, elevators, common services infrastructure such as air conditioning and water, and amenities such as pools and exercise facilities.

Maintenance and Common Area Fees – As compared to a single family home, a condo will have significant fees for the maintenance of the building, common areas, security and amenities. When buying a condo, a consideration of the fees will be significantly impact the total price one is willing to pay for the condo.

Social Aspects – One of the advantages or disadvantages of living in a condo, depending on one’s perspective, is the social aspects of the building. Are there many organized activities? Do the activities reflect your lifestyle? Do the common areas support interaction?

Insurance – The Condo Owners Association will have insurance on the building and common areas. The unit owners will need insurance on their space, including furnishings and liability. Ensuring the Association and you have proper insurance will be important to you and your bank as you obtain financing.

Financing – Historically, banks have had greater losses financing condos than single family homes. As a result, financing rates are generally slightly higher than for single family homes and required down payments are generally higher. Most financing for condos will require 50% of the condos be owner occupied, monthly dues for nearly all units to be up to date, and other ownership requirements. In addition, the bank will insist on certain requirements for the Association such as: appropriate insurance, adequate budget reserves and no pending litigation.

Miscellaneous Considerations – With respect to parking, one will want to consider security and walking distance. For overall security, is the level of security and cost appropriate for your needs? In a condo, space is at a premium. So, is there adequate storage for your needs?

Living in a condo provides many benefits one may not have in other living arrangements. However, one will want to be sensitive to the associated issues.

All Those Fees

There are many payments, costs and fees associated with buying and selling a home. Some are paid by the buyer and some are paid by the seller.

Costs and Fees Generally Paid by Buyer:

While there are a number of categories of costs and payments, the most significant buyer fees are related to financing.

Inspection fees – In the Houston area, these are generally mechanical, structural, foundation, termites and pool.

The warranty deed and deed of trust, if applicable, will be recorded with the County.

Escrow Fees are paid by both the buyer and seller to the title company for the services the title company is providing.

Survey cost is generally paid by the buyer. However, the seller may have an existing survey, which may be acceptable. Or, the seller could pay if that is negotiated.

Having Fun at Home

Having Fun at Home

Homeowners’ Association Dues and Fees are generally paid at the beginning of the year. As a result, the buyer will reimburse the seller for that remaining portion of the year for which the buyer will own the home.

Property taxes are paid at the end of the year. As a result, the seller will owe the buyer for that portion of the year for which the seller owned the house.

Optional Owner’s Title Policy additional coverage for discrepancies and shortages is negotiable but generally paid by the buyer, if purchased.

Homeowner’s Insurance and Flood Insurance may be paid directly to the insurance company if there is a cash transaction. If a loan is set up with an escrow account (meaning the bank pays these costs on behalf of the buyer), they are paid by the bank.

If financing is involved, there will be Lender Fees and Charges:

  • Lenders typically set up an escrow account to directly pay the buyers property taxes, homeowner’s insurance and flood insurance (if applicable). To set up the initial funding for that account, the bank will generally require a payment for three months’ insurance and at least a year of the estimated annual property tax amount.
  • Other lender fees and charges are loan origination, appraisal, document preparation, credit report, and mortgage insurance premium, if applicable. Mortgage insurance is paid if the down payment does not meet specific levels or on some government supported loans.
  • Interest for the period from closing to the date of the first payment.
  • Although not paid to the bank, the buyer will pay Title Insurance covering the bank for the amount of the initial loan.

Miscellaneous fees like courier fees are also charged.

Costs and Fees Generally Paid by Seller:

While there are a number of categories of costs and payments, other than debt payoff, most sellers’ payments, fees and costs are related to transaction commission to the broker, title insurance premium paid on behalf of the buyer, and property tax credit to the buyer.

Basic Title Policy for buyer – Although negotiable, this is almost always paid by seller.

Proration of Property Taxes – Property taxes are due at the end of the year. As a result, the sellers are charged for the portion of the year they owned the home. This amount is credited to the buyer who will be responsible for paying the tax at the end of the year (or their bank if there is an escrow account.)

Home Warranty –Typically, the seller pays an agreed amount for a substantial portion of a one year warranty on mechanical items in the home such as sprinkler systems, heaters and air conditioners.

Homeowners’ Association Dues and Fees are generally paid at the beginning of the year. As a result, the seller will be credited for the portion of the year related to the period of the year in which the buyer will own the home.

All commissions are the responsibility of the seller.

The payoff of all loans and liens will be charged to the seller.

Escrow Fees are paid by both the buyer and seller to the title company for the services the title company is providing.

Miscellaneous other fees and costs are related to recording the release of liens, document preparation fees, and homeowner’s transfer fees.

Getting Your Home Ready to Sell

In our current market, where we keep reading about how fast houses are selling and how prices are still rising, one could easily decide to list a home without doing anything to get it ready. However, the home’s appearance can significantly impact both the total time it takes to sell a home and the amount for which the home will sell. It only makes sense to spend a little time and a little money to maximize your return.

The exterior is important because of curb appeal and first impressions. The most obvious first step is to ensure the address is clear and can easily be seen from the street. I cannot tell you how difficult it is to figure out addresses for some homes. Other suggestions include:

  • Buy a new front door mat
  • Keep grass freshly cut and edged
  • Remove all yard clutter and pet waste
  • Weed and mulch flower beds
  • Clean windows
  • Pressure wash exterior, driveway and sidewalks
  • Tighten and clean all hardware
  • Clean gutters and downspouts and ensure they are attached
  • Store garbage cans, hoses, toys, etc.
  • Replace burned out bulbs
  • Caulk around windows, etc.
  • Clear out and clean garage
Inspecting the Home

Inspecting the Home

In thinking about all storage areas (garage, closets, pantry, cabinets, etc.), go ahead and get ready for the move. You should throw away anything that will not be moved, organize the space, and make enough room that someone could easily see storing more in that location. The hall closet should only have a couple of coats. It should not have all your winter clothes. The two car garage should have room for two cars and additional room to see where items could be stored. Obviously, this may also require renting temporary storage.

Actually, the garage example is a good way to think about the interior as well. Every room and closet should show there is plenty of room and be organized. If a room is crowded, remove furniture until it is not. And, de-clutter. You should put away toys, clothing, dishes, towels, etc. If you have children or pets determine how you will have a 10 minute de-clutter process for showings. For the adults, this 10 minute de-clutter process probably applies to all bathroom and kitchen counters. Shoe boxes to be put under the cabinet will probably work for the bathroom. A toaster oven can go in a kitchen cabinet. Other interior items include:

  • Clean ceiling fans and light fixtures
  • Repair grout issues
  • Replace bedding
  • Consider buying new shower curtains
  • Add or replace accent pillows (a good way to add color)
  • Add a throw in the living room
  • Replace rugs for updating or to add color
  • Hide trash cans
  • Repair all plumbing leaks and drips
  • Keep toilet seats and lids down
  • Add light by keeping curtains open and, subject to fixture limitations, increase bulb wattage
  • Clean walls and shampoo carpet
  • Paint should be taken to a neutral color
  • Remove items from the front of the refrigerator
  • Consider adding fresh flowers to add color

In my experience, the key issues which negatively affect first impressions are:

  • Inadequate lighting (natural and interior)
  • Clutter and disorganization
  • Cleanliness
  • Too much furniture, knickknacks, personal items (the accumulations of our life)

Texas Realtor magazine recently published a list of the mistakes sellers make during the process of selling their home. The ones most applicable to this discussion are not making cosmetic repairs, failing to remove pets, leaving personal items and decor in place, not maximizing natural light, and letting emotions get in the way. We get attached to our homes. The longer we have been there, the more memories and attachment we have to the home. However, to the extent possible, you need to start thinking of your home as an investment in a building and land. It is going to be somebody else’s home. They need to see themselves in the home and not you.  You will need to de-personalize the home. Your knickknacks may be somebody else’s clutter. You should consider removing family photos, especially those of younger children. And, religious symbols may be inappropriate for the buyer who may be from India or Asia.

With respect to cosmetic repairs that may cost some money, key items would be:

  • Painting the exterior or interior
  • Replacing damaged siding
  • Replacing wallpaper
  • Eliminating popcorn-style ceilings
  • Replacing light fixtures
  • Painting cabinets
  • Replacing hardware in kitchen and bathrooms (handles and faucets)
  • Taking out half-walls or turning them into bookshelves or storage

A professional stager can help you in suggesting additional steps which will get your home ready to be viewed by the public, including changes in color, de-cluttering and room arrangements. In my experience, stagers are worth the money.

One last item to consider is to ensure the safety of expensive or personal items in your home. Checkbooks, bank statements, tax returns, etc. should be stored in a safe place. Prescription drugs, jewelry and other valuables should be stored in a locking cabinet.

 

ANNUAL PROPERTY TAX APPRAISAL

Your property taxes may go up significantly this year. If your only home is your homestead and you made no improvements, the increase in the taxable value of your home is limited by law to 10% per year. However, the taxable value on second homes and investment properties which is based on market value may have increased by 20% or more in Harris County from 2013 to 2014.

Whether your homestead makes the 10% limitation applicable, your market value is determined in area counties by appraisal districts who must perform an appraisal annually. The Harris County Appraisal District (HCAD) has almost completed the process for 2014. They have created several interactive maps which identify the average percent change in market value by area, new construction by area, and million dollar homes by area. See http://www.hcad.org/2014Values/

Houston SkylineThe biggest increases in Harris County were in the western half of the county with the areas inside the West Loop and just south of I-10 showing the most change.

You may protest your valuation through June 2nd this year. This is an HCAD document that explains the process http://hcad.org/pdf/forms/GTA-IAD-001.pdf. And, this is the form that must be filed to protest your valuation http://hcad.org/pdf/forms/2014//41-44.pdf.

–          If you live in Montgomery County, your appraisal district can be found at http://www.mcad-tx.org/

–          If you live in Fort Bend County, your appraisal district can be found at http://www.fbcad.org/Appraisal/PublicAccess/

–          If you live in Brazoria County, your appraisal district can be found at http://www.brazoriacad.org/

And, if you just moved into your home in 2013, you have until April 30 to file for the homestead exemption, which, as you can tell, is even more important this year. For Harris County residents, it can be found at http://hcad.org/pdf/forms/2014/11-13.pdf.

Clearly, our good fortune to be in an area booming with the energy industry has downsides including the need for more roads, other infrastructure and services to accommodate the wonderful people moving here to help us develop and process our energy needs. This need for infrastructure and services will be paid by taxes on their new homes and additional taxes on the increases in value our housing market has seen. As you are grumbling about the new taxes, try to remember how lucky we are to live in the Houston area. If you have any questions about the property tax process, please let me know.

SELECTING A PRICE

The vast majority of homes sold in the Houston area go through the Houston Association of REALTORS’ MLS, which means a real estate agent was involved in the transaction. For each home listed, the REALTOR had proposed a price at which to list. When you list, how do you evaluate the REALTOR’s proposal?

You want to use Goldilocks pricing. Not too high because you will make the home sit longer, and possible buyers will start wondering what is wrong with the house. Not too low just to get a quick transaction. But, price it just right. Factors you may want to consider in evaluating the REALTOR’S proposed price are:

  1. The market sets the price. You and your REALTOR are not driving the process. The market is. So, what you paid for your house, how much you have spent on upgrades, or how much you need to net from the transaction have no impact on a possible selling price.
  2. Supply and demand will impact the price. A market equilibrium exists if there is a 6 or 7 months’ supply of homes on the market. The number is calculated using homes for sale divided by number of homes sold in the prior 12 months. If there are 50 homes on the market and 100 sold in the prior twelve months, there exists a 6 months’ supply. If there are fewer homes on the market, it is generally helpful to the seller in pricing the home. And, when there are more homes on the market, it is generally helpful to the buyer.
  3. Prices are very local. In calculating the months’ supply, one would want to use your neighborhood or subdivision. And, if there is a significant difference in size or pricing in the neighborhood, the calculation would need to be modified for relevant or comparable properties.
  4. Compare your home to the homes that are for sale. You can search homes for sale in your neighborhood and study how relevant the homes that are for sale are to your home. You can also visit open houses. The relevant homes you select are the competition, and your home will need to be priced in line with the competition. Relevancy can be determined by relative:
    • At Home

      At Home

      Size – For both the home and the lot. The larger the size, the larger the price.
    • Number of bathrooms –  The more bathrooms, the higher the price
    • Location – Are the homes on a corner (higher), busy street (lower), views (the better, the higher the price), near noise (freeway or a nearby entertainment area will reduce the price.)
    • Age – Many neighborhoods in Houston are mixed with older and newer homes. Your relevant homes should be from the same generation.
    • Condition – Well maintained homes will obviously improve the price comparison.
    • Flooding and foundation issues – In Houston, many homes have had water in the structure. A history of water will reduce the price. The status of the need to repair the foundation will impact the price.
    • Quality of remodeling – Poorly done remodeling or additions will reduce the asking price.
    • Uniqueness – A home that is different from others in the neighborhood (e.g., all bedrooms down and living area up, or a much larger home than others in the neighborhood) may make a home more difficult to sell, lengthen the selling process, or reduce the possible selling price.
  5. Staging can help. Having a professional stager or using a list of steps your REALTOR provides (e.g., plant fresh flowers and put mulch in the flower beds) can both speed the sale and improve pricing.
  6. Appraisals can be a limit on the price. Even in an excellent market for the seller, most homes will need to be financed. As a result, the appraisal for the bank may limit your ability to pursue a higher asking price.

When you select a price, there are three basic theories:

  1. Odd pricing – Pick a price like $236,475. It will make people curious and get a conversation started.
  2. Grocery or gasoline pricing – Price your home at $299,999 as it may sound less expensive than $300,000.
  3. Internet pricing – Many homebuyers or their agents use round prices to search for homes. If the round numbers are $290,000 to $320,000, they are going to miss your house priced at $289,900. With all the technology in use today, I prefer the round or internet pricing theory.

Although you can rely on your REALTOR to propose reasonable pricing, you will want to use these guidelines to evaluate their suggestion. Good luck.

Home Buying Process – Part III of III

POST CONTRACT TO POSSESSION

This is Part III of three parts listing the broad steps in the home buying process. Parts I and II were included in prior posts. The steps listed are generally in order of occurrence. Although, some will occur at the same time or cross other steps.

Checks  – The checks you wrote when the offer was prepared are delivered by your REALTOR to the seller’s agent (option money) and to the title company (earnest money – generally 1% or so of purchase price.)

Option period – The standard contract provides an option period in which the buyer may back out of the contract with no reason required. During this option period you and your agent will complete the steps not completed during due diligence and have inspections performed. Your REALTOR can provide you names of general inspectors and those that can review for termites, foundation issues or other specialized concerns. You will need to obtain the inspection reports and negotiate repairs to be paid by the seller prior to the end of the option period.

In addition, you will want to complete due diligence with your insurance agent by obtaining the CLUE report if you have not previously done it, and obtain an estimate of homeowner’s insurance and flood insurance.

Loan Application – As soon as the contract is executed you will start the loan application process. As part of this, the bank will request an appraisal. Your REALTOR may provide data relative to comparable homes to the appraiser. The bank will also be concerned about the status of the title and will wait on the title commitment from the title company. The buyer can back out of the transaction if the financing is not approved.

Title Company – The title company holds the earnest money until release is approved by the parties to the contract or closing, depending on whether the contract closes. They also review the title for encumbrances (issues), provide title insurance to the buyer and the buyer’s bank, ensure all conditions of the contract are met and perform closing.

They will provide the preliminary title commitment (which notes any issues) to the bank, the buyer and the seller. Each party will have a chance to review it for issues. The bank or the buyer may back out of the transaction if there are issues with the title.

Insurance and Utilities – You will want to arrange for your homeowner’s and flood insurance to commence on your closing date. If it is hurricane season, it sometimes takes 30 days after purchase for flood insurance to be effective. So, you will want to discuss this issue with your insurance agent.

Having Fun at Home

Having Fun at Home

Walkthrough – You will perform a walkthrough the day of closing but prior to closing or the day before closing. The purpose is to ensure no major issues have arisen (e.g., a fire) and that repairs to which the seller committed have been made. The buyer may want an inspector to review repairs made.

HUD-1 – Also called an allocation or settlement statement, the HUD-1, or similar document if there is no financing, sets out the sales price, down payment, fees and other financial activity associated with the transaction. The buyer and seller and their REALTORS will review the statement in detail to ensure all amounts are appropriately calculated and allocated. It cannot be prepared until the bank provides the loan commitment. So, in many cases, this is right before closing.

Closing – Prior to closing the buyer will purchase a cashier’s check or arrange a wire transfer for the “down payment” (amount shown as paid at closing on the HUD-1.) At closing (which can be an event for each party or one event for both parties), each party signs numerous documents transferring title and setting up the loan. During closing or shortly after (could be the next day), the bank funds the loan to the title company. Once closing and funding have occurred, the buyer owns the house. Unless the seller enters into a short-term lease with the buyer, the buyers are given keys and can take possession.

Congratulations. It is now your home.