How HOA Payments Reduce Your Buying Power

buying powerIf you buy a condo or town home, there is almost always a homeowner’s association (HOA) that charges a monthly fee. What the fee buys you varies, but typical benefits are exterior maintenance, water, trash, and sometimes amenities such as a pool, tennis courts and club house.

The issue with HOA payments is they reduce your buying power, which is the amount of house you acquire for your monthly payment.

How You Lose Buying Power
Most people have a total monthly payment (TMP) they can afford, say $1200. If your HOA fee is $335, it takes $335 from the TMP. This leaves $865 for the rest of the TMP. If your HOA fee is $167, it leaves $1,033 for your TMP. Obviously you can borrow more with $1,033 a month than with $865, so that’s how the HOA fee impacts how much house you can buy.

Impact On Buying Power
What can you buy for $865 per month with a $335 HOA fee?

  • A $155,000 condo with 3.5% down and 4.5% interest creates a monthly payment of $840.18 (Principle + Interest + Mortgage Insurance)
  • You also need $77.83 for taxes and about $20 for insurance
  • $335 HOA fee
  • TMP = $1264

What can you buy for $1,033 per month with at $167 HOA fee?

  • A $175,000 house with 3.5% down and 4.5% interest creates a monthly payment of $948.55 (PI + MI)
  • You need $88.92 for taxes and about $20 for insurance
  • $167 HOA fee
  • TMT = $1,165.87

As a seller with a high HOA fee, you are competing against properties that are 11% higher priced, most likely with more features, more square footage, perhaps newer, or in better locations. As a buyer, you are bypassing properties that are 11% higher in price.

Another consideration is property appreciation. Since HOAs tend to increase over time, they put a drag on appreciation as they rise.

That being said, when a property is RIGHT for you, then that is your major consideration, not the HOA fee; it becomes something you live with to have the house you want.

Appraisals

Real-Estate-AppraisalWhen you buy a house, your lender will require an appraisal on the property before they will complete your loan. Why is an appraisal necessary? Because the bank wants to know that they are not loaning more than the property is worth.

What’s an Appraisal?
Appraisals are completed a week to ten days before the closing. Even though lenders require appraisals, you get to pay for them. The cost is $400 to $500.

Appraisals are conducted by – believe it not – appraisers! These are professionals who specialize in determining the “actual value” of properties. The actual value is based on past sales, features, condition, location, and other factors. Appraisers attempt to remove biases and simply look at facts and numbers.

Appraisers vs Real Estate Agents
Instead of “actual value,” real estate agents determine the “market value” of properties. Market value is the price that buyers will pay for a house in the current market. Market value is based on supply and demand, marketing plans, buyer emotion, and market trends. If a market is active and buyers are frenzied, they will often pay higher prices than past sales appear to support.

What to Look For in an Appraisal
From a buyer perspective, your objective is for the appraised price to be at least as high as the purchase price; anything higher is a bonus. You don’t want it to come back lower than the purchase price. The reason is that lenders loan you money based off the appraised value.

For example, if you are buying a $200,000 house with an FHA loan (borrow 96.5%), and the appraisal comes back at $195,000, then the bank will only loan you $188,175 not $193,000.

If the appraisal comes back too low, you have a couple of options. First, make up the difference out of your own pocket. In the previous example, that means you come up with $11,825 down payment (5.9%) rather than $7,000 (3.5%). Another option is to have the seller lower the purchase price to match the appraised value. Your third option is to terminate the contract and walk away.

Summary
Think of your appraisal as a reality-check on the price you agreed to pay the seller. It’s nice when a third party agrees that your new home is a good value – or warns you that the house is over-priced.

Homeowner’s Insurance: How Much Coverage Do You Need?

insurance-agentWhen you buy a new home, you are required by the lender to have homeowner’s insurance (aka “hazard insurance”). The question is, how much coverage do you need?

Daryl Alexander, an agent in Fort Collins with State Farm, recommends that you “make sure your home is insured for at least 100% of its estimated REPLACEMENT cost. “

What does Daryl mean by “replacement” cost?

The Difference Between MARKET VALUE and REPLACEMENT COST
Market value is the amount a buyer would pay for a home. Replacement cost is the rebuilding cost necessary to repair or replace the entire home.

Over the years, the cost of materials and labor increase, sometimes faster than the market value of a property. If you have a fire, water leak or hail claim, and you’ve owned your house for many years, the cost to repair your house could be really high.

Cost of Premium
It sounds like replacement cost is the way to go, right? Then why would anyone get market value insurance?

The premium for market value insurance is lower than replacement insurance, which is why many homeowners buy it.

That’s being penny-wise and pound-foolish, as the expression goes. For the minimal increase in cost, replacement insurance gives you the coverage you’ll need in case of a disaster. Remember, you are buying peace-of-mind that your family and possessions are protected.

Review Your Policy Occasionally
As the years go by, it’s a good idea to get together with your insurance agent to ensure you still have the right coverage for your home. This is particularly true if you have remodeled bathrooms and kitchens, finished basements, or added on rooms or living spaces.

The worst time to find out you DON’T have enough insurance is when a disaster occurs. Avoid the heartache and trauma of insufficient coverage; find a trustworthy, reputable insurance agent, listen to his/her advice, and buy the coverage he/she recommends.

If you would like a referral to some trustworthy insurance agents, please contact Gary Clark.

Mortgage Debt and Inflation: An Investor’s View

Inflation-rateInvestment advisors are nearly unanimous in saying that inflation will hit the USA in the next few years. So what is the thinking on mortgage debt in inflationary times? Overall, debt should be avoided whenever possible, in my opinion. However, a manageable, intelligent mortgage on your residential rental property can be good.

Remember that debt on a rental property isn’t paid by you; it’s paid by tenants. (As long as you made a reasonable down payment, such as 20-25%, and your payments and maintenance costs cash flow.) But what happens to your debt if the inflation rate hits 10%?

Rents would presumably rise with inflation. Your mortgage payments, on the other hand, would remain fixed (assuming you have a fixed rate loan). Certain costs, such as maintenance, utilities, insurance and taxes, would all go up too. All in all, your cash flow would probably improve. You could either pocket the extra revenue or use it to pay down your mortgage faster.

What about your loan principle? Let’s say you borrowed $150,000 at 5% fixed rate, prior to inflation taking off. Your payment would be $805.23. Now let’s assume that interest rates climb to 8%. The payment at that rate would be $1,100.65. In five years that makes a difference of $1,477.10. Suddenly your 5% loan seems like pretty cheap money.

Now consider that the value of your property would also rise with inflation. If you bought your property for $200,000, before inflation took off, it would likely increase at the 10% inflation rate. In 5 years your house would conceivably be worth $292,820.

Investment advisors say solid inflation hedges produce income, allow prices to rise along with costs, and increase in value along with the inflation rate. Rental property meets all these criteria.

Every way I evaluate rental property against inflation, it comes up favorably. You have to compare it against own investment criteria, of course. And you have to want to be in the business. But if it’s the right thing for you, I think you’ll find that rental property will protect your wealth when inflation hits.

What Type of Investment Property Should You Buy?

house-for-rentOver time, investors develop a certain type of property they prefer to own. Some like single-family houses, others like duplexes, townhouses or condos. It’s simply a matter of taste.

For new investors who don’t have the benefit of experience, what is the best type of property to buy? There’s no right or wrong answer, all properties have advantages and disadvantages. Let’s look at the merits of each type, based on a few criteria.

Profitability. Properties without Home Owner Association (HOA) dues tend to be more profitable than properties with HOAs.  To be fair, if you don’t pay HOA dues, you still have repairs and maintenance costs so you’ll need to set aside money in a reserve account. The difference is that HOA dues include administrative expenses and profit, which you save by doing it yourself.

Management. Townhouses and condos are easier to manage than houses. That’s because associations maintain townhouses and condos, while owners maintain their houses. (To be clear, by “maintain” I’m referring to the exterior.) Newer houses are easier to manage than older houses because they take less maintenance. The easiest form of management is to hire a property management company.

Ease of Renting. When it comes to rentability, my experience is that people like to rent houses the best, townhouses second best, and condos third (depending on the condo configuration). Why? Privacy, personal control, noise.  In today’s world of 2% vacancy rates, however, you’ll find you can rent practically anything without much effort. Who knows how long that will be the case, however.

Multiple Properties. If you plan on owning several rentals, management time is your biggest consideration. If you are busy and time is an issue, townhouses and condos are your best option. If you have time for management and want to maximize profit, look for newer houses without HOAs, but have very efficient management systems in place.

The best advice I ever got was: think about the tenants you want to deal with and buy housing they want to live in. The caveat to that statement is to stay within the boundaries of fair housing laws. Do you like working with college students, professionals, section 8 folks, or factory workers?  Then buy properties that are ideally located, priced, and set up for those prospective tenants.

If you would like to explore investing in rental property, please contact me. My company, Rooftop Property Management, owns one of each type of property and I’ll be glad to share what I’ve learned over time.

The Power of Curb Appeal

front_curb_appealEveryone’s heard the term “curb appeal.” Most people understand it means that the outside of your house looks good to buyers. True, but why is “curb appeal” so incredibly powerful?

It’s because buyers make up their minds about your house based on first impressions at a few key points. If their first impressions are favorable, then they try to find reasons to like your house. If their first impressions are unfavorable, then they try to find reasons not to like your house. What are the key points on which buyers form their first impressions?

Point 1: Driving Up in the Car
Prospective buyers make judgments as they drive up to your house. They look at your neighborhood, your yard, your landscaping, the house style, and the paint color. They are getting an overall “feeling” about the location and the setting.

Point 2: Walking up to the Door
As buyers move towards the front door, they take a closer look. They glance at the driveway, the walks, the grass, the plants, and the paint. They are getting a general sense of the property’s condition.

Point 3: Waiting to Open the Door
As their agent opens the lockbox, buyers have 15 to 25 seconds to examine your front porch, the doorstep, the door, the eves, and the soffits. They are determining if the house feels warm, clean and welcoming, or otherwise.

Point 4: Entering the House
As soon as the front door opens, buyers step into the front entry, which I call the “landing zone.” After stepping inside, buyers stop and scan the room for sights, smells, and sounds. They look at wall colors, carpet colors, furniture placement, whether the room is tidy or messy, and the general size of the rooms. They smell food and pet odors.They are getting an overall “feeling” about the interior of the house.

Curb Appeal Impressions Build on Each Other
Each curb appeal point builds on the next. If buyers have positive “vibes” at points 1 through 4, then houses often end up as favorites, and offers are written. If buyers have negative “vibes” at points 1 through 4, then buyers usually want to keep looking at other houses. Mixed “vibes” at points 1 through 4 often result in “maybe” scores, and buyers want to keep looking; they may or may not end up writing an offer on the house.

Importance of Showing Standards
Showings, like job interviews, offer a small window to make a good first impression. Curb appeal is why it’s so important to have your home in great shape so it shows well, and to prepare your house well for each and every showing. If you get in a hurry, concentrate on the four areas that make up curb appeal, and then work on the rest of your house.

Prepare Your Mind as Well as Your House

mindset-300x300As you prepare your home to sell, you should make a difficult but necessary change in mindset.  You have to stop thinking of your home as your home. Instead, think of your home as just a house. Even better, simply think of your home as property that needs to be sold.

Easy to say; hard to do. It’s difficult because you put your heart, creativity and individual imprint on your home. It’s a reflection of who you are.  Maybe you raised your kids there. Perhaps it’s your dream home. Whatever your home is to you, “divorcing” yourself from your feelings about it is tough to do.

Nevertheless, the mindset change is essential because it will help you cope with the challenges, stresses, and frustrations of selling your home.

There are three hurdles you typically need to cross. Thinking of your home as simply a house or property will make it easier to get over these hurdles.

Inspections. After inspectors comb through your house, buyers create a list of objections (problems) that they want you to resolve (fix). Common objection items are plumbing and electrical issues, deferred maintenance issues, and radon mitigation. The list of objections often irritates sellers, who are offended by the notion that something’s wrong with their home. Then, sellers must negotiate what to fix or not to fix, which is stressful. Finally, the expense and hassle of fixing objection items strains pocketbooks and nerves.

Financing. Getting a home loan is a challenge for most buyers. The time frame to process a loan is about 45 to 60 days. The information required is voluminous and the level of detail seems intrusive and silly. No matter what buyers do, the closing can go down to the wire, causing heartburn and sleepless nights for buyers and sellers.

Appraisals. Banks loan against the appraised value of property, so they hire appraisers to set a price for your house. If the appraisal is the same as or more than the negotiated price of your contract, then everything is fine. If the appraisal is lower, then you have a problem; to keep the contract in force, you can either drop the price, or the buyer can come up with a bigger down payment. Otherwise the buyer can terminate the contract.

As you can see, distancing yourself emotionally from your home can be helpful throughout the selling process. Changing your mindset will help maintain a healthy mental, emotional, and physical state so you can deal with the twists and turns of your transaction.