Recession Reality

Long and drawn out recessions are hard as they wear down the patience and fortitude of the average worker.  Obviously  the unemployed have immense challenges enduring a recession.  The salaried employee marks time from lay-off to lay-off.  The non-salaried employee or entrepreneur?  Well, recessions like this will make or break them.  The blessing and curse is they have the most of the control over how much they earn.  I concede that certain industries and corporate policies may impede or interfere with an individual’s ability to grow during the recession.  Furthermore, I am not a Tony Robbins disciple chanting mindless brain chatter at myself in the hopes of replacing those ideas with some failure message life has certainly taught us all.  I simply believe that the cream will rise to the top.

Recessions are great forges that refine the weak out of the marketplace which creates great opportunities for the strong to gain market share and enhance their business model.  In fact, this applies to everyone int he marketplace.  On the surface, my brother-in-law and I had little in common when we first met outside of marrying sisters.  I quickly grew to like him and have since become a huge fan and a great friend.  One of his most remarkable attributes is that he is not afraid of hard work.  He is not the most driven man I know, he does not have a superior education or family pedigree, he simply shows up and get his job done.  The result is that while his company shrank from 70+ employees to  13, he was in the minority 13.

I got the following email from a trade group where I am a member:

Dear Peter,

The spring/summer home buying season is almost here!  Yet, I’m almost certain that the last few months and years of industry chaos have beaten you up and worn you down to the point where you’ve probably given serious thought to pursuing a career outside of the mortgage industry.  That’s one reason why I’d like to spend 60 minutes with you sharing some of my latest thoughts on how to rediscover your passion, rejuvenate your career, re-invent yourself (again), and make 2010 your best year ever as a Certified Mortgage Planning Specialist!

This was a few days after one of the largest Realtor groups in our marketplace told me my career was floating in the waters as the Titanic sunk around me and they were a lifeboat coming by to rescue me.  They wanted me to “regain the courage to pick up the phone” and call my clients (who I have avoided) and tell my client that I have found a better solution than foreclosure – short sale!  This makes several wrong assumptions.  First, that our business needs rescuing.  Second, that our thousand-plus clients are facing foreclosure.  The reality is that most of our clients (or almost all…) are able to weather this storm.

To both I say, “I am not your target market.  I did not just get my butt kicked.  Actually, I just came back from kicking someone’s butt, I’m covered with their blood, and I am looking for a place to flex!”

Are you growing or are you shrinking?  This isn’t mindset self-actualization, this is reality.  What’s your reality.

Great Article

Here is a link to an article that Michael and I authored and posted online through Box.net: Feasibility Plan for the Move-Up Homebuyer. You can view the file by clicking the link below.

http://www.box.net/shared/5vd41klizq

After reading, I’d welcome your feedback  on my blog or on LinkedIn.  Also, please feel free to forward this article to people in your network who would value the plan we’ve laid out.

Feasibility Plan for the Move-Up Home Buyer – Part 2

Once you understand your family’s needs, the next step is deciding what to do with your current home.  There are two options you can exercise: sale or rental.  If you want to sell, you must determine if you have any equity?  A Realtor or appraiser is able to guide you on your home’s value and then tell you how long it could take to sell.  You will either have equity to use for a down payment, you could break even, or you may have to come out-of-pocket to sell.  If you would have to write a large check to sell, you may want to stay put.  It is important to note that you will not be able to short-sell your home and finance a new home.  Current underwriting guidelines consider a short-sale to be like a foreclosure.  (See previous post about short-sales.)  If it only takes a few thousand dollars out-of-pocket to sell, the discount on a new home may make that worth the expense.  You will also want to evaluate the out-of-pocket expenses of selling versus any potential negative cash flow created by turning the home into a rental.

If you owe more money that your home is worth or it will take too long for your home to sell, it may be a great option to turn it into a rental.  The easiest way to do this is to use a property management company.  I know many people do this themselves, but many people also cut their own hair.  A bad haircut last 30 days and saves $20, on the flip side, months of a vacant rental property costs thousands.  A management company will advertise the property, underwrite potential tenants, and take care of rent collection and maintenance issues.  When talking to a property management company, you should ask them for a responsibility breakdown so you know what you can expect from them and what they expect of you.

Before you find an acceptable neighborhood and identify the right home for your family, you need to know what types of financing are available to you (FHA vs. conventional vs. jumbo loans), how much you will need for a down payment, and if you will need to sell you current home or have a lease agreement prior to closing on your new home.  While looking at the financing options, it is imperative to perform a Liquidity Analysis.  This can be in conjunction with your financial planner or one-on-one with us.  A Liquidity Analysis includes totaling your cash reserves and evaluating the current market performance for invested assets.  This will tell you how much cash you have to either sell your current home, cover negative cash-flow if rented, use for a down payment on a new home, and have as reserves in the event of a decrease in income.  This is also a great time to determine if the rest of the rooms in your financial house are in order.  Do you have enough insurance, short-term, long-term, and life?  What about a will and a trust? Deficient insurance and asset planning can turn you from a family taking advantage of this market into a family that is a victim of this market.

In my last post, I will discuss finding the right home and how to position yourself for financial success.

To learn more, please contact us to begin the process.  We work with a team of Realtors and property management companies that are proficient in this process.  By July 2010, there will still be good opportunities available, but they won’t be great in comparison to our current environment.  We look forward to helping you and your family.

Feasibility Plan for the Move-Up Home Buyer – Part 1

One victim of the paralyzed housing market is the growing family.  If you are a family on the grow, it used to be that you would use your current home’s equity to move into a home that better met your needs.  Typically, while your family was growing, your household income was also increasing so the payment on a higher priced home was not as much of a stretch as it would have been years prior.  Life for move-up home buyers is not as easy as it used to be.   Most families, irrespective of family needs, are locked into their homes.  As a move-up buyer, you are locked by your lack of equity in your current home, you are locked by the insecurity of continuous income, you are locked by the inability to determine the feasibility of making the move to a larger home.  This removes you from many great opportunities that this market has provided – opportunities you may be able to take advantage of – if you had a comprehensive plan.

We have developed such a plan.  The window to receive all the benefits this plan offer is small.  Our current rate environment, created through the Federal Reserve trillion dollar purchases of mortgage-backed securities, is scheduled to end in the second quarter of 2010.  When that happens, rates will move from the low 5%’s to the low 6%’s – immediately.  As well, the renewal of Stimulus Package II, that pays move-up home buyers up to $6500, expires May 1, 2010.  Home values will continue to be discounted, but the alignment of three great factors, rate, incentive, bargain prices, is now.

The first thing we need to look at is need: what are your needs?  Your family’s need will determine how much risk you should be willing to take.  If you are commuting long distances, if your family is living on top of one another, if your garage doesn’t fit your storage needs much less housing your vehicle, you may be more desperate to move than someone who simply wants a spare bedroom for the occasional guest.  There is a lot of logic staying put and exercising prudence.  But if the need is great enough, the potential to improve your quality of life makes it worth examining the options.

In my next 2 posts, I will discuss the options available on your current home, and how to best approach a new home.

To learn more, please contact us to begin the process.  We work with a team of Realtors and property management companies that are proficient in this process.  By July 2010, there will still be good opportunities available, but they won’t be great in comparison to our current environment.  We look forward to helping you and your family.

The Jeffersonian Plan

The 1970′s brought us a lot of great television.  CHiPs, Good Times, All in the Family, and it’s spin off: The Jeffersons.  Even the older segment of Generation Y should be familiar with their theme song: “We’re movin’ on up | To the top | To a deluxe apartment in the sky…”.  In many respects, that song symbolized the American Dream for so many (not just African-Americans moving from Queens to Manhattan).  George and Louise Jefferson finally had their piece of the pie, it was apartment 12D.

There are a couple of standard ingredients to realizing the success portrayed on that sitcom.  In our current marketplace, a day doesn’t go by with out a news story highlighting something good and bad about our current recession and it’s effect on the housing market.  Last week, it was reported that 1 in 4 homeowners are underwater, owing more on their mortgage than what their home is worth.  Earlier this week, the Wall Street Journal reported on the new breed of house flippers, folks who buy homes at auction and sell for profit shortly afterward.  Today, I read a story about folks leaving their big mortgage payments only to rent nicer homes that cost half of their former mortgage payment.  There is good news and there is bad news.  Let me ask you a question: Are there opportunities out there for the prudent?  If so, how would you know and what metrics would you use to determine if you can benefit from our current marketplace?

Homes are being bought and sold at amazing discounts in relation to prior years.  This creates a huge opportunity for the move-up home buyer (current homeowners who need, want, can afford, a nicer, larger, or more-expensive home).  The move-up home buyer has been sitting on the sidelines waiting for something that looks moderately like the final recovery or a great opportunity.  They are prudent, financially savvy, and opportunistic.

In my next post, I will highlight what we believe to be the best plan for these folks to follow; a prudent strategy to determine what opportunities exist in our current market, how to identify the pitfalls, and then how to best protect yourself from those pitfalls.

What ever happened to the Jeffersons?  Well, after seizing their piece of the pie, they moved to California making a cameo appearance in the final episode of The Fresh Prince of Bel-Air as the buyers of the Bel-Air mansion that played home to Will Smith throughout that show’s run.  In a twist of TV fantasy vs. reality irony, Sherman Hemsley financial reality was far from the character that made him famous.  He obviously didn’t have a good plan.

Tax Credit Details

TAX CREDIT OVERVIEW

Who Gets What?

First-Time Homebuyers (FTHBs): First-time homebuyers (that is, people who have not owned a home within the last three years) may be eligible for the tax credit. The credit for FTHBs is 10% of the purchase price of the home, with a maximum available credit of $8,000

Single taxpayers and married couples filing a joint return may qualify for the full tax credit amount.

Current Owners: The tax credit program now gives those who already own a residence some additional reasons to move to a new home. This incentive comes in the form of a tax credit of up to $6,500 for qualified purchasers who have owned and occupied a primary residence for a period of five consecutive years during the last eight years.

Single taxpayers and married couples filing a joint return may qualify for the full tax credit amount.

What are the New Deadlines?

In order to qualify for the credit, all contracts need to be in effect no later than April 30, 2010 and close no later than June 30, 2010.

What are the Income Caps?

The amount of income someone can earn and qualify for the full amount of the credit has been increased.

Single tax filers who earn up to $125,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, single filers who earn $145,000 and above are ineligible

Joint filers who earn up to $225,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, joint filers who earn $245,000 and above are ineligible.

What is the Maximum Purchase Price?

Qualifying buyers may purchase a property with a maximum sale price of $800,000.

What is a Tax Credit?

A tax credit is a direct reduction in tax liability owed by an individual to the Internal Revenue Service (IRS). In the event no taxes are owed, the IRS will issue a check for the amount of the tax credit an individual is owed. Unlike the tax credit that existed in 2008, this credit does not require repayment unless the home, at any time in the first 36 months of ownership, is no longer an individual’s primary residence.

How Much are First-Time Homebuyers (FTHB) Eligible to Receive?

An eligible homebuyer may request from the IRS a tax credit of up to $8,000 or 10% of the purchase price for a home. If the amount of the home purchased is $75,000, the maximum amount the credit can be is $7,500. If the amount of the home purchased is $100,000, the amount of the credit may not exceed $8,000.

Who is Eligible fort FTHB Tax Credit?

Anyone who has not owned a primary residence in the previous 36 months, prior to closing and the transfer of title, is eligible.

This applies both to single taxpayers and married couples. In the case where there is a married couple, if either spouse has owned a primary residence in the last 36 months, neither would qualify. In the case where an individual has owned property that has not been a primary residence, such as a second home or investment property, that individual would be eligible.

As mentioned above, the tax credit has been expanded so that existing homeowners who have owned and occupied a primary residence for a period of five consecutive years during the last eight years are now eligible for a tax credit of up to $6,500.

How Much are Current Home Owners Eligible to Receive?

The tax credit program includes a tax credit of up to $6,500 for qualified purchasers who have owned and occupied a primary residence for a period of five consecutive years during the last eight years.

Can Homebuyers Claim the Tax Credit in Advance of Purchasing a Property?

No. The IRS has recently begun prosecuting people who have claimed credits where a purchase had not taken place.

Can a Taxpayer Claim a Credit if the Property is Purchased from a Seller with Seller Financing and the Seller Retains Title to the Property?

Yes. In situations where the buyer purchases the property, even though the seller retains legal title, the taxpayer may file for the credit. Some examples of this would include a land contract or a contract for deed.

According to the IRS, factors that would demonstrate the ownership of the property would include:

1. Right of possession,
2. Right to obtain legal title upon full payment of the purchase price,
3. Right to construct improvements,
4. Obligation to pay property taxes,
5. Risk of loss,
6. Responsibility to insure the property, and
7. Duty to maintain the property.

Are There Other Restrictions to Taking the FTHB Credit?

Yes. According to the IRS, if any of the following describe a homebuyer’s situation, a credit would not be due:

• They buy the home from a close relative. This includes a spouse, parent, grandparent, child or grandchild. (Please see the question below for details regarding purchases from “step-relatives.”)
• They do not use the home as your principal residence.
• They sell their home before the end of the year.
• They are a nonresident alien.
• They are, or were, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year. (This does not apply for a home purchased in 2009.)
• Their home financing comes from tax-exempt mortgage revenue bonds. (This does not apply for a home purchased in 2009.)
• They owned a principal residence at any time during the three years prior to the date of purchase of your new home. For example, if you bought a home on July 1, 2008, you cannot take the credit for that home if you owned, or had an ownership interest in, another principal residence at any time from July 2, 2005, through July 1, 2008.

Can Homebuyers Purchase a Home from a Step-Relative and Still be Eligible for the Credit?

Yes. As long as the person they buy the home from is not a direct blood relative, the purchase would be allowed.

If a Parent (Who Will Not Live In The Property) Cosigns for a Mortgage, Will Their Child Still be Eligible for the Credit?

Yes, provided that the child meets the other requirements for the tax credit.

TAX CREDIT OVERVIEW

Who Gets What?

Walk Away?

In a recent Wall Street Journal blog, University of Arizona law professor Brent T. White advocates that homeowners who are underwater in their homes should simply walk away.  You can find the complete article here (which includes a link to the white paper the professor published): http://blogs.wsj.com/developments/2009/10/30/its-ok-to-walk-away-a-law-professor-argues/.

Mr White claims that fear, shame, & guilt are preventing people from making a rational decision.  I have heard this argument before and I understand that this can be seen as an ethical gray zone.  However, the economic catastrophe that would result in mass foreclosures would make our current real estate market look like “the good old days.”  As for the ethical gray zone, every homeowner “promised to repay”.  While the bank may accept your deed in lieu of payment, that was plan B not plan A.  That was only if the homeowner went against his or her own guarantee.

This is real simple: homeowner sign a note that they will pay to the best of their ability.  If their ability is impeded, the note dictates what the lender can do.  Foreclosure is not a way to pass on your financial loss to your mortgage lender.

I have a lot of empathy for folks who have had legitimate problems with their mortgage payments.  The effects of our current crisis will hang over our national culture for decades.  There will be a debt hangover that hopefully causes a greater reluctance to borrow so much and, more importantly, borrow to invest.  There is shame and guilt and fear involved in foreclosure and short-sale, but let’s not hang onto that in judgment and pretend that we are better.  For most of us, there is a thin line, call it luck or grace or providence, that separates the haves from the used-to-haves.