Rent or Buy?

“Should I rent or should I buy?” It’s a question that real estate and lending professionals encounter often. Traditional wisdom holds that buying a home is more advantageous than renting. However, because renting does provide unique benefits in certain situations, prospective buyers today can make the most informed decision by completing a detailed cost–benefit analysis, as well as weighing the non-financial pros and cons of home ownership. In most cases, the scales will be tipped toward purchasing real estate instead of renting it.

The choice to purchase is a lifestyle decision as well as a financial one. While the purchase of a home is certainly considered an investment, most Realtors advise their clients to find a home they like and will enjoy. In the end, a buyer is not going to wake up in the morning, look around, and exclaim, “What a great tax deduction!”

Here are some of the financial and non-financial benefits to home ownership, along with a few quick calculation tools that may come in handy for the first-time homeowner.

Advantages of buying

Tax benefits: All interest paid on a mortgage is deductible for state and federal income tax purposes. State and local property taxes are also deductible.

Stable housing costs: When a purchaser takes out a 30-year fixed rate mortgage, the mortgage payment will typically stay about the same for the life of the loan. Taxes and insurance may change, but the principal + interest payment will not. If interest rates go up, the payment amount doesn’t change; however, if interest rates drop, the homeowner has the option of lowering the payment by refinancing. Additionally, rents typically increase right along with a renter’s paycheck, whereas homeowners can watch their salaries increase while their housing costs remain stable.

Investment appreciation: While different areas of the country experience different rates of appreciation, real estate appreciation historically has kept pace with and usually exceeded the rate of inflation. Historically, homes have appreciated at an average rate of about 5% per year, although some years can be more and others less. And of course this figure varies from market to market.

Equity: When a homeowner pays rent, the money is gone, never to be seen again. But the money paid into a mortgage builds equity the longer a homeowner stays in the home.
At first, the amount paid toward principal is usually a small percentage of the house payment. However, the larger amount of interest paid can be written off as a tax deduction, and, over time, the equity grows as the principal-to-interest ratio changes (and the property value appreciates).

Lifestyle benefits: Homeowners experience greater freedom and privacy than their renting counterparts. A homeowner is free to change and improve his home without restrictions from a landlord. There is also usually more privacy for homeowners, since a landlord does not have access to enter the property for inspections or maintenance.

Homeowners also have the chance to experience greater stability and involvement in their community, since they are putting down roots. The homeowner’s tenancy is more secure, without worries about new ownership or rent increases. Finally, a fixed-rate mortgage provides predictability of future housing costs, an advantage when it comes to financial planning.

Disadvantages of buying

Home ownership is a bigger financial responsibility than most people realize before they have owned a home. In addition to the large investment required as a down payment (sometimes as much as 20%), buyers need to pay for the appraisal, credit report, points, closing costs, and additional fees.

Buyers of a new home may discover they need to landscape the yard, install window coverings, and acquire appliances. Those purchasing an older home may be astonished at the cost of upkeep and repairs, especially if they remodel one or more rooms. In addition to the monthly mortgage fees, homeowners will need to pay one of more of the following: taxes, private mortgage insurance, homeowners insurance, and/or homeowners association fees.

Although the cost of these items is often offset over time by tax benefits, appreciation, and growing equity, the cash required to purchase and maintain a home can be daunting and may not be practical for certain individuals.

Advantages of renting

Renting is a practical lifestyle choice for some people who do not want the responsibilities of home ownership. People who move frequently, have credit problems, or cannot afford the home they want are good candidates for renting. Some people simply desire not to have the responsibilities of maintaining a home. Since the landlord or property owner assumes the cost (plus time and energy) of maintenance and repairs to the property, many renters enjoy the ease of living in a rental. For some lower-income families, the tax benefits are not great enough to outweigh the additional costs of home ownership. Finally, less cash is required upfront to move in.

Disadvantages of renting

Renting, of course, means writing a check each month with no chance of seeing it again. There is no return on investment and no tax benefit to the renter. Unlike the stability of a 30-year mortgage, rents can increase on a regular basis. Renters are also subject to the sale of their building and the possibility of having to deal with new management.

How much mortgage can you afford?

In general, lenders expect the monthly mortgage payment to total no more than 29% of the borrower’s monthly gross income. The following chart gives a general idea of how much home a buyer can afford at various rates on interest, based on monthly gross income. (This chart does not take into consideration debt ratios; your lender will need to take into account debt ratios and other information before providing your buyer with a pre-qualification letter.)

Gross Income, Percent Comparison Chart

Cost comparison

The following charts can help assist a first-time home buyer in comparing monthly ownership expenses with the cost of renting.

Monthly Expenses: Renting Versus Owning
Figure This Out, Write It Here
($ per Month)

  1. Monthly mortgage payment (see “Mortgage,” below) $ _______
  2. Plus monthly property taxes (see “Property Taxes,” below) + $ _______
  3. Equals total monthly mortgage plus property taxes = $ _______
  4. Your income tax rate % _______
  5. Minus tax benefits (line 3 multiplied by line 4) – $ _______
  6. Equals after-tax cost of mortgage and property taxes
    (subtract line 5 from line 3) = $ _______
  7. Plus insurance ($30 to $150/mo., depending on property value) + $ _______
  8. Plus maintenance (1% of property cost divided by 12 months) + $ _______
  9. Equals total costs of owning (add lines 6, 7, and 8) = $ _______

Now compare line 9 in this table with the monthly rent on a comparable place to see which costs more — owning or renting.

Mortgage

To determine the monthly payment on your mortgage, simply multiply the relevant number (or multiplier) from the table by the size of your mortgage expressed in (divided by 1,000) thousands of dollars. For example, if you’re taking out a $100,000, 30-year mortgage at 6.5 percent, you multiply 100 by 6.32 for a $632 monthly payment.

Property taxes

You can ask a real estate person, mortgage lender, or your local assessor’s office what your annual property tax bill would be for a house of similar value to the one you are considering buying (the average is 1.5 percent of your property’s value). Divide this amount by 12 to arrive at your monthly property tax bill.

Ownership of Property and Types of Tenancy

How Should Buyers Take Title to Property?
All four versions of the Contract to Buy and Sell Real Estate allow for a choice in the way in which two or more Buyers can take title to the property purchased in Colorado. The choice is either to take title as tenants in common or in joint tenancy.

Tenancy in Common
Under Colorado laws, unless the deed states otherwise, two or more people will be presumed to hold title as tenants in common with an equal undivided interest in the property. Each co-tenant has a non-exclusive right to possession of the property, bur an exclusive right to sell, mortgage, or otherwise deal with the property, without the consent of the other co-tenants. Co-tenants can hold title in different percentages, by stating this in the deed conveying title to the co-tenants, or in a deed between themselves.

On the death of a co-tenant, the co-tenant’s interest passes to the heirs who will hold title in common with the other co-tenants. Probate must be opened and and a personal representative appointed to convey the interest of the deceased co-tenant.

If the co-tenants cannot agree on the sale or management of the property, a court action can be filed for a court order to partition (subdivide) the property and award the subdivided units to each of the co-tenants, usually based on the percentage each co-tenant owns. If the property cannot be subdivided, the court can order the sale of the property and the net proceeds divided between the co-tenants, based on the percentage each co-tenant owns. The court may make any order deemed necessary to completely adjudicate the dispute.

It is common for tenants in common to enter into an agreement regulating their rights and duties. A common example is a jointly owned vacation homes. The agreement may (1) grant a right of first refusal to the other co-tenants should one of the co-tenants wish to sell, (2) provide for the sale or lease of the property by all co-tenants, (3) set out the terms of periodic use by each of the co-tenants.

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Joint Tenancy
Joint tenancy is also a form of co-tenancy, where two or more persons may own a property. The important difference is that a joint tenancy includes the right of survivorship. On the death of a joint tenant, the surviving joint tenant(s) will own 100% of the property, without the need for probate to appoint a personal representative, and a personal representative’s deed to convey the interest of the deceased joint tenant. For example, if three persons own a property as joint tenants, then on the death of the first dying, the remaining two owners will continue as joint tenants.

The very strict requirements of C.R.S. 38-31-101 must be followed to create a joint tenancy. The abbreviation “JTWROS” and the phrases “as joint tenants with right of survivorship” or “in joint tenancy with right of survivorship” can be used.

There is not joint tenancy if this is not done. Probate must be opened to convey the interest of a deceased co-tenant. This is a very common error when the wrong choice of tenancy is made in the contract, or when the deed is signed without checking that the property is conveyed to the Buyers as joint tenants.

Co-tenants, at any time, can covert their tenancy to joint tenancy by deeding to themselves as joint tenants, provided that the correct terminology is used.

The interests held by joint-tenants, like co-tenants, is presumed to be equal, but the joint tenants can agree on unequal interests in the deed conveying the property to them.

On the death of a joint tenant, a certified copy of the death certificate, or verification of death, together with a supplementary affidavit, must be recorded to prove the death of the joint tenant and to show that the surviving joint tenant(s) are the owners of the property.

Home Inspection Tips for Buyers

Most Buyers’ worst nightmare is to purchase a home only to discover latent defects that cost so much to repair that they lose their investment. Colorado real estate transactions place a substantial burden on Buyers to perform their own due diligence to investigate the condition of the home. This means that it is incumbent upon Buyers to hire inspection professionals with the knowledge and experience to identify the major problems during the inspection process. In order to protect their future investment, here are some basic tips that every Buyer and Seller should know.

image_Property-Disclosure

Seller’s Disclosure
The Seller’s property disclosure is the best source of information for a Buyer to understand the performance of a home. First, determine whether the Seller is the first person who has ever lived in the home. If the Seller purchased the home from someone else, ask the Seller whether they have a copy of the the property disclosure provided to them before they purchased the property. This can provide substantially more information regarding the history of a home. Next, Sections A and B of Colorado’s standard property disclosure specifically request the Seller to identify both past and present conditions related to the structural integrity and the roof of the home. Many Buyers mistakenly overlook the fact that the disclosure encompasses previous problems that were identified and repaired by the Seller. Buyers should have a right to learn what problems were encountered and to investigate the adequacy of the repair. Buyers and their agents should ask the Seller whether they included past issues on the disclosure that were repaired and if so, inquire how the Seller resolved the problem. Finally, Buyers and their agents should provide their inspector with a copy of the Seller’s disclosure before the inspection.

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Hiring Inspectors
Buyers and their agents should do research to ensure that they hire the right inspection professionals for the home in question. Most quality home inspectors will be direct about exactly what services they can offer and more importantly, what areas are outside of their expertise. Especially when inspecting older homes, Buyers should inquire whether their general home inspector has the knowledge to perform all areas of the inspection including the exterior facade, windows, roofs, foundation, sewer and utilities and mechanical equipment. For example, homes with stucco or EIFS typically require inspectors with particular knowledge of these systems and the equipment to evaluate whether they are adequately performing. Another example would be a home with a complex foundation system or a home that had major structural repairs which would require evaluation by a structural engineer.

questions

Ask Questions
Many Buyers fall in love with a home and ignore obvious warning signs of problems. Buyers can protect their investment by asking important questions about the history of the home. Most Buyers would not spend money on a used car without carefully reviewing the vehicle maintenance history and accident records. Buying a home is no different. Buyers should ask the Seller about the maintenance, repair and replacement history on the home. For example, has the roof been inspected, repaired or replaced? When was the mechanical equipment last serviced or replaced? Are there any existing warranties on the home that might transfer to the Buyer? When was the last time the house was painted or windows sealed? Has the Seller ever made any insurance claims? Keep in mind that the most homeowners that take pride in their property should readily be able to answer these questions. A Seller’s inability to provide this information should be a red flag.

Colorado Ballot Initiative 66

Colorado is presently considering Ballot Initiative 66 which would limit all new construction permits all along the Front Range to no more than 1% of existing housing stock.  A ballot initiative is a proposed new law sponsored by citizens – it does not originate from elected officials at the state legislature.  This is an effort to limit growth in Adams, Arapahoe, Boulder, Broomfield, Denver, Douglas, El Paso, Jefferson, Larimer, and Weld Counties.  Initially, the 1% cap on new construction permits would remain in place for 2019 and 2020.  After 2020, the 1% cap would remain in place unless 5% of the voters in a jurisdiction put a successful initiative to a vote to remove the new construction cap.

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The 1% new construction cap would apply to home and apartment construction, but not commercial, office, or industrial construction.  There is already a shortage of homes and apartment housing available in the Denver Metro Area.  Limiting new construction will only drive up prices of the existing inventory and make the area less affordable.  Denver, Douglas and Weld counties will be the hardest hit by Ballot Initiative 66 and those counties have issued construction permits above 2% of existing housing stock.  In other words, new construction permits in Denver, Douglas, and Weld counties will be effectively cut in half if Ballot Initiative 66 is approved by voters in November.

Ballot Initiative 66 is being reviewed by the Colorado Supreme Court.  At the outset, there does not seem to be anything unconstitutional about Ballot Initiative 66.  It is not taking private property without due process or compensation.  Moreover, the new home and apartment construction restriction seems like a reasonable exercise of municipal police power to protect the health, safety, and welfare of citizens.  So, Ballot Initiative 66 may make onto the November 2018 ballot, but should Colorado voters adopt it?

At least one study by Shift Research Labs estimates that the Denver metro area will have a shortfall of 32,000 homes in 2018 due to shortages in new construction.  The new construction cap would exacerbate this shortage for likely years to come and continue to drive up home prices and rents.  The impact of new construction on traffic, infrastructure, schools, etc. is most felt at the local level.  Shouldn’t each town or city decide whether to impose a cap on new construction and what that limit should be?  Why should voters in parts of the state not subject to the proposed 1% new construction cap cast what could be a deciding vote on the fate of new construction in the front range communities?

Keep an eye on Ballot Initiative 66 in Colorado.  I’ll post more as the initiative progresses towards a November vote.

 

First Impressions

Assuming the curb appeal of your home is satisfactory, then what the potential buyers see when they enter your home will be the first impression.  Those first moments in your home are critical to a good first impression.  According to a 2006 study by researchers at Princeton University, it only takes seconds to make a first impression.  And, those first impressions are not easily reversed or undone.  Humans, perhaps subconsciously, look for additional data points that will support or bolster that initial impression.  Hopefully, you see where I’m going with this train of thought with regards to selling your home.

That first room, the entryway and whatever buyers can see from the entry, are the first impression of the interior of your home.  That first impression of the interior of your home includes the lighting, smell, and appearance of your home.  The first impression of your home should be well lit, odor free, and well presented.  If the lighting is too dim, then buyers may wonder if you’re trying to hide something.  The same thing goes for aroma.  I’m not a fan of air fresheners, perfumes, etc.  There are enough buyers that are sensitive to different smells that you don’t want to turn some of them off with a scent they don’t like.  It’s best just to have a clean, aroma free home.

Finally, the appearance of the interior of your home for the first impression is critical.  It should be clutter-free, organized, and well-kept.  Below is an example of hardwood floors at a home:

The worn and beat up hardwood floors detracted from the rest of the home and were difficult for potential buyers to overlook.  The condition of the floors were frequently mentioned in comments after showings.  I believe that potential buyers got such a negative impression of the home from the first impression that they were unable to overcome that shortcoming when viewing other wonderful and attractive aspects of the home.  Even offering buyers a credit for refinishing the hardwood floors could not reverse the first impression.  Now, look at the hardwood floors after they were professionally refinished:

The impression of the home changed completed and comments from potential buyers were much more positive after the floors were refinished.  Moreover, refinishing the floors cost less than the amount of credit that was being offered to buyers.  Upon entering the home, buyers now saw a well-cared for home.

While the entire home needs to be clean, well-cared for and properly staged to attract today’s buyers, the first impression room can be a difference maker.  The walls should be freshly painted a neutral color, the carpet or hardwood floors should appear as new as possible (refinished or re-carpeted if necessary), and the trim, baseboards and doors should be cleaned or painted to make everything pop.  You’ve now used those first critical seconds to make a good first impression and put the buyer in the proper mindset as they tour the rest of the home.

2018 Mortgage/Lending Update

The Federal Housing Financing Authority has announced an increase to the limits for conventional, conforming loans have been increased.  The maximum amount of a loan is dependent upon the county in which you are seeking to buy property, so if you’re not interested in Weld, Broomfield, or Boulder counties in Colorado, then you’ll need to follow this link for the full pdf table.  The FHFA has a set maximum loan amounts for conventional conforming loans as follows:

  • Boulder County         $578,450
  • Broomfield County   $529,000
  • Weld County              $453,100

An increase in the loan limits is good for both buyers and sellers.  Home prices in Colorado have been increasing and raising the loan limits will give buyers more purchasing options.  Likewise, sellers benefit from an increase in the number of buyers that are able to realistically consider purchasing their property. 3 dollars

Another important change to borrowing process, is an increase in the debt to income ratio that went into effect in the second half of 2017.  The maximum allowable debt ratio increased from 44% to 50%.  According to at least one industry professional, this has resulted in about a 10% increase in the number of loans being approved and transactions closing.

Finally, there will be a change to the loan application format (ULA 1003) for the first time in 20+ years.  The form is increasing from 4-5 pages to about 8-9 pages in length.  The increase is due to a requirement that borrowers provide additional demographic information.  Once implemented (date uncertain), it’ll probably feel more invasive in terms of the amount of information that borrowers must provide.  The changes were made to protect borrowers from discriminatory lending practices.

Holy Shiplap

Let’s be honest for a second – or two. Go view five 3 bedroom 2 bathroom houses in one day and then try to remember (without notes) what differentiates them a couple of days later. Odds are that you won’t remember too many differences. You may remember that one house had a nicer yard or that one house had a bedroom that was painted a surprising color.

As a seller, what can you do to make your home stand out to potential buyers? Sure, you could spend thousands of dollars on a kitchen remodel or finishing your basement to add a home theater or extra bedroom. But, there are other options that will only cost you hundreds of dollars — not thousands. One such option is an accent wall using a different material. I’m a big fan making such an accent wall from shiplap or beadboard. A reasonably skilled DIY homeowner should be able to install shiplap or beadboard themselves. I recently converted a basement storage room into a wine cellar by installing beadboard over one of the walls. Below, you’ll see before, during, and after pictures of my beadboard accent wall project. I completed the entire project in a few hours and was able to do all the work myself. The room was transformed from a cold, sterile basement into a warmer, more inviting space. This is now something that makes a home memorable and it will stand out to potential buyers.

And the finished project:

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Dave Mahalek

RE/MAX Momentum

303.946.7907

@COagentDave
#realestate #shiplap #beadboard #DIY