The Tax Bill And Its Affect On Real Estate

The Tax Bill And Its Affect On Real Estate

The recently passed federal tax bill will definitely have an impact on real estate.  In general markets with high taxes and high values will be most affected.  Despite the recent increase in local property taxes, Boulder County is considered a low property tax area compared to other parts of the country.  However, we are a high value market.  Here is a summary of the main points of the tax bill that affect real estate.

Mortgage Interest Cap – This is in regards to how much of the interest paid for mortgages can be used as a deduction.  For those whose mortgages balances are less than $750,000 this will not affect anything.  Previously the cap was $1 million and it has now been reduced to $750,000.  Not many people have loans in excess of $750,000, but in our area where the luxury home market is very robust, we may see fewer buyers able to make those purchases. The interest on the first $750,000 is still deductible.  This may dissuade some luxury home purchasers to buy a less expensive home, thereby reducing the demand for the very high end.

Local and State Tax Deduction – The Boulder County Treasurer was inundated before the new year with property owners pre-paying their property tax bill in advance.  This was in response to the section of the tax bill which caps the deduction for state and local taxes at $10,000. Previously, homeowners were able to deduct from their federal tax return the amounts paid for state income tax, various ownership taxes and property taxes without limit.  Now the deduction is limited to $10,000.  Buyers may shy away from a house with a large tax bill knowing that payment will no longer reduce their tax bill.

Other Related Items – Those who own investment real estate may be getting a tax break on their real estate investment income.  Income that comes through pass-through entities such as LLC’s get a tax break.  20% of that income can be deducted.  You may have heard that the capital gains exclusion time limit had been expanded to require living in a house 5 of the previous 8 years in order to use the $250,000 for a single or $500,000 for a couple when selling a principal residence, this was overturned during the last few days leaving the existing rule of occupying the home two of the past five years.

This is just a high level outline, please contact your tax professional for more details.

The Real Estate Cycle – Where Are We Now?

The Real Estate Cycle – Where Are We Now?

The Real Estate Cycle

The Real Estate Cycle

Approximately 2500 years ago Heraclitus of Ephesus said “The only thing that is constant is change”.  In the moment we sometimes forget that forces larger than we can see are slowly moving culture, markets and people.  Everything we see is changing, however the rate of change makes a difference. We notice more readily the melting of an ice cream cone than the erosion of a mountain.  It’s normal to only take note of what we can readily see.  However, there is wisdom in taking a longer view.

Real estate is cyclical.  There are many factors involved, but the peaks and valleys of the real estate demand and value have been shown to have a relatively consistent cycle of approximately 18 years.  Economist Homer Hoyt made a detailed study of the Chicago real estate market and the broader United States real estate market and found that it has run its course in a steady 18 year rhythm since 1800.  There have been exceptions that have disrupted the normal cycle such as The Great Depression, World War II and the post war boom but on average, the business cycle and the real estate cycle have been very consistent including the 18 year cycle than ended in 2008.  

The infographic above shows the four phases of the real estate cycle.  Here is more information on each of the stages of the cycle.  Most studies present Recovery as the first phase of the cycle, but since the last recession was so memorable I think it makes a good starting point.

Recession 

Think back to what was in the news in 2008 – 2011: Foreclosures, unemployment, short sales, mortgage reform, lowering interest rates, 40% drop in real estate sales, stock market losing value, declining home prices (Boulder was one of the few markets to hold most of its value), consumers reducing spending, rental vacancies, lower rents, incentives to buy and lease, etc. etc.  The situation was shocking, many of the US real estate markets had just climbed to all time highs, buyers were using easy credit to buy multiple homes thinking that the easy money would continue indefinitely.  And it did, until all of a sudden it crashed. Fortunes were lost. Especially for those who couldn’t hold on for the recovery.  This was the low point in the economy and the real estate market.  The signs to look for when recession is on the horizon are; interest rates are raised to slow an over heated economy, increased inventory of unsold homes, higher rental vacancies, new construction shows with more unsold inventory and higher interest rates (although some developers who are late to the party always get caught), mortgage delinquencies increase which leads to more foreclosures.  During the recession it is a buyers market.  Those with the wherewithal should purchase real estate at a discount.

Recovery

This is the bounce off the low point.  During this phase the inevitable march of population slowly increases the demand for real estate and other goods. Accumulated inventory gets absorbed, vacant rental units get rented, adult children slowly move out of their parents basements, the Fed lowers interest rates to stimulate demand. With favorable interest rates businesses expand.  They hire more employees, make capital investment.  During this phase, prices stabilize, excess inventory gets purchased and there is virtually no new construction (developers are licking their wounds), in the aftermath of the recession, banks are very careful about lending.

Expansion

Recovery turns to expansion when most of the available inventory has been absorbed by individuals of businesses.  Rental occupancy rates are higher than average, new construction finishes are at a low and stalled projects finish out, built up foreclosure inventory is all but gone.  Once the expansion is recognized developers scramble to fill the new demand by planning new projects. However, developing property takes 2-3 years from start to finish so this isn’t instantaneous, there is a lag. With very little new construction the demand for re-sale homes is very strong.  This results in rising prices and in some markets the supply demand discrepancy results in multiple offer situations that further exacerbate price increases.  In times of unusually low inventory during this phase (before the new construction projects which have been in development are complete) prices tend to reflect an anticipation of where the market is headed rather than the current market price.  This is a sellers market.  As the expansion phase matures buyers and renters have increased choices but continue to find new places to live.  Positive pressure on prices slows. The real estate market falls into a phase of balanced activity. As long as the broad economic forces are stable, this phase can last quite some time. People have jobs, they start families, they buy cars, the buy houses, they buy refrigerators.  Companies are making profits, they continue to invest in infrastructure.

Hyper Supply

The delineation between market expansion and hyper supply is marked by an increase in unsold inventory and and increase in rental vacancy.  The projects which were started late in the expansion phase continue to come available but to an increasingly tepid response.  Growth in prices is decelerating.  If developers recognize the turn in the market and stop building, the coming recession can be softened considerably.  In this phase, housing, rental units and office space become over built.  As interest rates rise we are then led into another recession.

Where  Are We Now?

First let’s eliminate where we know we are not.  We are not in recession, nor are we in recovery.  Over the last ten years, the Boulder area real estate market has come through the recession phase and then quickly moved through the recovery phase.  I say quickly because we were fortunate not to have a big back log of foreclosure homes that needed to be sold.  Since mid 2012 we have been in the expansion phase.  Throughout the Denver Metro Area we have seen unprecedented construction of rental apartments.  We have seen a steady stream of new residents drawn to our area by a good economy and a great lifestyle. We have seen compounding double-digit real estate appreciation that rivals the top markets in the nation.  Early this summer, the temperature of the expansion seemed to have been turned down a few notches and we are now seeing a slowing in price appreciation and a bit less demand.  However, our inventory is still very low and the overall economy is still doing well.  We seem to be at the beginning of a cycle of increasing interest rates but a 30 year mortgage is still at around 4%.  To me it seems like we are still in the expansion phase, but if each phase was a day we would be definitely in the afternoon.  Here are the next signs we need to look for which would indicate a shift toward the hyper supply phase: 1) increased vacancy rates on rental properties 2) Meaningful increase in interest rates 3) Increased inventory of resale homes for sale 4) New home builders offering incentives and price reductions.  

If we are to believe that the real estate cycle runs in an 18 year cycle, we would expect our next major recession in 2024.  If you would like to discuss a personal strategy as it pertains to the real estate cycle I invite you to contact me.  Neil Kearney, Kearney Realty Co. Neil@NeilKearney.com  303-818-4055

Working with a Realtor – Buyers Agent vs. Transaction Broker

Working with a Realtor – Buyers Agent vs. Transaction Broker

When a buyer is working with a real estate agent in Colorado there are two ways in which to work, as a Buyers Agent or as a Transaction Broker.  It may seem to make sense to a buyer that if they are working with a Realtor that they are “their agent” and will automatically be working on their behalf.  This ins’t true.  In order to have a true agent a buyer must take that next step sign a buyers agent agreement.  If there is no written agreement you still have someone working with you but not necessarily for you.  In this post I will outline the differences between the two relationships.

Working With A Buyers Agent

  • You can liken working with a buyers agent as working with a coach who has your best interests in mind.  Think fiduciary, advocate or agency.
  • Working with a Realtor as a buyers agent requires a written contract.  This contract set’s forth loyalty and compensation.  Loyalty is the promise of the buyer to work with just one agent, and depending upon how the contract is completed the buyer may be guaranteeing a commission to their agent upon completion of a purchase.  See the note on compensation below.
  • A buyers agent works as a fiduciary to their client.  They owe duties of care including: obedience, accountability, loyalty (including confidentiality) and disclosure.
  • In addition to the uniform duties owed to all clients (see the list under the “Transaction Broker” section, a real estate agent working as a buyers agent is obligated to:
    • Promote the interests of their client with the utmost good faith, loyalty and fidelity.
    • Seek a price or lease rate and terms that are acceptable to their client.
    • Counsel their client as to any material benefits or risks of a transaction.

Working With A Transaction Broker

  • You can liken working with a buyers agent as working with a referee who helps you through a transaction.
  • In Colorado, unless there is a buyers agency contract signed, it is presumed that a Realtor is working as a transaction broker. There is no written contract needed.
  • A transaction broker assists one or more parties through a real estate transaction with communication, interposition, negotiation, advisement, contract terms and help at the closing table, all without being an agent or an advocate.
  • The uniform duties due to all parties a real estate agent comes into contact with are:
    • Perform the terms of any written or oral agreement with Seller
    • Present all offers to and from Seller in a timely manner regardless of whether the property is subject to a contract for sale
    • Disclose to Seller adverse material facts actually known by Broker
    • Advise Seller regarding the transaction and advise Seller to obtain expert advice as to material matters about which Broker knows but the specifics of which are beyond the expertise of the Broker
    • Account in a timely manner for all money and property received
    • Keep Seller fully informed regarding the transaction
    • Broker must not disclose the following information without the informed consent of Seller:
    • – That Seller is willing to accept less than the asking price for the property
    • – What the motivating factors are for Seller to sell the property
    • – That Seller will agree to financing terms other than those offered
    • – Any material information about Seller unless disclosure is required by law or failure to disclose such information would constitute fraud or dishonest dealing, or
    • – Any facts or suspicions regarding circumstances that could psychologically impact or stigmatize the property.
    • Seller consents to Broker’s disclosure of Seller’s confidential information to the supervising broker or designee for the purpose of proper supervision, provided such supervising broker or designee does not further disclose such information without consent of Seller, or use such information to the detriment of Seller
    • Brokerage firm may have agreements with other Sellers to market and sell their property
    • Broker may show alternative properties not owned by Seller to other prospective buyers and list competing properties for sale
    • Broker is not obligated to seek additional offers to purchase the property while the property is subject to a contract for sale
    • Broker has no duty to conduct an independent inspection of the property for the benefit of a buyer and has no duty to independently verify the accuracy or completeness of statements made by Seller or independent inspectors. Broker has no duty to conduct an independent investigation of a buyer’s financial condition or to verify the accuracy or completeness of any statement made by a buyer
    • Seller is not liable for Broker’s acts or omissions that have not been approved, directed, or ratified by Seller
    • When asked, Broker (will or will not) disclose to prospective buyers and cooperating brokers the existence of offers on the property and whether the offers were obtained by Broker, a Broker within Brokerage firm or by another broker.

Compensation

In the vast majority of cases the compensation due a real estate agent are not affected by whether they are working as a Transaction Broker or as a Buyers Agent.  When an agent shows a property that is listed through the MLS there is an offer of compensation from the listing broker to agent working with the buyer.  This co-op commission is not a fixed amount and there is a space for compensation amount offered to both a Transaction Broker or a Buyers Agent, however in most cases the offer is the same.  So as long as this amount is acceptable to the agent or is otherwise in agreement with the minimum amount specified in the Buyers Agency agreement the compensation to the agent isn’t an issue for the buyer.

Senior Property Tax Exemption

Senior Property Tax Exemption

With property values increasing as steadily and as rapidly as they are in Boulder County, it should come at no surprise that property taxes are following suit. This became very clear this past May when assessment notices made their way around town informing Boulder County residents that the assessed value of their property had significantly increased by on average 26%. Although it is exciting to watch the value of your assets increase it does mean that property taxes will most likely increase for you as well.

When discussing property taxes I believe it is helpful for anyone to have a basic understanding or concept of how property taxes are actually determined. When boiled down to the basics it is actually quite easy to understand.

Three major components go into your property taxes:

  • Rate of Assessment
  • Assessed Value
  • Mill Levy (Tax Rate)

The Rate of Assessment for residential properties in Colorado serves as the base for property taxes as it determines what percentage of your homes actual value can or will be taxed.  This can be adjusted on the state level and just recently got lowered for the first time in 14 years from 7.96% to 7.2%.  The rate of assessment is multiplied by the assessed value to your taxable value. The Assessed Value is the value assigned to your home by the county assessor.  This assessment is adjusted every two years based upon comparable sales in your neighborhood.  The assessed value is what arrived in your mailbox in May.  Finally, the Mill Levy (also known as the Tax Rate) is the percentage of the Assessed Value that is actually taxed and collected by the county on a yearly basis.  The Mill Levy is set every fall and sets the amount and allocation so that the budgets for schools, emergency services, roads, etc. are met.

As taxes rise, one tax exemption that may be important for you or your family members to know of is the Senior Property Tax Exemption. With the deadline of July 15th rapidly approaching it can be helpful to understand what this exemption is, how much it could save you, and of course if you are eligible. Those that are eligible for the Senior Property Tax Exemption will receive a 50% property tax deduction on the first $200,000 of the properties value equating to between $550 and $760 of property tax savings per year.

Am I eligible for this exemption?
You are eligible if you meet all three of the following requirements:

  • You Were born on or before January 1, 1952
  • You have continuously lived in the home starting before January 1st, 2007
  • You have continuously owned the home starting before January 1st, 2007

If you happen to meet all three of the requirements and file your application before July 15th, 2017 you will first see the discount on your tax bill in January of 2018. There is no need to reapply each year as the exemption will continuously stay active as long as no disqualifying event occurs.

To see more information on the exemption or to fill out the application go to: https://www.bouldercounty.org/property-and-land/assessor/senior-exemption/

Home Search Zillow Sued For Inaccurate Zestimate’s

Home Search Zillow Sued For Inaccurate Zestimate’s

ZillowThis past May, Zillow, the online real estate search company was sued by a Chicago based home building company who claimed that Zillow’s online Automated Value Model (AVM) is deceiving home buyers with prices below the true value of properties leading to frustrated sellers. Furthermore the suit claims that Zillow’s “Zestimates” are in violation of the legal description of an appraisal, which under Illinois law must be administered by a licensed appraiser. Zillow defends themselves by stating that their Zestimates claim only to be approximations not true appraisals; to which the suit responds stating that whether or not they are technically appraisals homeowners are viewing them as such leading to confusion and irritation. It will be interesting to see over the coming months how this lawsuit plays out. It’s clear that Zillow’s Zestimate and other AVM’s which are becoming common across the internet are being used by consumers to determine the approximate value of their home.  But in my experience, many times this approximation isn’t close to the true market value.

So just how accurate are Zestimates. In a Nationwide study conducted by Zillow it was found that their Zestimates fall within 5% of the sales price of homes 53.9% of the time, within 10% of the sales price 75.6% of the time and finally within 20% of the sales price 89.7% of the time. Back in 2007 when Zillow was just getting its footing I conducted my own research local to Boulder on the subject and found that on a whole Zillow’s algorithm was 99% accurate.  However, when I took a closer look I found that there was an 18.4% standard deviation.  Additionally, the outliers were up to 50% off.  Although Zestimates generally do a good job when looking over a large pool of properties, their approximation for any specific property within that pool can many times be significantly off of the true value.

To read my 2007 article click here.

With home values rising as fast as they are in Boulder and with Automated Value Models such as “Zestimates”  readily available, inexpensive and simple to use, it’s easy to understand why so many consumers gravitate towards them. It’s important to remember though that the very nature of AVM’s being automated hinder their ability to provide an accurate evaluation of properties all of the time. AVM’s fail to take into account many critical and influential aspects of a property that can greatly affect the value such as the current condition, recent upgrades (or the lack thereof), actual square footage, views and other details. After understanding these substantial flaws it becomes clear why AVM’s, including Zestimates often over or undervalue homes leading to users feeling mislead.

AVM’s have their place as a non-binding general view of the market when you are not considering a transaction.  It’s fun to look.  However, when you are considering a real estate transaction you need to bring in an experienced professional to give you a more accurate comparative market evaluation.  Experienced Reatlor’s like myself can give you the broad information and experience necessary to make decisions around. If you are considering a move I would be happy to come by and give you an individual market analysis.  

To read more about the case go to: http://www.marketwatch.com/story/do-zillow-zestimates-mislead-home-buyers-illinois-lawsuit-claims-yes-2017-05-22

The Steps Of A Home Search

The Steps Of A Home Search

Open RoadIf you have determined that you are ready to buy a house (click here for more information about determining if you are ready) the next question to ask is how do I do it? What is the smartest way to go about buying a home? What are the first steps in a home search? This article will show how to begin the process of buying a home as well as point out some common pitfalls that can be avoided.

Step 1 – Finding a Really Good Realtor

It’s easy enough to start browsing houses on the internet or going to the random open house, but at some point you will want to get more serious about looking at homes.  The first step towards getting more serious about looking for a home is finding a good Realtor who has been through the process time and time again.  Most people end up working with a Realtor, so why not engage one early on in the process?  Realtor’s have tools that will save you time and put you on track to finding the right home more quickly.  A good Realtor is much more than a person who shows you the houses that you have found online, they serve as an information source, an advocate and a guide through the process.  Make sure you are working with a Realtor who is more interested in helping you find a great house for the long term rather than a quick sale for them.  It takes patience and persistence to make sure you end up in the right home.

Note: A Realtor is a member of the National Association of Realtors and is bound to abide by a code of ethics. Not all real estate agents are Realtors.  Make sure your’s is one.

Step 2 – Get Pre-Approved

One of the most important steps in a home search is to find a good lender and get pre-approved.  Your Realtor should be able to recommend a few local lenders who have proven themselves to be responsive and know how to get the job done. Using a local lender is important, not only are they accountable but they are there to solve problems at the closing table if anything comes up at the last minute.  Your earnest money is at stake!  If your lender is delayed at the last minute or their money doesn’t make it to the closing table on time and the seller chooses not to give you an extension, you lose your earnest money.  You cannot go back to your lender and recover those lost funds.  Choosing a lender is more than finding the lowest interest rate, it is finding an advisor who will help you make a sound financial decision given your unique circumstances.  The credit rules change often and it is important to use an experienced lender to help you get the job done in a timely manner.

Step 3 – Looking at Homes Online – The First Showing

Boulder House with FenceThe internet is a great tool when searching for homes.  When you view internet sites such as Zillow.com, Realtor.com, Redfin.com and Coloproperty.com you are able to easily find and view homes for sale by putting in any search criteria. The results are quick and beautiful.  It’s easy to get caught up in the great houses that are available.

But here are the pitfalls of the national home search sites:

  • Many of the popular home search sites don’t have all of the properties listed for sale.  Listing brokers determine who gets to display those listings and some don’t send to all of the available sites.  Many company sites just get feeds from one MLS system so if a listing is listed in another (which is often the case in the Boulder area) those other listings are not displayed.
  • The goal of the big national sites is to get as many views and clicks as possible. So properties show up as “active” until they are sold. Don’t fall in love with an active house on Zillow until you check with your agent to make sure that it isn’t already under contract.
  • The agent who is listed in conjunction with a given property many not be the listing agent.  So if you click on a “more information” button you will most likely be contacted by an agent who has paid for that opportunity and knows nothing about the house.

Now a word about search criteria. When clients tell me their “wish list” I write down every bit of it, but I then explain that it might be better to keep our search wide so that we don’t miss a house that meets 95% of what they want. In a market characterized by low inventory this is especially important.

Note – www.Coloproperty.com is the public site for the local MLS system IRES. This site changes the status of a property (active, under contract, sold) on their display right when it happens. So to get the true scoop go to this site.  Disclaimer – I have served on their Board of Managers for 9 years now.

Step 4 – Viewing Homes In Person

Boulder Tudor HouseHow soon is too soon to start actually looking at houses looking? For example, if your lease is up in July and you don’t want to have rent and mortgage payments for more than 1 month, January is usually too soon.  However, when to start depends upon how particular you are, how many homes are likely to come on the market during a particular time etc.  This is a good conversation to have with your Realtor.

Once you and your agent have identified some properties to view the next step in your home search is that your agent will set the showings with each listing agent (through them, their company or a showing service). Sometimes homes can be viewed immediately but often times the owners require a few hours to 24 hours notice.  Sometimes the listing agent needs to be at the showing and that complicates the timing.

Once you are inside a home you will have already begun to judge the house on these criteria; “could I live here?”, “how does it compare with other homes?”, “is this the one?”.  If you quickly realize that this isn’t “the one” it’s still good to see the rest of the house but in my experience it’s not necessary to see every little thing.  Who cares what the second basement closet looks like! You only have so much memory available and if you fill it up with the tiniest details of a house that you have already determined you won’t buy you end up confusing houses.  Was it the yellow house that had the gold faucets or was it the one next to the park?

Once you find the one that you think you want to pursue you will want to go back for a closer look.  This is the time to “kick the tires” and make sure you know what you’re in for.  Hopefully the second time through will only make the heart grow fonder.

In the next installment in this series I will go through the process of what happens once you find a house that you love.

 

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