Inspection Issue – Lead Based Paint

Inspection Issue – Lead Based Paint

The discussion of lead based paint comes up in every transaction that involves a house built before 1978.  All sellers and landlords are required to disclose in writing the knowledge of any lead based paint hazards and provide results of any previous tests that they may have to any potential buyers or tenants.

Lead based paint has been linked to health difficulties primarily in children but can also be hazardous to adults.  Most older houses have lead paint somewhere under the layers of paint in the house.  So what is the hazard?  If the lead paint is contained it is not an immediate hazard. Only when the paint is released by chipping, sanding etc. does it become a hazard.  Once released, it can be in the air, contained in dust or it can be in exterior soil.

In a real estate transaction a Lead Based Paint Disclosure must be filled out and signed by the Seller, Buyer and both real estate agents. This disclosure must be signed before or concurrently with the purchase agreement.  If it is done after the fact, heavy fines can be placed on the Realtors.  Along with the disclosure, a booklet explaining the hazards must be received by the buyer.

The buyer has the right to have the house inspected for lead based paint hazards, but in my experience I have never seen a buyer have the tests performed. The testing is expensive and can be invasive (samples).  I think the object of the program set forth by HUD is education of the public and at least in the the properties I have been involved in, I think that goal is being fulfilled.

The EPA has a very informative websitewhich has more information if you are interested in learning more.

The cabin shown above is still standing, although I’m sure it is a lead based paint hazard. It is my grandfathers old cabin in MN near Itasca State Park. He passed away just over 10 years ago and my cousin and I have since built the new cabin below on a different location on the land overlooking Gill Lake.  {I have recently converted my blog to a new squarspace platform. During the conversion all of my old posts made the journey but the functionality of the search has not come through cleanly. This is a previously published post that contains information that is still a good resource so I will periodically re-publish a few select topics so that they are searchable on the site.}

Homeowners Insurance

In order to close on the purchase of a home, a buyer must obtain a homeowners insurance policy.  A few years ago a property insurance deadline was added to the buy/sell contract.  This clause gives the buyer the right to shop around and make sure that an acceptable and reasonable homeowners policy is available for the house they are purchasing.  This contingency came about after some insurers, after a particularly dry and fire laden summer, decided to add outrageous premiums to mountain homes.  Many buyers were waiting until the last minute to line up their insurance and found it was too late to cancel the contract after they found out what it would cost.  The situation has settled down now but the deadline and contingency is still in place.  Here is a video that gives some good tips for those who are looking for homeowners insurance.  It is also a good idea to shop around every few years to make sure you are not paying too much.  Please let me know if you need a recommendation of a local insurance agent, I know some good ones.

http://www.howcast.com/flash/howcast_player.swf?file=164288

Case Study:  Move-up Buyer in Difficult Market

Case Study: Move-up Buyer in Difficult Market

Most of the buyer’s right now in the distressed markets across the country are either first time buyers or investors. Both of these categories recognize that this is a perfect opportunity in which to buy.

But what about move-up buyer’s? Those who already own a home but are ready to purchase a larger home or a different type of home. Many of these would-be buyers are waiting until the prospects of selling their homes are better. Let me explain why this may not be the best strategy.

According to the National Association of Realtors the average move-up buyer purchases a home that is 50% more expensive than the house they are selling. For our example let’s assume that the Smith’s currently own a home that they think should sell for $400,000. They came up with this price because their neighbor across the street sold their house last year for $390,000 and their house is “much nicer than that house”. They have their eyes on a house in the same school district that has been listed for four months at $600,000. After our initial consultation I inform them that their house would sell within a reasonable time for $380,000. They are obviously disappointed and initially feel that they should delay the move until their house will sell for what they think it is worth. Before I leave, I take them through the following two scenarios.

Sell and Buy Now (slow market)
Sell House $380,000
Buy New House $570,000
Amount Down $130,000
Payment at 5.25% $2,429

If they decide to sell now they will need to price their home competitively in order to get it sold in a reasonable amount of time. The good news is that the house they want to buy is in a similar situation. Let’s assume each seller needs to take 5% less than they think it is worth to get the deal done. The Smith’s end up with a great house that they were able to buy for $570,000 with a total monthly payment of $2,429 excluding taxes and insurance.

Sell and Buy Next Year (strong market)
Sell House $400,000
Buy New House $600,000
Amount Down $150,000
Payment at 6.25% $2,770

If they decide to wait until everyone else is buying and selling they trade certainty and price for overall financial soundness. As the tide moves it takes all boats with it. As they gain $20,000 on their home they end up paying $30,000 more on their new house. More importantly they pay 14% more each month in interest. They also get to enjoy their new home with family and friends for an extra year.I think you would agree that the Smith’s would do well to take advantage of the opportunity that is presenting itself.

1031 Exchange of Vacation Property

1031 Exchange of Vacation Property

 

The 1031 exchange is one of the greatest ways to grow real estate wealth. The 1031 is a fairly straight forward transaction used for “like kind” exchanges of property with the goal of deferring capital gain taxes. I have personally used the 1031 exchange to sell one property and buy two a few years back. There are many great resources on the web, but I always go to http://www.1031cpas.com/ because they have great resources and they are the intermediary I recommend.

 

The rules about non-owner occupied rental property are fairly straight forward and well documented. Until recently the rules about the exchange of vacation property has been vague. Here are the latest guidelines from the IRS published in February regarding the exchange of rental properties.

 

In order to avoid the possibility of your exchange being challenged by the IRS you must in the two year period prior to the sale:
  • You must have rented the property; at a fair rental price, for at least 14 days during each 12 month period.
  •  

  • You must not use the property personally for more than the greater of 14 days or 10% of the days the unit was rented during each 12 month period.

So obviously it will take some planning, bookkeeping and a paper trail to make this work. If done correctly it could save thousands in taxes and allow you to invest more into that next property.

 

The Real Estate Cycle – Illustrated

The Real Estate Cycle – Illustrated

The Real Estate Cycle

I found this graphic on a power point slide I had put together a few years ago. Looking at it again, I firmly believe that we are in the “absorption” phase characterized by the arrow on the left side. Many of the symptoms of the bottom of the market have already happened and are improving. Rents have fallen but are now improving. Housing permits were down 26% last year. Vacancies have fallen, both in commercial and residential rentals.

It is still a buyers market and sales are not happening as quickly as some sellers would like but we are working again toward the top. Inventories are down and now is a great time to buy before prices spike again.

Have a great day!

How Accurate is Zillow?

What is the value of a home? The quick answer is what a Buyer will pay for it. Most people when they ask that question are looking for n exact value or at the very least a range. Traditionally people have called Realtors or appraisers to answer the question “how much is my house worth”. Today getting a value is only a few key strokes away. A persons home is most likely their largest investment and people are understandably curious about where their investment stands. This curiosity leads to lots of traffic for the website Zillow.com.

I hear it all the time, “Zillow has my house valued at X”. Many times, this value is incorrect and I then have to work extra hard in proving what I think is the correct value. Therefore, I thought I would run some numbers and see how accurate Zillow.com actually is in my market. This is what I found:
The Method:
  • Find all homes that have sold in the City of Boulder for the past month. (there were 58, so this is a limited sample size)
  • Obtain the estimate of value from Zillow.com.
  • Compare the sold value to the Zillow value in the form of a ratio.
  • Find the standard deviation to find out how accurate each value is. The larger the standard deviation the more each of the values in the data set varied. For example if you found the the Zillow value was 100% correct with a standard deviation of 1%, you would know that Zillow was nearly perfect.

The Results:

There were 58 sales of single family homes in the City of Boulder between October 12th and November 11th. The price ranged from $245,000 to $2,800,000.

     

  • The average ratio of Zillow prices to actual sold values was 99.4%. To put it another way, if you looked at the average Zillow.com price it would be just .6% lower than the actual value. Good right? Not so fast.
  • The average was nearly right on the money but the individual values ranged from 158.2% of value to 48% of value a huge dispersion. The Standard Deviation for the entire data set is 18.4%. In other words the values are 99% correct +- 18%. A huge discrepancy. On a $600,000 home that would mean a the Zillow estimate is $600,000 +- $108,000.
  • I next broke up the data set into three equal groups; sales up to $500,000, Sales up to $715,000 and the remaining 19 sales up to $2,800,000.
  • For the lowest price range the Zillow value was 100.7% with a standard deviation of 10%.
  • For the middle price range the Zillow value was 103% with a standard deviation of 14.6%.
  • For the top price range the Zillow value was 94.8% with a standard deviation of 26.07%.

Conclusions:

  • In the Boulder market Zillow is better at estimating the value of lower priced homes.
  • As the prices rise the variables of bedrooms and baths matter less and the finish quality as well as intrinsic values such as location and view become more important. These later qualities are not easily picked up by a mathematical algorithm.
  • Overall, Zillow is a fun way to look at a home but the accuracy varies so much that if you are serious in getting the right value you still need to call a Realtor or appraiser.