Consider This Before Selling Your Second Home

Second homes became very popular during the pandemic because of the drastic rise in work-from-home flexibility.  Who the hell wouldn’t want to work from the beach?! Owning a second home allowed homeowners to spend more time in their favorite places or even to spread out from their spouse or other family members who were also primarily always at home.  Others also own second homes to use as a vacation home or even to rent out as a stream of income.

But what if you bought a second home that you are no longer using?  Maybe you have shifted back into the office, or maybe your needs and priorities have changed and you find you are just not utilizing the second home as much.  It may be time to sell it.

The good news is that you can reap the profits of the home sale – especially if the property has increased in value over the years, which it likely has.  The not-so-great news is that you will likely be subject to the capital gains tax (CGT).  Fortunately, there are ways to prepare for these taxes and even some steps you can take to mitigate them.

Just like with income tax, the capital gains tax is not a flat fee, but rather a percentage of the profit.  Also remember that the percentage will change based on what tax bracket you are in.  There are ways to avoid paying some, or all, of your capital gains taxes, but there are very strict guidelines that need to be followed, so make sure you are working with a highly experienced professional (like me) to guide you through the process.

The best strategy for lowering your CGT is to minimize your net profit.  How?  Deductions! Any money you invested to renovate or repair your second home can be deducted from the profit.  For example, if you put a new roof on the house, deduct that.  You can also deduct costs associated with the purchase and sale of the second home.  Things like realtor commissions, inspections, origination fees, etc. can all be deducted from your net profit, therefore lowering your CGT.

Again, you’ll need to follow the guidelines, which means carefully saving receipts and tracking expenses so that you can accurately file your taxes when the time comes.  I highly recommend seeking professional help when going through this process to avoid any pitfalls that may lead to an audit. I’m not an accountant or CPA after all.  Need help or need to be put in touch with someone who can?  Give me call. I got people. LOL

How to Know If Your Home Will Increase In Value

There are many different pieces to the home value puzzle, most of which are widely known.  However, there are lesser-known factors that can have a big impact on home value.  Let’s take a look at the top 3:

  1. Good Schools

Homebuyers feel very strongly about the education of their children or future children.  In a highly-rated school district, you’ll see higher-priced homes and higher demand for those homes.  In fact, your school district is so important, that studies suggest that people pay an average of $50 more per square foot for homes in top-rated school districts.

For every $1 on school funding, property values increase by around $20.  There is no denying that your school district and home values are directly linked.

  1. Fiscal Responsibility

Taxes are the financial backbone of local governments and are a significant local revenue source for financing K-12 education, police and fire departments, parks, and other services.  These kinds of services are what draw people to neighborhoods.  No one wants to move onto a block full of potholes, not a decent park around, and MIA civil servants.  Taxes are a very important thing to weigh when it comes to buying a home.  Of course, we all want lower taxes, but at what cost to our neighborhood?

  1. Solid Civil Structure

Businesses want to move into a thriving neighborhood where they will be in demand.  This brings job growth and an improved economy.  However, municipalities can crush the developmental and investment spirit on a whim.  Businesses do not want to move into neighborhoods with excessive bureaucratic red tape.  Think about your local restaurants, gas stations, and even a Dunkin’ Donuts or an Amazon warehouse.  If these businesses are not wanting to operate in your city, it will greatly impact your overall quality of life as well as impact property values. Keep in mind, that those same companies spend millions of dollars tracking all of these trends and will only invest in growth areas. Therefore, if you see big corporations coming in, that means they’ve done their research. Plus, you get the rewards of a Mocha Latte from your local Starbucks.

Multigenerational Housing

While the trend of multigenerational living began long before the pandemic, the popularity of it has grown significantly during the past couple years as families have been forced to reevaluate how to care for themselves and their loved ones.

We Americans tend to be outliers when it comes to multigenerational living.  Here in America we expect our kids to have it all figured it by the time they are 18 when they are “adults” and forced out of the home to make it on their own.  Instead of promoting independence, this can essentially start them off on a path of stress and financial debt.  They take out college loans and credit cards and start racking up debt before they can even legally drink a beer.

In most other cultures outside of the USA, the extended family model is the norm, and kids leaving the family home before marriage is not something you see.  Collectivist cultures are dominant in Asia, the Middle East, India, and Africa, as well as most Hispanic countries. In this model, the entire immediate family as well as the extended family, including grandparents, and even sometimes uncles, aunts, and cousins, are all an intimate part of the familial network.  They live together, share costs and responsibilities, and support each other financially, physically, emotionally, etc.

If more families here would adopt this way of living, it would drastically help the housing market and the economy as a whole.  Shifting our thinking to normalize our kids staying at home with us until they are 25 will go such a long way for helping set their future on the right path.  Look at it this way, you can pay for your kids to stay at home until they are 25, or you can pay later when they are in debt and unable to buy a home and come to you for help with the down payment.

Sometimes going against the trend is the wisest way.

Are You Stuck in the 2023 Rental Trap?

As a renter, you have a tough choice to face each year: renew your current lease, start a new one, or buy a home.  In the past year, current and new renters have seen their rent increase, sometimes a jaw dropping increase like 20%.  So if you are considering renting as an option in 2023, it’s worth taking the time to look at the current trends, and the trends indicate that rent will continue to climb.

These rising costs may force you to reconsider what other alternatives are out there.  If you are looking for more stability, it could be time to prioritize homeownership.  One of the major benefits to owning your home is that it provides a relatively stable monthly cost that you can lock in for the duration of your loan.  Imagine the peace of mind that comes with not having to worry about rent increases each year!  It’s hard to build wealth when the cost of your shelter keeps going up.  And let’s be honest, the rate of increase may fluctuate, but the increases aren’t stopping.  Rent is only going to continue to climb up and up.

Homeowners also enjoy the major added benefit of home equity, which has grown substantially.  In fact, the average homeowner gained over $34,000 in equity over the past year alone.  As a renter, the money you pay in rent only covers the cost of your dwelling and when you leave that rental, you leave with nothing.  But when you pay your mortgage, you grow your wealth through the forced savings that is your principal paydown.

As I always say, most people in this country pay a mortgage, it’s up to them whether it is theirs or their landlord’s.

No, Foreclosures Aren’t Coming Back

Yes, there has been a shift in the market over the past several months, which has raised concerns that we are destined for a repeat of the crash we saw in 2008.  But the reality is there are a few major differences between what is happening today and the bubble of the early 2000s.

The major key here is the simple fact that banks do not want to take your home back from you – they don’t want it, it does them more good to keep you in your home than it does to take it from you.  If you think about it, it really is a lose/lose situation for the bank to take your home back.  They have already lost money on you not paying the mortgage, now they have to hold it, insure it, maintain it, pay the broker’s fees, fix repairs, etc. all before being able to resell it.  And who do you know who is being foreclosed on and willingly leaves the home and doesn’t practically destroy it on the way out?  Chances are there will be squatters and serious property damage before the home is even in the possession of the bank again.

Banking systems today have learned a lot from the mistakes they encountered from the bubble burst.  Loans are much more solid now and people have so much more equity in their homes now that even if they find themselves out of a job or otherwise unable to pay their mortgage, they can still cash out their equity and sell their home before getting upside down and the bank taking it back.

Banks are full of bankers, not landlords.  They do not want the headache of foreclosing on you.  It is a very timely and expensive process and they try to avoid it at all costs.  So if you are seeing clickbait headlines about a wave of foreclosures coming, remember that context is important.  It may be true that the number of foreclosures is higher now that it was a year ago, the fact is that foreclosures are still well below the pre-pandemic years.  Nothing is imminent, don’t buy into the hype. You can always #asksethanything

Advantages of Buying a Home in the Current Market

Buying a home in any market, at any time is a very personal decision.  The best way to make that decision is by educating yourself on the facts, working with a trusted professional, and not following the sensationalized headlines in the news daily. My team and I only deal in facts and bring an educational approach to this process. In reality, headlines do more to scare people than help people who are ready to buy a home.  As they say in the news: “If It Bleeds, It Leads!”

Here are two BIG reasons why the current market is still a good time to buy:

  1. Home Prices Won’t Crash
    Home prices will continue to moderate at various levels depending on the local market and factors such as supply and demand, but leading experts agree that they do not believe a crash is coming like what we saw in 2008.  So if you are holding off on buying because you are worried about a crash, rest assured that is not what the experts are projecting. Keep in mind that there is no rule that says another Great Recession is inevitable. In fact, history has taught us that an economic failure like that is a once-in-a-generation event.
  1. What Goes Up, Must Come Down
    The best kept secret of the media in the past four months is this: In 2022 until Thanksgiving, interest rates rose the fastest they ever have. Since then, they’ve dropped the fastest ever! The FED rate you hear about on TV is not the mortgage rate as it is somewhat independent. Many in the industry think if they enter the lower 5s or upper 4s, we will revert back to the manic environment we saw these past few years. That means you’ll once again face steep competition and bidding wars.  It would be a huge advantage for you to be a step ahead of them. Believe it or not, that’s more opportunity for buyers now to start building equity in a home instead of paying their landlord’s mortgage.

The bottom line is that you can’t sit around and wait for a unicorn of low mortgage rates and ample inventory. If you do, odds are there will be other factors preventing you from buying a home.  You want to start putting things in motion now, and start making moves so you stay a step ahead of all the people waiting and watching from the sidelines.

Why Some Flippers are Losing Now…

In 2022, mortgage rates hit 7%, which put a major strain on housing affordability and further priced buyers out of the market.  All the while inflation continued to drive up labor costs, sending costs for home renovations and new builds up and up.  This is a perfect recipe for disaster for home flippers.

Just like anything in life, timing is everything.  Flippers who bought right before the mortgage rates spiked are likely dealing with the reality that they’ll have a tougher time selling than in 2021 and early 2022 when sellers were seeing bidding wars amongst eager buyers.  All of this amounts to the fact that it will be increasingly difficult for home flippers to turn a profit.

Many believe this will just thin the herd of flippers who have entered the market in recent years as home prices increased and HGTV flipping shows gained massive popularity. Another factor is the internet and all the “get rich quick” hucksters selling their systems for flipping. I have clients who flip and it is not for the faint of heart. 

Perhaps the flippers who are more seasoned and have longer-running connections will still make it out of this fairly unscathed.  But for the less experienced, it will be very difficult and thus likely force many people to leave the space altogether.

It remains to be seen if the fix-and-flip market will continue to lose steam as overall home sales/bidding wars have declined, and the cost of financing increased over the past year. If you’re thinking about getting into flipping, best to chat with me first to get a lay of the land. Like I said, it’s not for the timid at this point.

The Three Biggest Mistakes I See Young Buyers Making

First-time homebuyers are, on average, 33 years old.  Generally, the average age of homebuyers is 47.  Not only has the average age changed, but the home-buying process as a whole has changed not only with the invention of the internet, but then even more so when the pandemic pushed everything more digital.

I’ve been in this industry for many years and I have seen lots of trends come and go.  But I’ve noticed some recurring mistakes that I’m seeing young buyers making.  Let’s review the top three most common.

  1. Taking outdated advice
    Of course, your parents will have advice for you when you are on the hunt for your first home purchase.  They will want to be part of the process and share their experience with you in hopes of being helpful.  However, not all advice is actually helpful if it is outdated. Don’t get me wrong… I actually invite the input of parents and others for young buyers because they do have valuable input, but things are not always done the same way they were done in the past. 
  1. Not Working with professionals well in advance
    Take my word for it, there is no such thing as being too prepared.  Just because you are only thinking of buying, doesn’t mean it isn’t time to consult professionals, especially a realtor and lender.  Working with a lender well in advance will allow for time to get all your ducks in a row.  You can start to improve your credit if needed, you can work to save for your down payment, you can have a plan in place for your budget and know what is going to be realistic for you.  Too often a I see a potential buyer who thinks they are ready to buy, only to learn they have never spoken to a lender and in fact, are not ready. This makes for tough conversation and lots of unneeded delay.
  1. Relying too much on the internet
    I’ve talked in a previous blog about my belief that you need all 5 senses engaged when looking for a home. (Here) Relying on internet photos is not reliable.  Photos can be very misleading, both in a good way and a bad way.  You could write off a property simply because the agent didn’t have optimal lighting in their photos, or you could fall in love with a property just because the staged photo looks amazing and misleading.  Just like working with a lender in advance is crucial, so is working with an agent in advance.  Work with someone who knows the areas you are interested in, go see properties physically in person, engage those senses and take in everything from the neighbors to the smells.  Nothing beats seeing things in person for yourself.

If you are a first-timer and buying a home is anywhere on your radar, start the legwork now.  I promise it is never too early.  I have zero doubt that consulting with a lender and an agent will help you in the long run to reach your goals.

My Message to Home Builders

Although the U.S. has been in a decades-long housing shortage, we have also found ourselves in a time where homebuilders across the country are pulling back on development.  What?  How can both things be true?  Stay with me here.

This riddle is at the heart of the boom-bust nature of the housing market.  With changing incentives, fluctuating interest rates, and ever-changing regulations it’s really no wonder that there is never a time that supply lines up with demand.  Solving this predicament means that more building is required during downturns, which will likely require some sort of public program to subsidize it.

Think about where building has been most of the past year.  Builders have been maxed out trying to figure out how to supply enough houses for everyone who wanted to buy one.  Building companies couldn’t find enough land, workers were scarce, and lumber prices were exploding.  Supply chain issues were rampant – it was like a scavenger hunt for everything from dishwashers to garage doors, everything was out of stock and back ordered.

But the one thing that builders were not short on during this time?  Qualified buyers.  Interest rates were low, household savings were high, and suddenly millions of workers wanted to set up home offices.  Building companies had to get creative with forming waiting lists and even holding elaborate lotteries to pick a “winner” from the list.

But now?  With interest rates being higher, it has made buying new construction more difficult for many. 

The problem, simply put, is that sales of new homes are falling at the same time that a wave of homes are hitting the market.  The number of new homes that have been completed but not yet sold hit a 15-month high earlier this year.  Redfin reported that at that time, buyers were trying to back out of sales agreements at the fastest pace since the early weeks of the pandemic.

At the end of the day, this slump and slowdown in sales isn’t going to last forever.  The market will continue to evolve and change, as it always does, and when buyers are ready to jump back in, there won’t be anything for them to buy unless the building continues even now in the down times. In my opinion, the smart builders will keep doing what they do best… Build!

How Zillow Lost $380,000,000

Most homeowners wonder from time to time what they could get for their home.  Even if you aren’t actively looking to sell, it’s natural to wonder what the value of your home sits at. 

Chances are you’ve looked online at Zillow to see what your homes Zestimate is.  Basically, it’s an algorithm-fueled pricing tool that Zillow created to provide estimate values for millions of homes across the country.

In 2019, Zillow launched an iBuyer business called Zillow Offers.  Essentially, they were purchasing homes directly from owners, making repairs, and then putting the homes back on the market.  Zillow was so confident in their pricing algorithm that it said its Zestimates would serve as the initial offer price on eligible homes. As you can guess, this didn’t end well.

The company announced in 2021 that it was exiting the iBuyer business, basically stating that they were unable to correctly forecast home prices because of the volatility of the pandemic-driven housing frenzy.  A major flaw in the business model was the fact that they didn’t account for house-flipping investors paying too much, and also underestimating the time and cost to flip a house and get it back on the market.  The result?  Hundreds of millions of dollars lost.  Ouch.

The takeaway lesson from the Zillow fiasco?  Property values can change fast.  These three things will always be true, no matter how great an algorithm may seem:  

  1. A qualified real estate agent will help determine your home’s value by knowing the neighborhood and analyzing recent similar property sales.
  2. An appraisal is your friend.  Lenders require them for a reason.
  3. A “Sethstimate” is ALWAYS better than a Zestimate