If 2014 follows the same pattern as 2013 (and any year before that), you can expect the following to happen:
– Inventory will continue to gradually rise until the fall season
– The peak of activity (homes selling) will be between April and August.
– Home sales will decline after August
If you’re like most homeowners, you’re excited about your increased equity. Many homeowners who were barely “break even” or upside down with their loan are now wondering if they’ll have enough after selling to apply toward a downpayment. As values continue to rise and the economy improves, look for an increased number of “move-up” homeowners looking to sell their existing home to purchase a larger one.
Here’s the California Association of Realtors (CAR)’s forecast for 2014:
Keep in mind that we are already 1/4th into 2014. As multiple offers fuel rising values, look for an uptick in supply from the move-up sellers who’ll likely sell contingent.
The big difference between 2013 and 2014? Don’t expect prices to go up 28% in California. As the chart above shows, CAR expects a 6% gain.
Much confusion exists with homeowners who either made significant changes or inherited a home with unpermitted changes. Are you required to have everything permitted before selling? What effect on your home’s value would obtaining permits have?
In the case where you purchased a resale home and you’re not sure if permits exist, it would be a good idea to confirm whether or not the city has any records. Don’t worry — it’s not like the city’s employees are looking for homes to place “red tag” violations on. Most cities have online records on their websites.
The most significant change to a home is a room addition. The difference in square footage can complicate an escrow if not handled correctly.
If you know permits don’t exist, don’t panic. You have options:
1. Apply for permits. Depending on how drastic the changes were, costs and time can vary from a few hundred dollars and a few months to several thousand dollars and over 1 year. If the changes to your home don’t comply with local building codes, they may require further construction.
2. Sell home without permits. In this option, if the construction is done in a “workman-like” manner, homeowners can often get away with disclosing the alteration to the home along with any information they may know.
In either case, it would be best to obtain the advise of an experienced agent before you decide. If you can imagine, a home built before 1980 is likely to have changed hands several times with many unpermitted alterations and additions. Many housing tracts built in the 1950s hardly resemble their original post-war designs.
Impact on value
A seasoned Real Estate Agent can help you anticipate possible issues. They’ll know if it’s appropriate to market the home with the additional square feet or alteration. Since appraisers will often verify if permits exist, your agent will need to have measures in place to comply with conventional, FHA, or VA financing that the buyer might obtain.
In many of the North Orange County cities, losing value on a room addition can cost you around $280 per square foot if you don’t plan correctly!
With the passing of the new “Obamacare tax” which introduces a new, additional 3.8% tax, much confusion has transpired to homeowners who are thinking of selling in 2014.
Does this mean that all sellers will be subject to a 3.8% tax on their gain?
No. Since there are many complexities that surround this new tax, I’ll try to break it down into (3) yes or no questions:
1. Is the gain significant? For the individual: is the “realized gain” from the sale greater than $250,000? For couples: is the “realized gain” from the sale greater than $500,000? In a simple example, the realized gain is the selling price minus the price that you purchased the home. Of course, there are factors that can make the numbers change.
2. Is your income too high? For the individual tax filer: is your adjusted gross income greater than $200,000? For couples filing a joint return: is your adjusted gross income greater than $250,000?
This interview I conducted with Noel Dalmacio has a few examples where a sale resulted in tax liability:
If you’re seriously considering selling, you’ll need to seek the advise of your accountant on this matter. Make sure the accountant is well versed on this new tax.
If you discovered that you have significant tax liability, one option to consider is a 1031 exchange.
Bottom Line: Yes, the new tax will end up affected many sellers who have significant equity. However, with the recent appreciation surge of the past year, most will be better off selling now vs. 1 year ago.
Every home is unique in it’s own way. If I were to identify (2) extremes of classifying a home, it would be: 1.) the Niche home, and 2.) the “bread and butter” category. This is important because agents and sellers will often apply the wrong marketing strategy and have the wrong expectations. Of course, the wrong expectation will often produce the wrong result.
The “bread and butter” home is what the nickname implies: it’s something that appeals to almost everyone. In North Orange County, that usually translates into the following characteristics: newer built (after 1990), good schools, at least 3 bedrooms, at least 2 bathrooms with a direct access garage. You’ll also hear some cultures place additional requirements on “Feng Shui” or the way the home’s layout flows from room-to-room.
On the other hand, the “niche” home is sometimes a “love or hate” type of property. Some examples of this could include a historic home, a taste-specific home, a home with only one bath, or home that isn’t remodeled to today’s trends.
Everyone loves viewing brand new homes for a number of reasons. For myself, the near-perfection of a model home lets me imagine a near-perfect life.
All of my senses are pleased when entering a model home: My eyes are pleased with the professional decorations and strategically selected furniture. My ears hear the sound of a tranquil fountain blended with classical music piped in through speakers in every room. My nose smells carefully selected fresh fragrances. My feet feel the supporting firmness of brand new carpet.
Emotionally, I feel overwhelmed suddenly consider buying a new home in this development.
Although my rational self is somewhat drunk in all of this indulgence, I still can get a sense of value. I view the home price sheet and the prices appear to be reasonable over the resale homes in the area. I convince my wife that the monthly payment is within our reach and we start conversations with the salesperson in the office.
Similar to buying a car, we are shocked at the price we would have to pay when we add the lot premium, minimal upgrades to even remotely resemble the model home, and how much it would cost to have the surrounding dirt professionally landscaped. By the time everything is taken into consideration, we would be paying anywhere between 10-20% above a similar-sized resale home.
Knowing that the “newness” of the home will be short lived, we decide to take the plunge anyway.
FACT: After taking into consideration the cost of landscaping and upgrades, a new home in North Orange County will cost over 15% more than a comparable resale home.
What can we learn from the New Home Builders to achieve the most money for a resale home?
While there are obvious things we can’t duplicate such as the “newness” of the area, bank canvas of the neighborhood, and minimal upkeep the first few years, there are still aspects that can maximize the emotional appeal of a home:
Market Exposure: If there’s any one thing large home builder knows, it’s how to market a new development. You’ll see large billboards, commercials, full-page ads in the newspaper, and tons of internet sites to promote the neighborhood. They even give it a fancy name that many can’t pronounce.
For a resale home, a local agent can carefully select professional photography, create property brochures (not “flyers”), and maximize website exposure by paying extra for premium positioning.
Home Staging: Model homes are decorated with one purpose in mind: to convince a homebuyer that this home is perfect for their life. Most buyers are terrible at using their imagination. When furniture and even fake food on the counter is displayed, it brings the buyer closer to thinking the home is destined to be their home.
With resale homes, there are common mistakes of having the home either too empty or too cluttered. Too much furniture and family photos will distract the buyer and they will always feel it belongs to someone else. On the other end of the spectrum, a completely empty home can feel “cold” to a buyer. Many Realtors offer the option of having the home professionally staged.
Careful Control of Supply
Ever wonder why a builder releases their home in “phases” as oppose to just building the whole development at once? One of the reasons is to control the amount of homes available. Scarcity is a fundamental aspect of value. Pushing buzzwords and cliches such as “limited release”, “priority waiting list,” or “only 3 homes left” reinforces scarcity to the buyer.
The release of your home has to take into account the competing inventory nearby. If there’s a home down the street with similar square footage, why not wait until it enters escrow? If nothing is for sale in your neighborhood, why not make an extra push to have the home ready on the market?
Availability of Showings
Many builder sales offices and models are open 7 days a week with common hours of 10 AM to 6 PM. This allows everyone’s busy schedules an opportunity to view the model homes.
With a resale home, making the home available for showings with a lockbox is a must. Anytime you restrict showings, it can possibly result in the top-paying buyer going elsewhere, regardless of market conditions.
Home Builders NEVER place an ad in the paper one day only to sell the home the following day. Similar to a movie release, they follow a timetable that has milestones and announces dates well in advance. Some examples include, “First Phase released this weekend” or “Waiting list starts this Saturday”.
This ensures that the all the interested homebuyers will know about the new development and ensure the highest-paying buyers will have a shot.
In resale, I always shake my head every time I see a home sold in a single day or even two days immediately after inputting the home into the MLS database. Even with today’s seller’s market, you’ll want to season your listing properly. A good agent would know the perfect balance and timing.
Cooperation of local broker community
Just like anything in life, this is a relationship-based business. While Home Builders spend tons of money on advertising, they still offer compensation to local brokers. In many cases, a buyer needs to sell their own home and a broker can manage their transition. Furthermore, working with local Real Estate agents has a “multiplying effect” on the exposure through word of mouth referrals and occasional entry into the local Real Estate board’s Multiple Listing Service (MLS).
Case in point: When builders struggle to sell homes, one of their common options they’ve used as opposed to reducing the price, is to increase the Realtor commission. This not only creates an extra incentive for agents to get the word out, but it also protects values for the homeowner who recently purchased in the development.
With a resale home, make sure that your agent has a track record of selling their listings with outside offices. Unfortunately, there are always greedy agents who only care about their commission — not the best offer on your home. In my opinion, an agent who’s always looking out for their seller’s best interests doesn’t “double end”, or sell their listings without another agent more than 10% of the time.
We can go on and on, but you get the point. Homebuilders have been selling homes for more money for decades. Why not copy some of their techniques?
Ask Edwin what he would do to make your home appeal more to buyers at 714-501-2732.
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Homeowners who purchased a home a few years ago and are looking to upgrade have the option to stay in their own backyard. While many would love to escape to a beach community, there are several advantages to staying put within your current Placentia Yorba School district.
With many homeowners getting excited with an increase in their home’s value and improving economy, many are thinking of selling in order to “move up” into a larger home. In a prior blog, I mentioned the options a homeowner has for selling in order to buy.
Here are a few of my picks for someone currently living in less than 2,600 square feet in living space looking to expand to luxury home over 3,000 square feet in Yorba Linda, Brea, and Placentia.
1. East Lake Village – with homes built in the late 80s to early 2000’s, these ageless designs by S&S (now named Shapell Homes) can be either a rare single story home or all the way up to a 2 story with 4,000 square feet in the heart of Yorba Linda. Since many of the homes were built in the early 90’s, lot sizes are generous and there are plenty of greenbelt spaces to create an open feel of the community. There are countless amenities within the association such as a banquet room, full exercise room, private lake, tennis courts, and several pools. The 57 freeway is about 15 minutes away while the 91 is a 10 minute drive.
Schools: Glenknoll Elementary, Benardo Yorba Middle, Esperanza High (Southeast of Village Center & Paseo De Las Palomas)
2. Alta Vista South – With designs by HQT homes built in 2002 and Lyon homes in 1999, 2 communities within this area called Torrey Pines and Ironwood have floorplans over 3,000 square feet around the Alta Vista Country Club. HOA amenities include a pool and spa.
3. Bel Maison – located at the front of the Placentia Community “Alta Vista South”, these French-themed, tudor styled homes have the most unique curb appeal in the area. Floorplans range from 2,750 square feet to 3,200 square feet. A few lots on UnderHill Drive look upon the private Alta Vista Country Club and several streets end in a less traveled cul-de-sac.
Schools: Tynes Elementary, Kraemer Middle, Valencia High
4. Vista Del Verde – this high end community surrounds Yorba Linda’s Black Gold Golf course and is dominated by luxurious designs by famous luxury homebuilder Toll Brothers. With their vintage double sweeping staircases and impressive exteriors, these designs seem to command some of the highest values per square foot. Other possibilities include “Greenbriar” by MBK homes, “Corte Bella” by Shapell Homes, and other communities up to 5,100 square feet in living space with many view lots to Catalina.
Schools: Lakeview Elementary, Yorba Linda Middle, El Dorado High
5. Rose Crest – with floorplans up to 3,500 square feet, these modernized designs by Shapell Homes were built in 2005 and is walking distance from the Placentia Sports Complex. Compared to other newer homes in the area, lots sizes are generous.
Schools: Tynes Elementary, Kraemer Middle, Valencia High
6. Kerrigan Ranch – This high end community features a county-like setting with modern designs built in 2005. Directly across the street from Yorba Linda High school, the hilly landscape allows many lots to either be private or have a panoramic view toward Catalina. This is arguably Yorba Linda’s premiere tract home community.
Schools: Mabel Paine Elementary, Yorba Linda Middle, Yorba Linda High
7. Hidden Hills – known for the neighborhood with the “big white house on top of the hill”, this neighborhood contains several custom estates with the best views of North Orange County.
Schools: Travis Elementary, Travis Middle, Yorba Linda High
8. Parkhurst – as one of the premier luxury gated communities of North Orange County, Parkhurst offers all the amenities of a luxury resort while having several lots with views of the Tri-City Park lake. HOA amenities include large greenbelt spaces along walking trails, playgrounds, 2 pool areas with junior olympic-sized pool, spa, volleyball court, basketball courts, and club house.
These homes were built in 2001 and have floorplans that range from 2,800 to 4,600 square feet. All designs offer open spaces where the living room or foyer has high ceilings to the 2nd level roof line. Lot sizes are generous for a newer home. The community actually belongs to the City of Fullerton while residing within the Placentia Yorba School District.
Schools: Golden Elementary, Tuffree Middle, El Dorado High
Outside of the School District
A. Blackstone in Brea – featuring numerous communities with designs over 3,000 square feet, Standard Pacific and Shea Homes currently have 3 brand new communities for sale: Coral Ridge, Emerald Heights, and Montserrat. The communities built a year ago are Jade and Castillian. My prior blog has additional information on those communities.
B. Olinda Ranch – several builders such as Christopher Homes, Van Daele, and KB Homes have designs over 3,000 square feet. This community has several greenbelt spaces, walking trails, nearby museum, and private park with low HOA dues. Most homes were built around 2001.
C. The Presidential Collection – this newer built gated neighborhood consists of homes from 3,700 to 4,300 square feet within a prime area of Fullerton. Within a short walk is Fullerton’s famous “Fullerton Loop” desired by active individuals who enjoy hiking, jogging, and biking. Historic Downtown Fullerton is only minutes away. These 2002/03 constructed designs have many of the modern amenities and desired layouts.
For more information regarding upcoming listings and current pricing within these neighborhoods, you can call Edwin at 714-501-2732.
In a prior blog, I explained that if you’re a homeowner waiting for home values to increase, it will actually cost you more money. Especially in the example where a homeowner is looking to “move up” into a larger home, the gap can widen significantly between your home and your replacement home. Additionally, loan costs, commissions, and property taxes will be higher.
Of course, the ultra-conservative, zero risk-type of person will always find a reason to stay put and never sell. It’s a miracle they aren’t a lifetime renter. For the others who want to upgrade their quality of life, don’t worry — you still have plenty of options.
For the homeowner who wants to transition immediately into their replacement residence, they can choose from the following:
Buy & Sell “non contingent” – in most cases, the homeowner will first place their home on the market and close escrow in order to use the proceeds for their upleg home. The best terms and price are possible because you aren’t placing any restrictions on your sale or your purchase. This will require moving twice: once into a temporary residence until you find your replacement home then moving again once you close escrow on your purchase. The limbo period with this option will be the longest, but you don’t have the worry of having a deadline to purchase.
Sell with a rentback – in this option, you’d sell to a buyer who’s willing to let you rent from them until you close escrow on your replacement home. The lease period is usually capped at 30 days due to lending standards (unless you find a cash buyer). As you can imagine, it can become quite stressful if you can’t find a replacement home when your home is in escrow. Once your home is under contract, you can’t back out unless the buyer allows it.
Sell contingent upon your purchase – especially for the homeowner that’s concerned most about not finding a suitable replacement home, you can place restrictions on your sale. In this option, you’d place your home on the market and sell to a buyer that’s willing to cooperate with your transition. This will likely cost you money as it usually will eliminate the most motivated buyers. If you can’t find a replacement home, you can cancel with your contingency.
For the homeowner who doesn’t need to sell in order to buy, they have the option of completing their purchase then having the option to make their existing home a rental property or sell at a later time. It’s very important that you know upfront what commitment you’re making.
For you risk-takers, I have a fourth sexier option: Time the market. You would do something everyone advises against: predict when home prices have peaked and cash out your equity by selling. Then, you watch on the sidelines (while renting) until you feel selection has improved or prices have fallen enough. In most cases, the proceeds would be protected against capital gains due to primary homeowner exemptions.
This will require a thorough understanding of the market. Don’t rely on what the public and media thinks — they’re always telling you to do the opposite anyway (i.e. – they said 2005 was a good time to buy and 2008 was a “bad” market). Look at the following indicators:
Supply & demand: “Months of supply” – a metric that uses prior demand into today’s supply number. In Southern California, 4-5 months of inventory is classified as a “par” market. Anything higher is a buyer’s market and lower than 4 months is seller’s market. A Realtor should know this number in their local market.
% of distressed inventory – even when supply will indicate a seller’s or buyer’s market, it shouldn’t be used alone to determine if prices will rise or drop. Since maximum price isn’t the main priority of a distressed property, having over 40% of short sales and REOs can wreak havoc on values due to condition, lender’s lack of attention, and higher fraud rate over traditional equity sales. Two good sources of data are ForeclosureRadar.com and RealtyTrac.com.
Government intervention and lawsuits – recent tinkering of the market through foreclosure moratoriums, first time homebuyer incentives, and large-scale settlements are some of the recent ways the home supply was either severely limited or demand was increased.
Even with this knowledge, you must know that you will be off with your prediction. A realistic goal is to be within 12 months of the peak.
I’ve met a small handful of homeowners who were able to pull off this feat. One of them was an Engineer named John who thought 2005 was the best time to cash out his equity and it turned out to be a good decision. He rented for 2 years and re-entered the market in early 2008 as foreclosures and inventory levels were rising. While his timing on the purchase side was off by a few years, the difference in saving compared to if he simply “traded equity” in 2005 was over $150,000. Additionally, he had absolute control of terms and selection when placing offers.
As you can imagine, if you sell at the wrong time while prices continue to rise, you can become a renter indefinitely. This isn’t the end of the world. At some point, when affordability becomes unattainable to the public, the advantages to home ownership can be reduced significantly due to a widened gap between would-be mortgage payments and rent payments.
If you’re like many, you’ve been watching the Real Estate market on the sidelines and decide it’s time to make a move. What to do with your existing home? Should you keep it as an investment property? Or do you cash out the equity and use it toward your down payment? Maybe use the equity toward another type of investment?
When deciding to move from an existing home, you need to classify yourself in one of two categories:
A homeowner who must sell in order to buy
A homeowner who can qualify to own an additional property
In order to find out which category you belong to, you’ll need the help of a loan officer and Realtor. The Realtor will determine your home’s value and potential rent from today’s market conditions. After those numbers are determined, a loan officer can determine if your credit, income, and other factors will allow you purchase an additional home.
Without getting into too many details, some situations allow you to use potential rent as part of your income when your home has enough equity. Your income and existing debts will factor into your “debt-to-income” ratio.
If the loan officer determines that you can’t qualify for an additional property without selling your existing home, the analysis ends here. You need to sell before thinking of purchasing.
If the loan officer thinks you can qualify, this brings to the table further analysis. Not all properties should be held as a rental.
Most Real Estate investors take into account 3 factors when evaluating a property:
Appreciation & rent improvement potential – does the neighborhood or local area have an upside that will outpace surrounding markets? Some examples include a new school, shopping center, rejuvenation or updating projects by government, influx of affluent neighbors, etc. Are there improvements that can be made to the home that can increase rent or value? Especially in the case where a property has 2 bedrooms or less, adding an additional bedroom can make rent and value increase significantly.
Cash flow – I know several homeowners who have neglected this aspect of an investment property. In one instance, I remember a homeowner who had a negative of $2,000 per month and ended up selling when his home’s value increased by $50,000 in 3 years. He actually thought he “made money” when the truth was that he LOST money from -$72,000 in cash flow. Another common mistake is when a homeowner incorrectly calculates their expenses with only their mortgage and property taxes. Don’t forget about maintenance, your time, repairs, income taxes, and time the home will be vacant. Some landlords simply deduct 20% from their income to estimate their “NOI”, or Net Operating Income.
Acquisition price – Buying a home low and below market value is the key to everything. You probably realize that it has a direct effect on #2 above. Since you already own the home in this situation, it’s something to be mindful about on your next rental.
It would be a good idea to sit down with someone who has investing experience. Buy them lunch or have a discussion over a cup of coffee. Their advise can go a long way. I have a friend who keeps things simple without anything fancy: “if it doesn’t have positive cash flow, it’s not worth it to me.” In contrast, I have a co-worker that has detailed spreadsheets where it looks like the stuff Fidelity would give you when you invest in one of their mutual funds. I personally use Dolf De Roos’ Real Estate software called “REAP”: http://dolfderoos.com/software/
If you’re a fortunate homeowner who has equity in this market, you might be considering whether you should upgrade now or wait until prices get better so you can sell your house for more.
First, we need to determine which transaction you are most concerned about: Selling or buying? Are you concerned that your house will not sell? Or are you concerned that you won’t find a home that suits your needs?
You have to keep in mind that if you’re selling in order to buy, you’re trading equity. In most cases, the gap between the sale of your home and your purchase will move up and down with the market.
When selling in order to buy low:
Your property taxes will be lower
Monthly payments will be lower
More selection (purchasing in a buyer’s market)
When selling high and buying high:
buying in a “seller’s market” – possibly at peak
higher property taxes
less selection – more “move-up” buyers to compete with
Higher closing costs
With these factors in mind, most would agree that buying low and selling low is a homeowner’s best option.
Here are the (3) most common options that homewoners have for moving:
Leaseback / Rentback
When you move twice, you sell your house without any contingencies and move into temporary housing (apartment, rental, stay with relatives, etc) while looking for a replacement property without the stress of a deadline. Since there aren’t any restrictions with the sale of your home, all buyers are eligible, giving you the best chance of selling at the highest price. When it’s time to purchase, you will be buying “non contingent,” making you eligible to purchase any listing: equity sales, bank owned, or short sale. This would give you the best chance of purchasing as low as possible. You get the best of both worlds.
Leaseback / Rent back
When you sell with rent back, it saves you the hassle of finding temporary housing at the expense of possibly limiting the sale of your home. With this option, you sell and buy “non contingent”, and your buyer leases the property back to you for a period of time (typicall 1 month). This option limits your buyer pool because some buyers may not like the terms of a leaseback and/or would like to move into their home as soon as possible.
When selling and/or buying contingent, you enter a contract that is dependent on you finding and buying a replacement property. With this option, the sale of your home cannot be completed until you find a replacement property and you remove your contingency. In essence, the buyer of your home cannot complete their purchase until you give them permission. This may have an impact on your sale price and creates other complexities: When will the buyer conduct their inspection and appraisal? Will you refund any costs to the buyer if you cancel the contract? Furthermore, if you decide to buy “contingent upon sale” of your home, it will eliminate most listing types that you can offer on. Bank Owned homes will not accept a contingent offer.
Tax deferred exchanges (1031) will be covered in an upcoming blog. For an estimate on your home’s value and how this can apply to your situation, call Edwin at 714-501-2732.