Buying a Second Home

If you are looking for something to invest in, a second home may be a great option. We all know that the value of real estate never goes down, right? Since we are coming up on the 10th anniversary of the start of the Great Recession, we are reminded that the value of real estate can go down, dramatically. And second home values in vacation areas usually go down first and farthest. But, we are talking about investing here so a longer-term outlook is a factor. And long term, real estate properly located is a solid investment.

Real property ownership is considered an illiquid asset so real estate investing needs to be coupled with other reasoned commitments. Unlike stocks, bonds or bitcoins, there are no apps you can download that allow you to move in, out or around your investment. You need to have compelling reasons to invest in a second home other than a place to put your money where it can grow. Reasons like:

  • I like to vacation in the area where the home is located.
  • I wouldn’t mind eventually moving there later as my life style changes.
  • If I had a vacation home by the sea I might see my grown children more often.
  • I live in town so a home at the ocean or in the mountains would be a nice get-a-way when I need that.
  • I’m really quite handy and I’m always looking for something to do.

It has been suggested that the sweet spot for a second home purchase is when folks are in their fifties. The kids are through school, managing their college loans well enough and pretty certain not to be moving back home, the mortgage on the house is paid off, you have no desire to own a boat and the Jones’s just bought a place on the Cape.

Once you have convinced yourself with the help of a spouse and other family members that a property purchase is the right move, and your financial advisor hasn’t been able to talk you out of it, you can move to the next hurdle; how to pay for it. Banks are happy to lend on a second home. Be forewarned, they usually require higher down payments and charge higher interest rates on those loans. A home equity loan on the big house is cheaper and borrowing from yourself using a line of credit on your investment portfolio, cheaper still. Projecting an income stream from the property will work with some lenders to help make a mortgage deal.

Because we are talking investment, there needs to be fail safe mechanisms built into the ownership of a second home. After funding the purchase/mortgage, the first analysis to consider is operating expenses. Schedule what you think you will need, then add a factor. You have taxes, insurance, utilities, maintenance; everything the big house costs and a little more because you will be tending to the property remotely and concerned about security and broken water pipes. If you plan on using the place less than 14 days during the year, expenses become deductible, though property taxes and loan interest are capped under the new “Tax Cuts and Jobs Act.”

Not a bad idea to have six months of reserved cash on hand for the bad times. And even though you may be intending to use the place year-round, think about a mid-course correction and turning the property into leased housing. Know the market for rental housing in the area and be ready to lease the home under a worst-case scenario.

I’ve saved the best advice for last. Don’t even think about purchasing a second home without the help of a Resident Expert(sm). Even if you are considering a purchase by the ocean, on a lake or in the mountains, your Resident Expert(sm) has connections everywhere and can make a referral to the best real estate agents and companies across the country or around the world. Enjoy the adventure!

Property Assessment, Zestimates® and The Value of Your Home

The house across the street from my house is up for sale. I’m reminded of that every time I leave my driveway and I am curious to see how long it will take to sell and at what price. I’m curious not because I’m going to sell my house any time soon, but just because, well, I’m curious. It’s a rare homeowner who doesn’t regularly wonder what their home is worth.

This time of year, homeowners receive their third quarter property tax bills which contain the “actual” assessed value of their homes. Homeowners are billed during the first six months of the municipal fiscal year (July 1st through December 31st) based on the previous fiscal year’s assessed value. So how accurate is that new value?

The “actual” assessed value received in January 2018 is based on the home’s value on January 1st 2017, using sales that have occurred during the year 2016. That assessed value will remain in the public domain for the next 12 months. Meaning that the assessed value of a home in Massachusetts in December of 2018, is based on sales occurring between 24 and 36 months in the past, almost guaranteeing that the “actual” assessed value is not the correct market value.

Submitting the assessed value of a home is a required field in the multiple listing service so there is no getting away from that number even if it varies significantly from the current list price. Individual assessed values enter the public domain as a public record published by every town as required by law.

Good luck getting a local assessor to change that value; it does happen, but rarely. Local assessors are required by state law to assess property at its “full and fair” value. If you have ever talked to an assessor about the process they use, you will come away believing that they have done just that. Of course, time-frame is everything. What assessors are actually trying to do is establish a value for your home relative to your neighbor’s home and every other home in town. Most towns revalue properties every year, though they are only required to do so every three years. Year three values must be reviewed and certified by the state.

There is a dilemma in the residential real estate business that agents often are confronted with: The highest value ever published is the correct value of a property. This is almost never accurate. In an active, appreciating market, this value may be low; more often third-party providers of estimates like Zillow, Realtor.com or Redfin using proprietary algorithms, compete to provide value estimates that regularly vary from each other by tens of thousands of dollars.

These third-party providers admit that their estimates are not capable of directly taking into consideration the aesthetics of a home or its precise location and the accuracy of their estimates are off by 4 or 5 percent at best, which is not insignificant.

The estimates given for my house varies by $119,000 from one of these sites to another. So, you know where this is going. Why rely on an algorithm or some form of artificial intelligence when you can have real time intellect and the practical experience of a Resident Expertsm?

Breaking News – Unicorn Found on Spruce Street?

You may have heard that Amazon has opened brick and mortar bookstores, eleven actually, all across the country. Is Jeff Bezos hedging his bet on the original Amazon staple? Or just offering a different experience. Paul Swydan thinks he knows and will be bringing his Silver Unicorn bookstore to the Village, here in West Acton.

While the digital age has changed how we shop for items like homes and books, some underlying principles have been rediscovered. About seven or eight years ago, Google began to notice a trend in how folks were searching for goods and services, more precisely, how they were qualifying their searches.  Phrases like “near me,” “closest” and “nearby” began to appear more and more frequently,  thirty -four times more often to be precise, over that time period.

Characteristic of Google, they began to alter their algorithms to respond to consumer demand for the hyper-local intent. Not to pass up an opportunity to sell favorable search positioning in response to this newly found phenomenon, companies found themselves organically or purposefully showcased in searches like this:

While the pay per click ads provide favorable positioning on a limited basis, having original hyper-local content that Google recognizes as such, serves as the best way to get selected  among  the three or four highlighted firms.

Marketing by local companies has changed as the internet has grown. Still, some companies do not display their physical address as if admitting to being in only one place was a handicap. National brands once touted their broad reach as a positive differentiator. It is pretty much recognized by everyone now that the internet has leveled the playing field for marketing goods and services, like real estate and books, and the appeal for local connection has become a greater good.

Forces operating in the digital age do not give up easily on any challenge, satisfying the demands of the hyper local consumer is no exception. Enter Virtual Reality and the quest to create the hyper local experience remotely. Is VR truly satisfying, or merely cool? For some of us, it is hard to imagine virtual reality ever replacing actual reality, including reading books.

If you own a home, you are by definition, invested in your community and when you go to sell that home, you need to know that whoever is working for you is able to convince buyers that the community is worth investing in. Having restaurants, a coffee shop, some retail and now a bookstore in the neighborhood trends positively.

In the retail world, while local independent stores may lack a pricing advantage, survey respondents generally consider neighborhood businesses to be more trustworthy and better able to deliver on a quality experience than the national brand, big boxes. The polling company, Neilson, found that 75% of respondents to a larger, international survey, prefer to do business with firms with a nearby brand origin. And if you look, you’ll find that it’s Independent businesses that contribute more to the economy from their support of non-profits as well as enlisting other local businesses for its day-to-day needs like print services and marketing for example.

The continued interest in Acton Real Estate as a community based independent company by hyper-local consumers is of obvious importance to us. But we also hope for similar success for all of the businesses in the West Acton Village which will soon have a book store on Spruce Street. We helped Paul Swydan negotiate his lease and wish the Silver Unicorn Bookstore much hyper-local success.

Residential Real Estate Just Got a Bit More Complicated

By: Victor Normand

We have a dynamic economy in the US influenced by consumers, business interests and government actions. Housing is one of the largest sectors of the economy, comprising about 15% of our Gross Domestic Product. Sometimes changes happen at a slower pace that are easy to comprehend and manage, other times not so much. As we enter the spring market, Homeowners, Buyers and Sellers have big changes to consider.

The two significant areas of concern are accelerating home values (appreciation averaging around 6% annually) and the effects of the recently passed tax reform. Both come to bear regardless of where you might be in the housing market, even if you have no plans to change your circumstance at all.

As home values appreciate, you will feel more wealthy and tempted to spend (credit card balances are on the rise) or borrow against the new higher home value using a home equity loan (HELOC), That’s the up side for many of us. The down side comes from government actions to share in your new-found wealth by potentially increasing your local property tax bill, and taking away your ability to deduct interest paid on your HELOC on your federal taxes. And of course, your home is not the only one now worth more money; the home you may be hoping to up-size or down-size into, has also gone up in value.

Coping with rising home values is not completely new and we all know strategies to deal with that. What IS new and different is the new tax reform law. Here, the economic dynamics is very personal. In fact, it is so unusual, the IRS is requiring that everyone who receives a paycheck complete a new expanded W-9 with their employer. We will all be turning to tax accountants and lawyers to help us sort things out. Full disclosure, I am neither so take what I have to say as merely conversation starters.

On the upside, if you do not own a home, you do have a spouse and children and receive a pay check for your work, you will be getting more cash in the envelope. Of course because you do not own a home, you have nothing to appreciate and some of your tax cuts are effectively off-set.

If you have plans to move to a state with low housing costs and no income tax, the new tax law will be very good to you unlike your neighbor who stays in the big house, has no children, a HELOC and draws a big salary.

So, the big question for someone interested in buying a home, comes down to the ability to afford the monthly payments, taking into consideration debt servicing and tax benefits or lack thereof, along with the overall impact of the new tax law as it provides and diminishes various benefits. And then there is the market appreciation factor to consider and its ability to make a purchase worthwhile in the long run.

None of the above takes into consideration all of the other really good reasons for living where you live in a home you love. Hard to put a price on that. As always, you do not need to be alone as you navigate the emerging and confusing real estate landscape. Talk to a Resident Expertsm at Acton Real Estate, they are there to help you sort things out.

Challenging Group Think

By: Victor Normand

According to the Urban Dictionary, the expression “Do the math,” means to figure something out. To come to a solution or conclusion based on other facts. But my training, going back to my earliest experiences in the world of work literally means to do the math. Whenever I read an article with numbers in it, I do the math often discovering that something just doesn’t “add up” or that the verbiage doesn’t match the math. Or that the numbers have become group think detached from reality.

Tax Reform

The latest disconnect between the word on the street and the math has to do with tax reform. The group think within much of the housing community, including the National Association of REALTORS® has to do with changes to the mortgage interest deduction “eviscerating” the program and bringing home sales down and endangering the economy.

First of all, nothing yet has been turned into a bill let alone passed into law, so injecting panic into the marketplace is chilling and ill advised.

Secondly, even considering the most severe reduction from $1.0 million to $5 hundred thousand in mortgage debt, the reality is it will affect very few new homebuyers, mostly those buying big houses with big incomes. The average mortgage debt nationally is less than $225,000 and even in high cost markets, having a buyer’s tax liability rise by a few thousand dollars is not likely to be the go or no-go metric on a home purchase.

Down Payment Requirement

This still keeps coming up. Common knowledge among first time home buyers, reinforced by the printed word is that it takes 20% of the purchase price in cash to qualify for a mortgage. One of the Agents in the office asked a friend why she thought that way. Her response was that every time she went to her favorite real estate website and checked in with a mortgage calculator, the assumed number for down payment was 20%.

In actuality, according to the National Association of REALTORS®, about 60% of first-time homebuyers put down less than 6% on a home mortgage and in Massachusetts, there are programs that allow even less for qualified buyers.

Student Loan Debt

Seventy-five percent of all student loans are government loans and government loans provide for re-payment based on income which means that monthly payments are not necessarily tied to the amount of the loan but rather as low as 10% of the borrower’s income.

Lenders make loans in part based on debt to income ratios though it would be more accurate to say debt “service” to income ratios. From the lenders perspective, the amount of unsecured student loans a borrower has doesn’t matter but rather how much they pay each month on those loans.

Challenge everything; it’s a good practice and you will be surprised at how often the numbers don’t add up. It’s not a grand conspiracy; perhaps the media or word on the street picks up on a small or partial truth and runs with it because it seems to make sense and it very well may sometimes. Don’t be satisfied until you can relate the information to your personal circumstance. While the Resident Experts(sm) are not lenders or tax accountants, they know when you should be talking to one.

To Buy or to Rent, That is the Question…

By: Victor Normand

There are many considerations when trying to decide whether to buy or rent a home and there is no right answer that will suit everyone.  This blog will deal only with the economics of the decision using a realistic set of assumptions and current market conditions.  It’s a good place to start and allows for other life circumstances to inform the final decision.  Just under 65% of Americans are homeowners and a majority of those who do not own homes would like to some day, according to the National Association of Home Builders. It’s still a big part of the American Dream.

In order to conduct the analysis, a standard model was used to compare both the short term and long term costs and benefits of both owning and renting.  The specific numbers used to populate the model come from  recent sales and rentals as published in the local multiple listing service (MLS PIN). A time period of five years was chosen as the length of occupany for both the renter and the buyer. The metrics used for both the sold and rented units were:

We found 23 sales and 25 rentals that met these criteria.  The median sale price was $185,000 and the median rent was $1,550. The simple average was $177,661 and $1,541 respectively  The median was used because there are as many sales below that number as above, so extremes do not effect the selected values.

For the rental units, we assumed rental insurance of $240 per year and annual rent increases of 4% which seems to be the market for two bedroom units.

For the sold units, we assumed 5% downpayment, a 30 year mortgage interest rate of 5.0 (FHA),closing costs of $6,000, property taxes of $2,123 annually, condominium fee of $393 per month, mortgage insurance at .5% of the mortage amount, and condominium unit owners insurance of $240 annually.  Property taxes and condominium fees were also increased by 4% annually to be consistent with rent increases.

Based on these criteria, the total monthly cost to buy was $1,607 and the monthly cost to rent was $1,570.  Over a five year period of ownership, the cash paid out for the buyer would be $97,879 vs. $101,944 for the renter. So, if you are paying more than $1550 per month and you can find a nice condominium for anything less than $185,000, buying is your best economic option.

There are two real sweetners for the buy option.  Assuming a combined state and federal tax rate of 20%, a five year tax benefit of $10,752 would be realized by the homeowner.  Additionally, the homeowner would have paid down the mortgage loan by $14,361 and can expect the property to have appreciated in value by $40,081 over that time period.

As they say in investing, past performance is not necessarily an indicator of future returns.   The same holds true for real estate investing, including the purchase of a primary residence.  But unlike stocks and bonds, it’s easier to ride out the slow or down years simply because you need to have someplace to live.

So, if you’re secure in your job, have managed to save for a down payment and have a good credit score,(680 or above) a closer look at some available real estate may make sense at this time.  And as always, while formulas and rules of thumb are a good place to start, get a professional like a Resident Expertsm  to work closely with you on this journey.

Beware the Bubble

By: Victor Normand

My daughter Emily recently returned from a trip to Europe with a gift for her dad. It sits in front of me now as I write. A small brown paper bag with little holes punched on two sides so that the tulip bulbs inside can breathe, I assume they need to breathe. If this present of tulip bulbs and its long ago circumstances were described in a novel, its significance would eventually be revealed. Students of economic history may already have an idea of its place in this story.

Housing and real estate news have regularly of late, contained articles speculating on the growing signs of another housing bubble, especially in some red-hot markets. Not far from Acton, many communities closer to Boston and in Boston itself are seeing behaviors characteristic of a bubble in the making. Multiple and over-asking offers on homes are occurring with predictability, causing asking prices to rise ever higher.

The term” Bubble” dates back centuries and economic bubbles were occurring even before we had such a name for them. The term bubble derives from the prices paid for stocks that were inflated and expanded by nothing but air and are vulnerable to burst suddenly. Investors were most prone to be the victims of bursting bubbles though recent history has shown that ordinary home owners can get caught as well.

Bubbles form when the price of an asset, like a home, deviates substantially from its intrinsic value. Unfortunately, the intrinsic value is more often not revealed until after the bubble has burst. Most economists believe that bursting bubbles are a recurring feature of our modern economy. Models used to predict periods of irrational pricing rely on analyzing the expected stream of income or dividends, which is no help to buyers of single family homes.

The maddening aspect of bubble formation is that they present profit opportunities for investors who are in early and most importantly, out before the bubble bursts. These Ponzi scheme participants manage to find a chair before the music stops.

The key element for home buyers who are in the market during times of hyper price escalation is to expect a bubble. However, if the target property is in the right location, fits the buyers needs and desires and most importantly, occupancy is expected for an extended period of time, it’s right to make the buy. Home equity lost during the Great Recession of 2008-2009 has returned to most markets across the country. And here at Acton Real Estate, our “Resident Experts” have had lots of experience in all markets and can help you make those decisions.

As for the tulip bulbs Emily brought back from the Netherlands, in the Fall I will be planting them and thinking about how investors were paying a small fortune, as much as 5,500 guilders for a single bulb! That was enough to buy a small house in Amsterdam at the time. Tulip Mania of 1636-1637 is often said to be the first true economic bubble in history. As for my bulbs, I have assessed their intrinsic value based on having a loving memory of my daughter’s thoughtfulness.  Having said that, 5,500 guilders IS a lot of money!

The White House

By: Victor Normand

I have been thinking a lot about the White House lately and thought I should write a blog about it, so here it is. George Washington never lived there, the only President (the title he chose for himself over king), who did not, though the responsibility for its creation fell to him completely. Once the Constitution was adopted in 1788 and the first election of a leader was completed, it seems most of the Founding Fathers vacated the scene. As expected, and hoped for, George Washington won the election with all 69 of the electoral votes cast. He had done great things for the new country, and was about to add first time home buyer for the nation to his list of accomplishments. The task of finding the right location in the right part of the country and building a suitable home for its leader fell to him.

In 1789, no country on earth was ruled by someone who was term limited and George Washington was determined that the United States of America was to be the first. And that was not the only egalitarian distinction he was going to bring to his new charge. While he felt strongly that the President should reside in a substantial residence, he rejected city planner L’Enfant’s vision for a grand elaborate palace and settled on a house one third as large, yet grand for its time in America. Bigger homes would not be built until after the Civil War during the Gilded Age.

Capital cities in Europe were recognized for the wealth and commerce they attracted so it was not surprising that New York and Philadelphia, Americas two largest cities, competed for the chance to become the nation’s capital and home to the President, but Washington felt that it was important to locate the seat of government and the “Executive Mansion” in a more central location. He signed legislation in 1790, designating land not more than 10 miles square along the Potomac River at the Maryland/Virginia border to be the Federal City. Washington personally selected the “practical and handsome” design by James Hoban from among nine competing submissions. The cornerstone was laid in October of 1792 and Washington was present to oversee the construction of the house. He would not live to see his vision realized when the house was completed in 1800.

The White House is 185 feet long, 85 feet wide with two basements and four stories above grade for a total of 55,000 square feet of living area. It has had its share of challenges requiring upgrades including being set afire by the British in 1814, a major house fire during the Hoover administration in 1929, and near structural failure when Truman was President. The nation has never failed to respond to the needs of the White House, which only became the White House in 1901 when Theodore Roosevelt began using the nickname on his engraved stationary.

The White House cost about $3 million in today’s dollars. It was a great expense for the new nation, but Washington knew how important it was to show confidence to the world that our democracy would endure. No matter what your politics are, it is hard not to be anxious these days, but we can take some comfort in the permanence and beauty of this old house.

Student Loan (IBR) and Mortgage Qualification

Last month we discussed the very large problem of ever increasing student debt and its effects on first time home buyers. It’s clear that something needs to be done to bring higher education costs down and at the same time introduce some form of underwriting into the process of qualifying for a student loan. While there are differences between the sub-prime lending crisis and a student debt crisis, there are dangerous similarities as well.

In the meantime, there are many individuals and families who would otherwise be active in the housing marketplace but for the need to manage student debt. For good or bad, the debt is there and often perceived as an insurmountable barrier to home ownership. But there are options for those willing to seek them out.

For some, paying off college loans is paramount, and delaying home ownership and even marriage and starting a family will just have to wait. But the standard term of college loans, (10 years) is a long time to wait before the debt to income (DTI) ratios will be good enough to allow for a mortgage. Then there is the matter of a down payment and how that happens when there is no discretionary income.

The alternative for many with student debt is Income Based Repayment (IBR). This option is available to those with federal student loans, which is more than 75% of the $1.4 trillion in outstanding loans. These programs extend the repayment period for qualified borrowers to as long as 25 years. As you can imagine, the amount of interest paid under these programs relative to the original debt is substantial.

Qualifying for these programs involves calculating “discretionary income” which is the difference between adjusted gross income and 150% of the annual poverty line based on family size. Depending on when the loans were taken out, monthly payments are either 10% or 15% of that amount. A recent graduate with $60,000 of student debt who earns $40,000 annually could see their monthly payment decreased from $650 to as low as $180. There are many variables associated with IBR programs, but such decreases are not uncommon.

With discipline, someone taking advantage of an IBR could accumulate the cash needed for a down payment on a modest house or condominium. Making payments on time under an IBR program should reflect just as well on a credit score as payments under the original repayment plan. Loan underwriters and some of the Government Sponsored Enterprises (GSE’s) however do not look favorably on IBR plans.

Presently, some conventional lenders, FHA and USDA programs consider an IBR a temporary deferral and require underwriting to use the original loan terms or 1% of the loan balance, whichever is lower, to qualify a borrower. All IBR programs require annual re-certification, but they remain in place for as long as discretional income remains low and the borrower wants to participate. Fannie Mae and Freddie Mac will use IBR plans to meet their loan standards.

An added feature to some IBR programs is loan forgiveness. A graduate with high debt who is employed in a low paying profession, will have any balance remaining on their debt, forgiven at the end of the 20 or 25-year term. This may have tax consequences for the borrower, but it is something to consider. Of course, higher incomes than expected can always be used to pay down or pay off student loan debt at any time. And with home ownership, comes opportunities to use accumulated equity to pay down debt at lower rates of interest and greater tax deductibility options than student loan debt.

In conclusion, if those with student debt have a tolerance for making very high interest payments, especially during the early years of repayment, are willing to spend the time to learn more about the benefits and drawbacks of the IBR program and inclined to seek out a lender familiar with IBR, home ownership might just happen.

Decisions, Decisions, Decisions

Buying or selling a home is a big decision for most of us. Some people labor over the decision, some not so much. As an objective observer and professional real estate Agent hired to assist in either process, this path to the end is often a long and winding road and can at times, defy logical explanation.

You would like to think that there always exists a set of rational facts that when gathered together and organized properly, lead to a logical conclusion. This should hold true whether you are making the decision or helping someone else through the decision making process. It is not always easy to gather those facts. Finding a sufficient body of knowledge surrounding any given decision is not so easy but nonetheless, we all believe that those relevant pieces of information exist.

As we move forward in the process, we often come across the eureka moment when we are sure of the right decision. Suddenly, all is clear and apparent so time to move forward, right? Or have our emotions interfered with the thought process and are we about to make an irrational choice?

Is it possible to strip away emotion so we can know what is TRULY the right thing to do? Is there someone out there, some clear thinking real estate agent strong enough to tell us if we are in fact making the wrong decision because of our emotional state?

If you struggle to strip away emotion from the process, you are likely to be struggling for a long time and not getting any closer to knowing the right course of action. Emotions by definition, are powerful feelings that existed in the human brain BEFORE the ability to reason came along. Scientists have observed that reason and emotion are linked in human behavior and now believe that both functions don’t just co-exist but rather are a singular process.

Neuroscientists studying brain chemistry have found that the decision making process requires both reason and emotion to work. Now you know for certain that Dr. Spock is not of this planet……if you ever doubted that. Neuroscientist Antonio Damasio writes about a patient who underwent brain surgery to remove a tumor and lost the orbital frontal cortex which connects the rational frontal lobes with the emotional or limbic system and as a result, lost the ability to make decisions.

There is no sense trying to remove emotion from the decision making process, nor should we try less we unleash dire consequences. For clients and real estate agents alike, it’s important to recognize that the decision to buy or sell a home requires both a reasoned and emotional commitment. Even though life’s circumstance may point to a change in the size or location of a residence, it may be necessary to wait for the emotion connected to the change to catch up.

As professional real estate Agents, we commit ourselves to observing and listening to the needs and wants of clients. That process needs to include using emotional intelligence: the ability to identify and manage ones own emotions and the emotions of others. It may sound complicated, but it is after all, how we have evolved.