The New $7,500 Tax Credit

Just what is the new first-time buyer $7,500 tax credit, and how beneficial is it? It is part of the Housing and Economic Recovery Act of 2008, and was included to provide benefit to the consumer to offset the appearance of the bill as being nothing but a bail-out for financial institutions. Calling it a tax credit is also something of a misnomer, because it is in actuality an interest free 15 year loan. This is not to say that it has no benefit to those who may be eligible for it. In fact, the benefits can be significant, and those who take advantage of it have a built-in repayment plan.

A summary of the tax credit:

• The credit is available to first time home buyers (single family residences, condos and coops). By definition, a first time home buyer is anyone who has not owned an interest in a home within the three years preceding the purchase of a qualifying home.
• The income limit for eligibility is no more than $75,000 (individuals) or $150,000 (married couples filing jointly).
• The amount of the credit and eligibility for it is 10% of the purchase price of a home bought and closed between April 9, 2008, and July 1, 2009.
• The maximum credit is $7,500.
  
• The credit is not automatic. The credit will need to be claimed at tax time in the year following the purchase (April 2009 and April 2010).
• The credit (loan) will need to be repaid yearly at tax time at a rate of $500 per year (or 6.67% of the actual), or repaid in full (the out-standing balance) upon sale of the residence used to qualify for the credit.

One last feature that should be clarified is that the amount of the credit will be applied first to the tax liability of the claimant. Anyone claiming the credit who owes taxes above what they paid in will therefore reduce the amount due when they file their taxes or receive only that part of the credit above their taxes due. On the other hand, tax payers who are due a refund on over-payment of their taxes will receive the full amount of the credit for which they qualify.

Before jumping into this and claiming the tax credit, everyone should crunch their own numbers. The potential benefits for most appear to be worth taking the credit though. In example, consider a scenario wherein a qualifying couple with a child bought their first home for $120,000. The couple received a tax refund of $1,200 in the year before they bought their home and expects at the same in the coming year. They also maintain credit card debt balance of $8,000 at 12% interest, which they are repaying at the minimum each month. Without crunching the numbers, it should be pretty clear that paying off the credit card debt with the $8,700 refund check will benefit them significantly.

Remember, the tax credit is an interest-free loan over 15 years. Assuming that they can expect similar refunds during the 15 years during which they must repay the "credit," the repayment should not create additional problems. Moreover, they are now home owners—and the tax benefits of home ownership will afford them with an even greater reduction in their tax liability over the years to come.

Everyone's finances are not likely to fit this scenario, so the decision to claim the tax credit needs to be analyzed individually. Take the same young family in example, and assume that they did not maintain so large a credit card debt. Since their total debt was relatively low and manageable, they decide to take the tax credit and invest the $8,700 refund check as seed money in a college fund for their child.

There are scenarios in which taking the tax credit could become a liability. Make no mistake about that. Self employed individuals who routinely under estimate their taxes and must pay additional taxes each year will need to plan for the additional repayment of the tax credit. But the fact remains that money has value over time, and the majority of people who qualify for the new tax credit are likely to realize significant returns in an interest free loan over the next 15 years.

Buyer Agency: Myths and Misconceptions

The number of buyers who do not understand buyer agency is truly shocking. So many believe that forming an agency relationship will cost them more, or that they can somehow save money or do a better job of finding a home or negotiating price without an agent. These erroneous assumptions cannot be more out of touch with reality.

In example, I recently responded to a post on Trulia.com which asked, "I live in Texas and I am trying to buy a house in San Antonio. If I don't use an agent and do the negotiating and everything by myself would I be able to keep the 3% that would go to my realtor?" The answer is: No, and you would possibly even pay more. The seller is committed to pay the full commission to the broker regardless of whether the buyer is represented or not—and you would not be represented. You cannot therefore use your lack of representation to leverage a lower cost.

My response to questions like, "How can you make an offer on a house without an Agent?" is typically a curt recommendation that such a question is a sure indicator that the person who posted it needs an agent. This is especially true if the property is listed by an agency. Without an agent representing them, they will need to submit their offer through the listing agency—which represents the seller. Experienced agents love writing offers for unrepresented buyers.

Another buyer asked a question that allows for an example of how buyer's agency should work. The question was, "DOES THE BUYER OR SELLER OR BOTH PAY THE REALTOR(S) FEES?" My reply was, "If they are willing to do so, buyers sometimes pay part of a commission. This could happen if a buyer had an agency agreement with a buyer's agent. Let's say that the buyer agreed that their agent will earn a 3% commission, and they wanted to buy a home that had been listed for sale with a 5% commission, split evenly between the listing agency and the buyer's agency. It is possible then that the buyer would need to pay their agent 1/2%, but not necessarily. Every blank in a contact provides an opportunity to negotiate.

"A good buyer's agent will point this out to their buyer—it's part of representing the buyer's best interests. Just because the seller and their agency is offering 2 1/2 % to the buyer's agent does not mean that the buyer cannot insist (in the contract) that their agent be paid 3%. This puts the onus of taking a reduced commission on the agent that agreed to take a reduced commission in the first place! If the listing agent is doing their duty to serve their client's best interests, they will accept a 2% commission. The change in the contract does not affect the seller's bottom line, and should not be a factor in their consideration of the offer.

"I will not take less than I think my services are worth, but my buyers do not find themselves in the position of having to pay a commission, ever. Buyers are faced with enough expenses—I don't even charge gas money."

Most buyers don't even perceive the simple fact that they will spend countless hours driving around neighborhoods and calling on properties that they cannot afford, or which do not otherwise meet their needs. They call us about properties every day, asking "how much," when they should be asking to meet with us, and retaining us to find the right home—and to help them get their best price and terms. The unlucky ones finally hit on a property that they think they can afford, only to find that they cannot—or to have a listing agent squeeze every penny from them that they can.

The simple facts are that a buyer cannot hope to save money by going it alone, nor do the majority of buyers' agents charge their buyers a fee. Buyers going it alone are like someone who is trying to scale an 8 foot wall a few feet away from an extension ladder.

Caveat Emptor: Beware of FSBOs

People who sell their homes by owner (FSBOs) should likely not be stereotyped as being greedy or dishonest any more than real estate professionals should. There are some cautions about dealing with a FSBO that home buyers should be aware of though. There are also a few differences between the two that make dealing with a FSBO through a buyer's agent much less risky than dealing with a FSBO alone.

Unlike agents, FSBOs have neither a strict set of laws and a regulatory agency overseeing their actions, nor a code of ethics. There certainly are laws that affect their conduct, but most of them relate to civil remedies available to an injured buyer that are far less certain to result in timely recompense if ruled in the buyer's favor.

Caveat #1

FSBOs are motivated by one consideration, avoiding paying a broker's commission. Some will pass this on to a buyer, or at least offer to do so, but most will draw the line there. That's not a bad deal for a buyer, but it's not a good deal either. There is no guarantee that the seller has priced the property according to its value—or even knows what that value may be.

On the other hand, you may find one of that small percentage of FSBOs who so undervalued their home that they they contributed to the lion's share of the statistical finding that FSBOs net less on the average than they would if they listed with a broker. Don't count on it though.

Caveat #2

Many FSBOs are investors. Some may be savvy investors, while others may not. A savvy investor will often cut the best deal, though not necessarily the best deal you could have gotten. Amateur investors will usually make the hardest bargains.

Caveat #3

Some FSBOs have contract forms ready for you to fill out, and will refer you to a lender who will process your loan. Do not let the seller fill in the form. For that matter, don't use the form until you have it checked out by your attorney, and go out and shop for your own financing. The FSBO may have had their attorney write up the form in a way that serves their interests best, and they almost certainly did not go to any great trouble to find the best financing for you.

Caveat #4

Most FSBOs do not even know about the requirement for the property condition and led-based paint addenda for most transactions today. Ask them for a copy of the property condition addendum before you even look at the property. If they have one, use it as a guide to do your own close inspection of the property—and note whether they appear to have been honest. If they do not provide you with one, ask them to do so before you go any further. The led-based paint addendum is necessary only for houses built before 1976.

BTW—This will create the impression that you know what you are doing.

Caveat #5

Some FSBOs will question you in an attempt to get some information that may give them an advantage in the negotiations, including haggling verbally with you over terms. Excuse yourself for not engaging in business before you have made a decision, and avoid talking about the property at all until you are ready to make an offer. Then make your offer in writing, and insist that the seller respond with a written counter offer if they try to engage you in spoken argument about the merits of your offer.

Caveat #6

There are many other matters you should be aware of that are general to buying any home. Buyer agents know these and can inform you about a property's value before you make an offer and guide you through the process. They are not only obliged to do so, but they want your referral.

Caveat Vendor

Moreover, most FSBOs will deal with a buyer's agent and pay a satisfactory commission. The advantage to a buyer in this is that the agent will represent them, not the seller. That fact is also the seller's disadvantage.

If you discount expertise, motive, more than anything else, is the only real difference between FSBOs and agents that should matter to a buyer. As long as an agent treats all parties to a transaction fairly and honestly, a buyer's interests will be best served by having buyer representation. The FSBO should however beware. Buyers who are guided by their agents are not prevented from taking fair advantage of a seller.

Loss Mitigation: Take Action Now to Avoid Foreclosure

Figuratively speaking, too many home owners wait on the tracks for the foreclosure freight train to run them over. In every instance—yes, every instance—foreclosure can be avoided. What's more, there's a chance that the right action at the right time can save their credit rating. Very often, home owners facing potential foreclosure can even avoid the loss of their home as well! They simply need to take action when the time is right.

Everyone instinctively knows when the time is right, but not everyone knows what to do or how to do it—and too many let the right time go by without taking action. The time to take action is when you receive the first notice that your 6% Adjustable Rate Mortgage (ARM) is now an 11% ARM, or when you wake up in the hospital and discover that you no longer have the ability to earn an income adequate to meet your debts, including your mortgage. For others, the death of an under-insured income earner, or suddenly discovering that your medical expenses are about to erase your savings and ability to meet your debts. What ever the tragic circumstance, you know at that point that you are facing trouble, and you can hear the freight train bearing down on you.

Take Early Action

Now is the time to contact your mortgage lender—before you default on your payments. If you think it is too embarrassing to admit financial trouble, imagine how much more embarrassing it will be when you go into foreclosure. If you are concerned that your lender will begin foreclosure consequent to your contact, get that out of your mind! Unless or until you go into default, they are powerless to take action. What's more, they will stand on their head to help you avoid losing your home if it is at all possible for several reasons.

Not only is foreclosure a costly process for lenders, but carrying foreclosed property on their books requires that they keep five times the loan value of forelosed properties in reserve—it prevents them from doing the very business from which they profit! Recent legislation and incentives offered by the department of Housing and Urban Development (HUD), secondary mortgage market participants like the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are helping lenders avoid foreclosure and bear up to what would otherwise have left it as their only alternative. The Federal Reserve System (Fed) has also kicked in several times by lowering rates for lenders, and most recently offered short term loans against Treasury Bills, and allowed that lenders can use their inventory of foreclosures as collateral!

HUD outlines a number of loss mitigation options available to home owners, and actions to take before the crisis becomes unmanageable, including information about the availability of a HUD housing counselor. Military personnel and their spouses, including eligible reservists and guardsmen, can also take advantage of the Servicemembers Civil Relief Act of 2003.

The next step toward saving your home and credit rating is to contact lenders who are carrying unsecured debt,—credit card accounts, personal lines of credit etc.,—and work out a plan to reduce your monthly debt service. If at all possible, stop using these beyond your ability to pay off any additional debt as well. If medical expenses are part of the hardship, make arrangements to pay against the debt over time. As a last resort, payment on these debts can be temporarily suspended without significant long-term damage to your credit rating. Yes, doing this will affect a borrower's credit rating, but those with otherwise good to excellent credit ratings will be able to establish new credit with little or no repercussions when the crisis has passed and the need arises.

If taking early action has gotten a home owners out of harm's way, great! If not, or if the home owners waited too long (has received two late payment notices from the mortgage lender), there may still be time and options available. Note, once the home owners receive the foreclosure notice, it is likely too late. At this point an agreement with the lender to accept a deed-in-lieu of foreclosure may be the only option. It saves the lender the time and expense of going through the foreclosure process, and relieves the home owner from the debt. It will likely not save their credit rating though. Even so, it is far less damaging to a credit rating than a foreclosure.

Additionally, lenders would like to assure that the defaulting borrowers do not damage the property prior to vacating it, and offer a "Cash for Keys" stipend of $1,000 (VA) to $2,000 to induce those who fail to vacate the property after the first notice to quit. This is available as part of the deed-in-lieu of foreclosure agreement, but must be applied against any outstanding second mortgages or other liens on the property if such additional encumbrances exists.

What Then?

Even after a home owners defaults on one or two payments or learns, after all they have done, that their debt is not manageable—and the freight train's headlight is on them—they can still get off the tracks before they are hit. They have less time and fewer options at this point, but all is not yet lost. They may still be able to work out one of the loss mitigation options mentioned above, or, if needed, take advantage of a Pre-foreclosure Sale if they have the equity to cover the mortgage debt and settlement costs, or a Short-Sale if they do not. Note that HUD uses the term Pre-foreclosure Sale as a synonym for Short-Sale.

Short-sales refer to the sale of a property that will net less that the amount owed on the mortgage. In such sales, banks will not only accept less than they are owed, but will absorb the settlement costs. While the sellers will walk away from the closing of the sale with nothing, they will be free of the mortgage debt and will have had to pay nothing out-of-pocket to close the sale.

Short-sales have been available for a long time, but the public is becoming increasingly aware of them subsequent to the sub-prime lending fisco that led to the mortgage market melt-down. In the past, this option provided only a way to get out of an unmanageable mortgage debt, while incurring srious damage to their credit rating. Now, lenders are not only willing and able to forgive part of the mortgage debt, but willing not to report the deficiency to the credit reporting agencies! This is not a certainty though, and the sooner home owners act, the more likely they will salvage their credit rating. A little pleading and persuasion will likely be necessary to convince the lender not to report the deficiency, and it will be best to get some written guarantee to that effect.

If the lender will not agree not to report the deficiency to the credit reporting agencies, worse things could happen. The home owners could decide to allow the property to go into foreclosure, and thereby thoroughly ruin their credit rating.

As a side-line, it is worth noting here that the Mortgage Forgiveness Debt Relief Act of 2007 now also excludes the foregiven debt from taxation. In the past, it had been counted as regular income!

The requirements to take advantage of a short-sale have already been covered, but recapping them at this point may help clarify just what they are:

• A legitimate hardship preventing the home owners from meeting their debt structure.
• Falling behind on payments.
• Too little value (equity) to sell without a loss.
  

Sellers who meet the requirements for a short-sale face different proceedural requirements for different kinds of loans. Conventional and Veterans Administration (VA) loans have the simplest proceedures, and those for FHA loans are only slightly more involved.

The ABCs of Short-Sales

Regardless of the type of loan, the first step in the short-sale process is to list the home for sale through an agent for a real estate brokerage that is a REALTOR^® member of the local Multiple Listing Service (MLS). Lenders know the business, and know that a professional is not only more likely to sell the property within the allotted time, but to sell at the best price the market will bear. Selling by owner (FSBO) is not an option. Typically, the listing period a lender will allow will be between 60 and 120 days.

An agent who is associated with one of the larger, more successful firms in the area will likely have access to help from short-sale experts who are either trained or experienced enough to assist the agent and seller. It's not a terribly complex process, so direct experience with it should not be a major concern. There are plenty of agents with experience who have not done it entirely right yet.

If the sellers have already been in touch with their lender, they will likely have already filled out a form providing the necessary financial information for their lender. If not, the agent should have a form available for this purpose, or the seller will need to meet with the lender to provide this information. Though many of these forms authorize the release of information to the agent, it is best to obtain a separate authorization to release information which names the agent, brokerage and title company officers who will be handling the transaction.

To recap this section, with the exception of Federal Housing Administration (FHA) loans, these three things constitute the short-sale package that the pearties in the transaction will need: 1) A listing agreement with an MLS member REALTOR^®; 2) The borrower's financial statement; and 3) An authorization for the lender to release financial information.

FHA Short-Sales

In addition to the points made in "The ABCs of Short-Sales" above, FHA short-sales require that the short-sales package include an FHA approved appraisal that demonstrates that the proposed sales price meets certain ratios, and that the seller first meet with an HUD approved housing counselor. The appraisal will provide an "as is appraised value" that must be at least 63% of the total of the outstanding principal on the mortgage note, plus, delinquent interest, plus any partial claim payoff amount, if applicable. It must also be at least 82% of the contract sales price minus allowable PFS expenses and partial claim junior lien amount if applicable.

HUD short-sale listing agreements are limited to 90 days. In addition to those items mentioned in the standard short-sale package, HUD will require: 4) An as is appraisal by an FHA appraiser; 5) A completed form HUD-90038 to show that the seller met with an HUD approved housing counselor; 6) A completed Application to Participate Pre-foreclosure Sale form HUD-90036. On approval of the short-sale, HUD will issue an Approval to Participate . . . form HUD-90045.

PDF file copies of the HUD forms mentioned above may be downloaded from the HUD Web site. Adobe® Reader or another PDF application will be necessary to open these documents.

When You Hear that Train a Comin'

Don't wait for a train to roll over you. Often, taking the first step as far in advance of absolute disaster as circumstances permit can save home owners significant additional grief to that which cruel fortune has dropped on them. Whether you just over-extended your credit, or personal disaster befell you, quick, decisive and informed action can save much of the grief that will almost certainly follow in box-car loads if you wait for it.

A Seller's Biggest Mistake

Selecting the wrong agent is likely the biggest mistake a seller can make. The wrong agent can cost a seller thousands of dollars in net proceeds and needless months of frustration. Both are almost always related to a seller's lack of familiarity with the market, and poor pricing practices on the part of the agent.

While researching home values in the neighborhoods I have chosen to focus my attention on, I noticed that year after year the values for comparable homes varied by as much as an average $14 per square foot. Since the neighborhoods are tract developments, so wide a spread between top dollar and low dollar struck me as being an indication that something was wrong. None of the factors that could account for disparity in the values could possibly explain such a spread.

Not even a combination of the various factors could explain why one 3-2-2 with 1800 s.f. of living space could sell for $162,000 and another for $187,200—a difference of $25,200 or 15.556%. Even with a swimming pool and 100% brick face, which none of them had, a patio upgrade with a cover and added deck, an air-conditioner upgrade, ceiling fans, extensive landscaping, impeccable lawns, not even tile flooring, and kitchen and bath counters and top of the line fixtures on top of all of that could add so much more value. Upgrades and improvements just don't add their cost to a tract home's resale value.

Something else was afoot. Homes were appreciating at about 3% to 5% per year, but some of the higher sales prices occurred during the early months and some of the lower prices occurred during the later months. That wasn't it either. There was no way to truly gauge seller motivation, which could make a big difference—but median and average priced homes were on the market no more than about 2 to 5 weeks longer than the lowest priced over the first four of the five years I measured. The market was hot. Time and the need to sell quickly just didn't make sense. That is, not without another factor—unrealistic seller expectations.

This is not about unrealistic seller expectations though, because the higher priced listings sold, albeit they were on the market from 87 to as long as 320 days. This is about the difference that selecting the right agent can make. Even the best agent can seldom rein-in the expectations of a seller with an inflated notion of their home's values, but pricing a home for a quick sale does not require that it be placed on the market below market value. A home can sell quickly, and net the seller thousands more if it is properly priced and the right strategy is used. This is especially true when selling a home in neighborhoods where the median priced home is representative of the median price in the market. The homes in such a neighborhood will likely include properties being sought after by everyone from first-time buyers and empty nesters to families of four who are buying their second, third and n^th home.

There' a cliché in the real estate business that may explain why so many agents are so unimaginative that they focus only on price to make a quick sale. It goes something to the effect that "Sellers want the highest price, and buyers want the lowest price." This is arguably not always true for sellers, and it misses the distinction between price and cost that is so important for buyers. This is especially true for first-time buyers, but what other buyer does not want to get into a new home at the lowest cost, price not withstanding?

If an agent does his/her homework and does a good competitive market analysis (CMA), price will not be as significant a factor for a prospective buyer if proper buyer incentives are offered as well. Why not price the home at or slightly above the median or average price, and have the seller offer the difference toward paying a stated amount of the buyers prepaids and/or closing costs?

The strategy works, and has worked time and again. Several instances of it were in the data that inspired this article, albeit they appear to have been post facto. The sole caution is that care must be exercised not to price the home above the amount for which it is likely to appraise. The CMA will tell you whether you are within limits. Just price the home below the highest comparable sold property. Just how much lower a price will depend on your estimate of what you believe it can appraise for, and your seller's need to sell and expectations.

San Antonio NEISD Redraws School Boundaries

In a measure to relieve enrollment at Ronald Reagan High School and leave room at Claudia Taylor "Lady Bird" Johnson High School for future growth on the east side of U.S. 281, the North East ISD Board of Trustees approved new attendance boundaries for Johnson High School. The decision affects students currently enrolled in Reagan and Douglas MacArthur high schools. The boundary changes go into effect at the beginning of the 2008-2009 school year.

Johnson was planned to accommodate 3,000 students, whereas Reagan was built for 2,500. Students currently attending Reagan who will be seniors in 2008-2009 will have the option to stay at Reagan, and students temporarily assigned to MacArthur to accommodate overflow will have the option of remaining at MacArthur. Aditionally, the Board is also considering an option that would allow students living in the Reagan attendance area to enroll at Johnson.

The boundary changes for Johnson include all of the current Tejeda Middle School boundary and the following neighborhoods in the Bush Middle School attendance area: Big Spring: Village At Cactus Bluff, Village In The Hills and Village On The Glen; Canyons At Stone Oak; Estates At Canyon Ridge; Saddle Mountain; Springs At Stone Oak; Villages At Stone Oak; Abbey at Stone Oak; and Champions Village Townhomes.

In cooperation with city and county governments as well as private developers, the North East ISD has invested $2 million toward the extension of Stone Oak Parkway and the installation of a traffic signal at the Johnson High School campus entrance. The plan also includes improvements to Bulverde Road.

The NEISD has made a map & details (PDF format) for the redrawn boundaries available to the public. To keep up with news about the San Antonio Area school district that serves your children, you will find regional list of links to school districts in the :Area Info" pages on MySanAntonioAssociate.com.

Where Does The San Antonio Real Estate Market Stand Entering 2008?

At the end of 2007, the San Antonio real estate market remained one of the stronger markets in the US. It was not significantly affected by the backlash from the sub-prime lending fiasco, and held true to the forecasts for population and job growth--and appreciation in home values. Forecasts for future growth and steady appreciation in housing values appear good for 2008 as well. The forecasts and news reports were however varied, and deserve closer scrutiny.

While local news reports placed appreciation rates at 6%, the Top 25 US Markets and Texas Real Estate Markets pages of Housing Predictor are in my estimation more reliable. The likely flaw in the reporting is the statistical measure used in the report, median prices. It does not account for the trend in demand for larger houses over the past several years or the subsequent response by builders to meet that demand. As these larger homes are resold, the effect will be to skew measures based solely on prices in the overall market. By my own estimate, based on sampling the sales of existing homes, appreciation rates over the past year held to 5% overall.

The Housing Predictor real estate market forecast for San Antonio places it at #21 in the top 25 appreciating markets in the US again in 2008, and up to #5 from #6 in Texas. Population growth in Texas is forecast to remain strong through 2030, and especially in San Antonio. Over the past year, other forecasts for the San Antonio market placed it from a low of 7th in the nation on HomeVestors and 6th on Forbes.com's list of best U.S. housing markets to the number one real estate investment city by NuWire Investors.

What ever the real numbers may be, home owners in San Antonio can celebrate the new year with the assurance that the general malaise in the market had little affect on their home values, and look forward to ongoing benefit from the strength of their housing market.