Although the home mortgage interest deduction is one of the most oft-cited benefits of owning a home, most taxpayers don’t take advantage of it because it requires itemizing taxes. If itemized deductions including mortgage interest paid throughout the year exceed the standard deduction, a taxpayer can take advantage of the benefit.

The benefit isn’t as great as it sounds. If you pay interest, it certainly does help to get a tax benefit, but it rarely tips the balance of the long-term financial effects of renting vs. buying a house. Don’t let the real estate industry sway your opinion about owning a house through this faulty rationale. And certainly don’t decide to take out a mortgage if you were intending to buy with cash. Since this is a deduction, your taxes are reduced by only a percentage of the interest you pay, related to your tax bracket.

The home mortgage interest deduction is currently endangered. The Obama administration and Congress are looking for ways to cut spending, and this tax deduction is on the table for consideration. Some estimated put the cost of this deduction at $100 billion each year.

Despite the cost and its overstated effects, the tax deduction has helped convince renters to become homeowners — at least among people I have spoken with. In other words, for the cost of $100 billion, the economy has seen the benefit of a growing real estate market for many years. This law has made the National Association of Realtors, a lobbying group for the real estate industry, very happy, and they are working hard to prevent the government from eliminating the tax deduction.

There are many rules that determine whether you can claim the interest you pay on your mortgage for a tax deduction. The rules help ensure that the benefit goes to home owners rather than “investors” who earn a living from flipping houses, though due to market conditions the past few years, that activity has been less of an issue.

The interest you pay for construction, purchasing or improving your primary or secondary home, whether through a mortgage, home equity loan, or home equity line of credit, qualifies. There are limitations, though. You can deduct interest paid on up to only $1,000,000 of home acquisition debt. For home equity debt, which is any loan that was taken not to construct, purchase, or improve a house, you can deduct interest paid on up to only $500,000 of this debt or the fair market value of the home, whichever is less. For taxpayers who are married, filing separately, each of these limits is reduced by half.

Normally, the total of all of your itemized deductions are limited by income, but that income limitation was lifted in 2010. It could be lifted again if the benefit is not eliminated.

Question for homeowners: Do you take the home mortgage interest deduction? Question for everyone: Should this deduction be eliminated for the sake of reducing the national budget deficit?

Photo: Wonderlane

The original version of this article, Home Mortgage Interest Deduction, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Thanks to some changes to the federal Home Affordable Refinance Program (HARP), more homeowners can qualify for government-endorsed refinancing. Previously, the program only offered refinancing options for households where the mortgage value was up to 97% through 125% of the home’s market value. This did help families who have become underwater, having more left to pay on their loans than their houses are worth. Given the continued depressed real estate market in much of the country, this hasn’t been enough. HARP 2, the expanded program, will allow a family who owes more than 125% of its home’s value to qualify for refinancing.

This program is different than the Home Affordable Modification Program (HAMP), which encourages lenders to change loans to restructure monthly payments. Each program has different requirements for qualification.

Many people are in financial trouble due to the combined effects of unemployment, increasing expenses, and accepting a mortgage that carried too much risk for a family. Some are ready to walk away from the house and the mortgage, accepting the consequences such as destroyed credit. Others want to take every option available to stay in the house and pay the mortgage in some form. Programs like HARP can now reach more people who want to keep their homes.

In order to qualify, the mortgage must be owned by Fannie Mae or Freddie Mac, the mortgage must have originated on or before May 31, 2009, you must be current with your mortgage payments, you must have had no more than one late payment in the last year, and your loan most be at least 80% of the value of the house.

In the past two years, fewer than 450,000 homeowners have taken advantage of HARP each year. With this adjustment to allow households deeper underwater to qualify, the number of families taking advantage of the program could increase to one million in each of the next two years.

HARP and HAMP are sponsored by the Department of the Treasury and the Department of Housing and Urban Development. The programs come from generally good policies designed to help homeowners when mortgage lenders have been more apt to take advantage of consumers. Just this weekend, I spoke with a firmer loan officer who left the business due to the shady ethics in the industry; her large corporation was issuing mortgages with the full knowledge that the borrowers would eventually default. There’s more to the story — the bank was selling the mortgages, so they had no inclination to worry about what would happen to the borrower in the future, and the government was subsidizing and encouraging risky mortgages, and every lender was taking advantage of this “free” money.

Nevertheless, HARP and HAMP can help correct these problems from a systemic perspective as well as a homeowner’s perspective.

Would you take advantage of the new and improved Home Affordable Modification Program?

New York Times

The original version of this article, More Homeowners Can Refinance, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Imagine you’re shopping for a new high-definition television. You’re looking around the store for the television with the best picture from a brand you trust. You pick the one you like, not the least expensive model but not the most expensive, either. You take it home, plug it in, and all the television can display is an image that’s been painted on. You open a panel in the bank, and where you expected to see electronics, there’s only crumpled-up newspapers. You were sold a dud, and didn’t know it until you had taken the “television” home. Furthermore, there’s no return policy.

No one should allow a company to sell a product whose components are drastically different than what’s advertised, particularly if the opportunity to evaluate the components doesn’t rise until after the product is sold. This is similar to the reason the Federal Housing Finance Agency is suing Bank of America, JP Morgan Chase, Goldman Sachs, Deutsche Bank, and other banks. The products were mortgage-backed securities. Banks sold these securities to investors as if they were low-risk investments. For a while, there wasn’t a problem. Eventually, the banks had trouble finding qualified borrowers to bundle into securities and extended loans to riskier home buyers.

Selling the mortgages as securities meant that every investment would be somewhat diversified across a wide selection of mortgages, and this diversification should have kept risk low, but the banks — and most likely the investors, as well — continued these transactions because everyone was profiting.

The banks were complicit in making the mortgages appear better by falsifying borrower income statements. Perhaps other parties were aware that the securities were riskier than advertised, but no company, not the investors nor the companies providing insurance for these investments, stepped in to bring attention to the risk. Every company was making too much money to stop and consider the downstream effects.

The FHFA is making the allegations and will file a suit in federal court within the next few days, according to the New York Times and the Wall Street Journal. The banking industry’s position is that a downturn in the economy caused the loss of value on mortgage-backed securities, not that mortgages offered to people who couldn’t afford them caused the downturn in the economy. Now the industry is concerned that a suit in which banks are required to buy back the investments would put the economy back on this ice.

For many years, the government (and the real estate industry and the banking industry) promoted home ownership in the United States. Owning a home became the new definition of the “American Dream.” Owning your own property is the only way to be free, and this philosophy stemmed from feudalism in England. Those who owned land ruled over others. It’s not quite the same in the United States; homeowners are still subject to their local governments, but the feeling of freedom that accompanies home ownership has persisted. Land ownership in feudalism was for the aristocracy, and unlike feudal times when there was little socioeconomic mobility, the promise of America meant that anyone could be a land owner — anyone could be in the upper class.

This drive to live a better life and increase social status led to the market finding ways for more people to afford to be homeowners, from the proliferation and expectation of bank-financed purchases through mortgages to creative ways for increasing supply like condominiums, home ownership without land. The business of home ownership is profitable, so there was no need to slow down. With incentives from the government and a stigma attached to renting, potential homeowners would do anything to qualify for mortgages so they could buy a home quickly rather than saving money first, and potential lenders would do anything to find more borrowers, bundle the mortgages into securities somewhat masking the risk, and sell them to investors.

Now society is paying the price. The economy crashed after the housing bubble became uncontrollable. Homeowners lost their homes. Investors in the mortgage-backed securities and the banks that sold them are jockeying for who will be held responsible. Should the banks be required to buy back the mortgage-backed securities?

Photo: taberandrew
New York Times

The original version of this article, U.S. Will Sue Major Banks Over Mortgages, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

It’s been almost nine months since I had a regular paycheck. Last year around this time, I was starting to make my plans for leaving my day job. One of my concerns was the possibility of qualifying for a mortgage with only self-employment income. Banks are still tight with their lending. Although mortgage rates are historically low, you have to be a special borrower to qualify. If your income isn’t shown on a W-2, and if there’s any risk that prevents you from showing a steady income from month to month, you won’t receive any preferential treatment.

I’ve been working with my accountant to make sure this year’s business income will be shown on a W-2, having my business pay me a salary. The higher the salary, the more tax I’ll need to pay in the short-term, but it may be a small price to pay for qualifying for a lower mortgage interest rate, assuming I qualify at all. In an ideal world, I wouldn’t need a mortgage, but that’s not exactly a guaranteed assumption. I’d rather take the conservative approach and assume I’ll need or want a mortgage when I break down and buy a house.

For most freelancers, income is often shown on 1099 forms, not W-2 forms. 1099 income is viewed skeptically by banks.

Here are some suggestions for increasing the chances of qualifying for a mortgage when income is erratic or risky.

• Clean up your finances. Pay off credit card debt, get rid of car loans, and put money away into savings accounts. Always pay your bills on time and make sure you’re well versed in your financial condition. Being able to show you’re in control of your finances can help.
• Improve your credit. By cleaning up your finances, you should be improving your credit score over time. Look into some of the details that you know go into a credit score, like your utilization ratio and the length of your credit history. Make changes to maximize the positive aspects of credit that will increase your credit score. Don’t forget to check your credit score as you go through this process.
• Gather your documentation. The more proof you have, the more of a chance a bank will be willing to lend you money. At minimum, you should have your 1099 forms and your 1040 income tax returns. Any bank or brokerage statements that show you have substantial assets will help. Of course, this only helps if you do have substantial assets. (See the first point.) Any other documentation you have that indicates you will have the wherewithal to cover your monthly mortgage payments won’t hurt. Have a profit and loss statement ready for each of the last three years to coincide with your tax documentation.
• Shop around. You may not have much luck with the larger banks. They want low-risk borrowers, and because they have so many branches and are so well known, the largest banks can afford to be very selective. Look online for the best mortgage interest rates as a starting point, but don’t forget bout local banks and credit unions.

Avoid these headaches by buying a house with cash. If you save diligently, or if you have an incredibly successful freelance career or your own business, you might be able to pull off this feat. It’s a good way to “stick it” to the banks. You lose the benefit (and risk) of leverage, but that may not be important to you.

Photo: Images_of_Money

The original version of this article, How to Qualify for a Mortgage Without a Steady Paycheck, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

The American Reinvestment and Recovery Act of 2009, the 2009 economic stimulus bill, provided an opportunity for homeowners in trouble to qualify for mortgage modifications. The Home Affordable Modification Program (HAMP) and the “Making Home Affordable” provided support for lenders who worked with homeowners.

Part of the requirement for qualifying for the modification program is for borrowers to have missed a number of payments. This put homeowners who could benefit from the program, in trouble but not yet delinquent, in a tough position. They would need to skip payments, even if they could pay, ruining their credit in the process. In addition, lenders made it difficult to qualify, with understaffed departments handling the cases, a lack of communication, mixed messages from customer service, and overall disorganization.

A more pressing problem with HAMP was that borrowers were required to owe less than 125% of a home’s value — and in a tough market where home values were falling, it was much easier for a homeowner to find himself in that position — and to have a high credit score.

Without HAMP delivering the desired effect, the Obama administration is looking at improving the concept as a part of the latest economic stimulus package. A third round of quantitative easing is unlikely to gain wide support, at least not in that form, so the federal government is looking for ways to reduce the risk of a second recession, a double-dip recession, or any other type of economic problem.

The Obama administration is seeking feedback on a new round of stimulus designed to help more homeowners qualify for a mortgage refinance. After a decade of lax lending standards, following the recession and credit crunch they have tightened, making it difficult for consumer with marginal credit histories — or even something not too out of the ordinary, like self-employment income without W2 income — to qualify. The new program will seek to allow more homeowners to refinance at a time when mortgage interest rates are very low.

Another aspect of this program would take federally-owned housing and convert the buildings into rentals, turning them over to investment firms to manage.

The plan could actually help pay down the deficit, as there are unspent funds that have been set aside for stimulus:

The idea is appealing because it would not necessarily require Congressional action. It also would not tap any of the $45.6 billion in Troubled Asset Relief Funds that was set aside to help struggling homeowners. Only $22.9 billion of that pool has been spent or pledged so far, and fewer than 1.7 million loans have been modified under federal programs. But Andrea Risotto, a Treasury spokeswoman, said whatever was left would be used to reduce the federal deficit.

Photo: Tom Hilton
New York Times

The original version of this article, The 2011 Economic Stimulus: Mortgage Refinancing, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

The comparison of owning a home in New Jersey or Long Island with owning a home in New York City shows that the city has one financial advantage: property taxes. In New Jersey, it’s hard to discuss the cost of owning a home without talking about property taxes. With high property tax rates, it’s worthwhile to take as many actions as possible to reduce those rates. When filing personal income tax returns, taxpayers look for every deduction and credit, saving hundreds or thousands of dollars, but most homeowners accept what they owe for property taxes, even though that could easily be a bigger bill than income taxes.

With home prices on average having dropped in the past few years, now is a perfect time to take a look at these taxes. The amount of property tax you owe is based on an assessed value of your house, and depending on where you live, that assessment could have occurred when the market was at its peak. On average, assessments lag behind current values by three years.

Homeowners could save thousands of dollars with a successful appeal. We’d like to think our home values continue to increase because we want to feel that the decision to buy a home will result in a good investment over time. When it comes to assessments for tax purposes, it’s better to have the lowest value possible. Review your recent assessment, and consider these factors for appeal:

• Comparable home prices. Look at actual sales of houses in your area. Knowing the current market is a key to determining a fair assessment for your house.
• Age of the assessment. If the assessment is from over a year ago, comparable homes in your area might have sold for less money more recently.
• Room count and layout. Most assessments are accomplished without definite knowledge of your house’s layout. There could be mistakes in your assessment that result in a higher value on paper, like too many bedrooms. If your basement is unfinished, you could argue for a lower assessment.
• Amenities. When assessments are based on comparable home prices, if your home does not have the same amenities as your neighbors’ houses, you could be unfairly assessed. If you don’t have a pool like the houses surrounding yours, you shouldn’t have the same property tax bill.

After you receive notice of your newest assessment, review it quickly and repeal right away. Review the property record card and look for inaccurate details. Take photographs of relevant features of your house. Look at documentation for comparable home sales in your neighborhood. When you have your hearing, bring all the documentation to support your case. Authorities are aware that most assessments are inaccurate, but they won’t do anything unless owners speak up, and some who are unsuccessful with the first appeal give up. The savings from a successful appeal could be substantial, so don’t give up until your home’s value is accurately assessed.

Wall Street Journal

The original version of this article, Appeal Your House’s Assessment to Lower Your Property Tax Bill, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

For the time being, S&P’s downgrade on United States debt has yet to produce an increase in mortgage interest rates as some predicted. Borrowers can still find mortgage loans for such a low cost that if they qualify, low interest rates combined with lower house prices would make owning a house more affordable than ever.

Even with low rates available from many lenders throughout the industry, it pays to shop around for a mortgage whether you’re buying a new house or refinancing a current loan rather than choosing the first option presented to you. The difference of a few tenths of a percentage point could result in either savings or an expense of several thousands of dollars over the life of the loan. While mortgage brokers may shop around for you and claim they are presenting you with the best options, it is always beneficial to do your own research.

Quicken Loans advertises some of the lowest rates available today. When I first heard of Quicken Loans, it was through my desktop Quicken software. I immediately thought that the lender was a branch of Intuit, the makers of the software. I didn’t see a reason the software company would have a business lending money.

They don’t, though. Intuit actually licenses the name “Quicken Loans” and the associated logos to Rock Holdings, the parent company of Quicken Loans. There’s no relationship between Quicken software and Quicken Loans other than this license and the ability for Quicken Loans to align itself in consumers’ minds with the incredibly popular and favorably-viewed financial management brand.

Looking past the brand name, Quicken Loans offers some interesting features. They offer more choices than the typical 30-year fixed rate, 15-year fixed rate, and adjustable rate mortgages, allowing borrowers to customize their loan to an extent that’s not available with most other lenders. If you need to borrow less than $417,000 for the purchase of a home or a refinance of up to 95% of your home’s value, you can take advantage of this flexibility.

You can choose a loan term anywhere from 8 to 30 years and qualify with as little as 5% down. I recommend putting at least 20% down on a mortgage, but some borrowers will still qualify with a smaller down payment. Quicken Loans offers a product called PMI Buster, optional for borrowers who have a down payment less than 20%. This helps the customer avoid paying mortgage insurance (Quicken Loans pays it for the customer) in exchange for a higher interest rate. Run the numbers to see if this is worthwhile; it may not be for everyone, but the home mortgage interest deduction helps make this product a choice to consider.

After 7 years of paying back a 30-year mortgage with Quicken Loans, you can refinance for a 23 year term. This would let you take advantage of potentially lower rates while not extending your initial repayment period. Will rates be lower in 7 years? It’s hard to imagine that they would be because rates are so low now, but it’s still a possibility.

The flexibility in choosing your term means that you can tailor the loan to your cash flow or if you plan to send your first child to college in 18 years, you can design the loan to end right before the first tuition bill is due.

In July and August 2010, J.D. Power and Associates conducted a consumer study and found that found that Quicken Loans is the highest-ranked lender for customer satisfaction, with a score of 826 out of 1,000. The next closest competitor scored 734.

If you’re shopping for a new mortgage or a refinance, include Quicken Loans in your comparisons. If you qualify for the low rates they advertise, you will benefit from increased cash flow for what will probably be a good chunk of the remainder of your life. Most mortgages last thirty years, and that’s a significant time commitment. Make the best decision you can by researching as much as possible.

The original version of this article, Quicken Loans Review, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

When selling a house with the help of a real estate agent, that 6 percent real estate commission can eat into any profit the seller might receive from the sale. In today’s depressed real estate market, that fee could even result in an overall loss. Even with the funny accounting used when people sell their homes — the accounting that doesn’t consider all the costs of owning and selling a home as part of the cost basis — in a bad market, it’s difficult to show even a fake profit.

Who pays real estate commissions

That standard 6 percent commission is paid by the seller to the real estate broker, who often splits the fee between itself, the seller’s agent, the buyer’s agent, and possibly another agent on the seller’s side if they had additional assistance with the listing. Even with the agent seeing possibly only 3 percent of the total sales price, good real estate agents could make a living. Better agents can negotiate better arrangements with their brokers, and receive more than this share.

For the seller, this commission is a big expense. Many agents are willing to negotiate the real estate commission. If the seller is willing to compromise with the agent and perhaps do some of the legwork involved with the process, many agents will work with the seller to come up with a reasonable fee.

Negotiating real estate commissions

One reason that agents are willing to negotiate is that it is become easier for sellers to sell houses without the help of an agent. If a seller is just looking for a listing and is willing to show the house without an agent and the property is in New York City, RealDirect will charge a monthly fee of $395 or a commission of 1 percent for distributing the listing. Even with these smaller fees, the seller’s agent must still be paid, so there is an additional commission of 2.5 to 3 percent to consider. Still, this is a better deal than real estate agents offer sellers, but it’s only worthwhile to sellers who are confident in their ability to close the deal.

More low-cost do-it-yourself services like ZipRealty put pressure on agents to compete with lower prices as well.

If you’d prefer a full service broker but still want a reduced price, be willing to shop around. While agents are more likely to be willing to reduce their commissions if your home has a high value, today’s slower real estate market means the agents who haven’t given up their job are competing for fewer salable properties. Talk to several agents from different brokerages and ask for a reduced rate from each. The more agents you speak with, you’ll be able to have a better who will do the best work for you at the best rate.

By law, commissions must be negotiable; otherwise, the industry would be guilty of price fixing. The 6 percent commission is ingrained in the collective consumer consciousness, and that’s the way real estate brokers like it.

Even reducing a commission by 1 percentage point could save thousands of dollars. Not exploring reduced commissions would be a sign of financial mismanagement. I understand that for a large transaction, a 1 percent point difference might seem negligible, but this is real money you can save, thousands of dollars, just by shopping around and negotiating. This is not saving two cents a gallon by driving out of your way to an off-brand gasoline station; this has an immediate impact on your finances.

Photo: austinevan

The original version of this article, 6% Real Estate Commission, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

A few years ago, I declared I would (probably) never buy a condominium. I still believe this to be true. All my adult life, I’ve lived in rented apartments. Some have been nice, some have been not so nice. My least favorite living arrangement was a railroad apartment in Jersey City, New Jersey. It was a great deal in a great location, but a grocery store on the ground floor attracted a variety of critters and my roommate needed to walk through my bedroom in order to get in and out of hers.

Condo ownership brings with it some of the benefits of owning a home, some of the benefits of renting an apartment, but many of the drawbacks of both.

• Proximity to neighbors who may by inhospitable. I may not always be the first person to meet and greet the neighbors, but I try to be friendly and courteous. In my first apartment out of college, I lived on the ground floor. The ceilings were thin, so every night I endured the romantic sounds from above. In another apartment, I lived above a one-bedroom unit which was considered a home for somewhere between ten and fifteen loud residents. While condos are generally occupied by more serious, more mature residents, and the neighbors would tend to be less transient, in good rental markets, or in areas where condominiums are viewed as a good investment, the units are more frequently rented out.
• Condos generally appreciate slower than comparable single-family homes. While there are always exceptions, condos are worse investments than houses, and houses aren’t good investments to begin with.
• Fees and rules govern condos. While this may be true of single-family homes as well in some cases, there’s even less you can do with condos. Ownership associations limit your ability to personalize your front-facing living space, but you are often generally free to arrange the interior as you see fit, unlike apartments. Association rules can often work in your favor. Some rules can help prevent the property values from decreasing by requiring a standard of upkeep within the units, and fees often cover services like lawn care.
• Less work for the owner. Like apartments, regular maintenance and repair are the responsibilities of the owners. Condo owners do not need to mow lawns or fix pipes. Less time and money maintaining the operation of the household can result in more time and money for other concerns, like family, friends, and income-generating work. This is a trade-off; you will pay more in fees so that you need to do less work on the property.
• Condos are less expensive than comparable houses. You can find condos for less money than comparable single-family homes. The prices are lower for a variety of reasons, including the fact that you don’t own the land on which the condo sits. Condos can be ideal first homes simply because it’s more affordable. Many of my friends, some with the help of their parents, bought condos not long after graduating college.

A condominium can be the right choice for a family. A friend of mine considers himself a real estate broker, and one of his homes is a condo in an upscale neighborhood in New Jersey, very convenient to Manhattan. He showed me around a few empty units in his building, featuring thick enough walls to prevent disturbance from neighbors, a wide open floor plan, and amazing views of the New York City skyline. Even with a door man, a pool, and a parking garage, the condos were relatively affordable. Nevertheless, it felt like an apartment. When I’m ready to find a place to spend the bulk of the remainder of my life, I still believe I’d prefer a house with a yard, a garage, a basement, and a quiet street.

Do you live in a condo? Why did you choose a condominium rather than a single-family house?

Photo: Bitman

The original version of this article, The Benefits of Owning a Condo, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

It always pays to shop around. If more mortgage customers didn’t choose to borrow from the trusted institution that held their savings and checking accounts without question, it seems that these customers could have found lower interest rates, particularly if these borrowers were customers of Wells Fargo. The Federal Reserve is alleging that between 2004 and 2008, Wells Fargo sold mortgages with higher interest rates to customers who should have qualified for lower interest rates and changed information on documents, such as income, to make it appear as if these customers didn’t qualify for better rates.

As a result, the Fed is slapping Wells Fargo on the wrist with an $85 million fine and a directive to compensate up to 10,000 affected customers who may receive as much as $20,000 in restitution.

The Fed says that the Wells Fargo Financial subsidiary encouraged its employees’ unethical practices by having sales quotas. The bank doesn’t need to admit they did anything wrong, but in their marketing message, Wells Fargo says the actions of a select number of employees shouldn’t reflect poorly on the company as a whole. The $85 million amounts to just over 2% of Wells Fargo’s second quarter profit, and the bank had already set money aside to compensate the affected customers. A fine of 2% of a company’s quarterly profit is hardly a penalty.

While a financial institution should not lie about your finances to trap you into an expensive loan, potential borrowers should take a few steps to prevent themselves from a bank that might take advantage of them.

• Know your credit. Get a free credit score, free credit reports from AnnualCreditReport.org, and analyze your credit report. There should be no surprises when you apply for a mortgage, and with this knowledge, you should be able to tell if a mortgage broker is lying to you about your score or your credit history.
• Shop around. Yes, it’s difficult to find the right mortgage. It’s easy to be tempted into walking into the bank where you do business and ask to speak to their mortgage consultant. You should do this, but your shopping shouldn’t stop here. Find other local banks, community banks, and credit unions. Look online.
• Know the market. Be aware of the best mortgage interest rates. While companies often advertise their absolute best rates that only those with perfect credit will receive, this should give you an idea of the rates you should expect and prevent you from accepting a deal where the rate is unreasonable.

The conversation usually turns to determining who is to blame: the uninformed customers who end up paying more than they need to, the bank’s representatives who are viewed as trusted experts rather than salespeople trying to meet quotas, or the bank’s management that sets the policy and the environment. Everyone shares some blame, but as a customer, one can’t control anything other than your own actions and reactions to other people. Put yourself in the best situation as possible by understanding your own financial situation and recognizing that when you deal with any company, they are trying to sell you something and not always looking out for your best interest.

Wells Fargo is the bank where, through a series of acquisitions and mergers, I’ve been keeping most of my non-online deposits and active checking accounts for my entire adult life, but if I thought I had been misled I would have no problem moving my accounts elsewhere. I do not have a mortgage or any type of loan from Wells Fargo.

CNN Money

The original version of this article, Wells Fargo Fined For Misleading Customers and Falsifying Documents, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

When calculating my net worth, I tend to take a conservative approach. Where certain balances are not exact, like the value of my car, I tend to assume the value is lower than what it might be. This way, there are no dangerous surprises if I needed to convert an asset like that into cash by selling.

Car owners expect this asset to depreciate. The older the car is, the lower its value will be, except in unique circumstances. If the supply of used cars were to dry up, the price could increase. In general, however, people expect the value of their cars to decline over time.

This isn’t true with houses, however. People expect their value to go up over time. Regardless of whether it’s an appropriate attitude, the history of real estate in the past century has shows that people will pay more money for the same property, over time, on average. The real estate boom fostered even higher expectations for value growth. When it comes time to sell, though, today’s real estate market is not only a difficult environment to make a deal, but psychology is making it worse.

According to Zillow, listings during the recession were priced higher than the estimated value of the properties by a greater degree than any other time in the preceding decade.

Obviously the idea that your largest asset has been devalued significantly is difficult to accept, however, people who bought in the run-up to the bubble are seemingly more willing to confront this reality than those who purchased after the peak. In fact, relative to sellers who purchased their home before 2002, those who bought while the bubble was expanding rapidly are comparatively underpriced. When first placed on the market, the typical house is priced at roughly 10 percent above its estimated market value, but sellers from 2006 touch as low as 6.4 percent. Looking at sellers who bought on either side of the market peak nationally reveals stark differences between these two groups. Sellers who bought in January 2006 overprice their home by only 8 percent, while those who bought in January 2009 overprice by 22 percent.

Reaching for a higher listing price is rooted in psychology, particularly loss aversion.

• Sellers don’t want to lose money. Even if they paid less for the house, but a later appraisal valued the house as having experienced a large gain, selling at a price somewhere in between the purchase price and the peak seems like a loss, even though it’s not. Some sellers did buy at the peak and would experience a loss, so there are some for which this concern is real, but for most sellers, there is no real loss.
• Sellers want to aim high. Possibly due to advice from real estate agents, sellers list their houses for a high price holding out hope that there, somewhere among the pool of potential buyers, is a greater fool. All it takes is one person willing to pay the asking price to turn the imagined, inflated value into the realized, official value. Depending on how motivated a seller is, they could sit on a high listing for a long time, possibly waiting for the industry to recover.

The biggest mistake has been convincing people that the house you live in is a good investment. When investing in stocks, you take costs into account, such as the transaction fees, account fees, expense ratios, taxes, etc. The equivalents when buying a house include maintenance, association fees, upkeep (like lawn care, painting), upgrades, closing costs, real estate agent fees, and more, but these are never figured into the “cost basis” of the house purchase. If they were, it would be clear that owning the house you live in may be a good option for your family’s needs, but it’s not a good investment. Without the overall assumption that owning a house should make money for the owner, people wouldn’t be so afraid of selling for a loss, the expectation when selling any other used, non-collectible asset like a car.

That being said, you wouldn’t be doing your own finances any favors by not aiming high when determining an asking price. If you need to sell, eventually you’ll accept the best offer you receive, and if you don’t and you don’t mind waiting indefinitely, you’ll perhaps find the right buyer in the future.

Photo: karindalziel
Zillow

The original version of this article, Why Sellers Overestimate the Value of Their Houses, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Even with a credit score above 800, it’s still possible to be denied for a mortgage. Looking at the mortgage industry as a whole, for a period of time, lenders were too lax, offering mortgages practically regardless of qualifications. The pendulum has swung the other way, and even qualified individuals and families are having a difficult time receiving credit.

A recent story on CNN followed a potential new home owner whose credit score was excellent. Within days of closing, the lender he had been working with denied his mortgage application. He had a strong income from last year the business he owned, but that was preceded by a year of lower self-employment income during which time he was getting his business off the ground. The year before he established his business, he had a higher income from another company. The most likely explanation for declining his mortgage was his income instability. Even though most recently, his income would qualify him for the mortgage, the lender didn’t like pattern the past few years.

The story ends well; the potential borrower found another lender who was willing to extend a mortgage offer.

I used to think there was an equilibrium between interest rates and home prices. On general, interest rates would decrease while home prices increase, and interest rates would increase while home prices decrease. This would mean that, for the most part, the benefit of buying a house in one aspect would be countered by a drawback in the other aspect. Any timing would be good timing. Today, however, home prices are low and mortgage interest rates are low. This would appear to make a better market environment for buying a house, but fewer people seem to be able to take advantage of the situation due to tighter standards.

With my self-employment, I am concerned that I, too, will find it difficult to qualify for a mortgage with great terms. If I wait longer, buying a house with cash might be an appropriate option, and it may be the only option for someone like me, whose only income is generated through a business that is rather risky. I recently signed another one-year lease for my apartment, a great place to live, but I also paid an additional fee for an option to break the lease within the next twelve months, an likely action.

CNN Money (video with commercial, unfortunately)

The original version of this article, Excellent Credit, Denied Mortgage, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Homeowners over the age of 62 have a unique option available for accessing cash. Reverse mortgages can help seniors access home equity without having to make monthly payments to repay a loan. When a qualifying homeowner has paid off a mortgage in full, or is very close to paying off a mortgage, a reverse mortgage (or home equity conversion mortgage) can turn the equity into cash through a payment plan. The reverse mortgage is repaid from the proceeds when the owner sells the house.

For seniors who have discovered their expenses are higher than what they’ve planned, a reverse mortgage can help pay the bills. Considering you can’t take your wealth with you when you die, there’s always a case for spending down your assets while you still have time to enjoy your life.

If those are two of the benefits to reverse mortgages, they may be easily overshadowed by the drawbacks.

• Reverse mortgages are expensive. Just like regular mortgages, you’ll have closing fees and points to pay. They’ll be rolled into the loan amount, so when you or your estate pays back the mortgage when the home is sold or when you die, you’ll owe more than the converted equity plus interest.
• You’ll be at the mercy of the market. Reverse mortgages have interest rates, just like regular mortgages. This interest will also add to the total you’ll need to repay the mortgage after the sale, and if this interest rate is higher than inflation, you’re losing more overall value.
• You might not qualify for Medicaid. The proceeds from a reverse mortgage increase your income. If you’ve been relying on Medicaid, you may no longer qualify.

The first point above, the fact that reverse mortgages are expensive, is an important point to consider. Here are some of the expenses associated with reverse mortgages:

• Mortgage insurance (2% of the appraised home value)
• Origination fee (up to $6,000)
• Title insurance
• Title, attorney, and county recording fees
• Real estate appraisal ($300–$500)
• Survey ($300–$500)

In order to qualify for a reverse mortgage, the U.S. Department of Housing and Urban Development (HUD) requires you to receive counseling, which helps borrowers understand the concepts of reverse mortgages and identifies the best lenders.

Wells Fargo and Bank of America have recently exited the reverse mortgage business. They say that HUD requirements go to far to limit lender’s profitability, but in all likelihood, lenders are having a harder time making money from reverse mortgages — which were very profitable during the height of the real estate market — now that home prices are low. Reverse mortgages, like traditional mortgages, are packaged and sold to investors, and if lenders are having a difficult time finding investors for these securities, they’ll stop doing business.

While Wells Fargo and Bank of America are no longer offering reverse mortgages, MetLife is increasing its reverse mortgage business.

Due to the high fees, most reverse mortgages are seen as predatory products. I can understand the appeal of getting access to cash locked away in home equity, but it comes at a high price. Many people argue that you can’t be buried with your wealth, but there are ways to make it work for you after your die if selling your house is not appealing while you’re still alive.

Photo: Warren Brown Photography

The original version of this article, Reverse Mortgages, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

When living on a budget, there are circumstances where it might make sense to move to a location that makes living more affordable. Living in Manhattan, for example, can be a struggle for anyone earning under six figures of income each year. It’s possible, of course, but other areas of the country offer better housing options for the same amount of money.

There are trade-offs. New York City is a world-class metropolitan area, offering the best in art, music, food, and finance in this country. To take advantage of these benefits, if they are important to you, you’ll need to pay up to live here. The average home listing price in the TriBeCa neighborhood of the city is $4.2 million, and that’s not even the most expensive neighborhood.

Would you consider moving yourself and perhaps your family to better secure your financial future through lower costs of living?

A dual-income couple without kids and an AGI of $74,443 in Milwaukee can afford a median standard of living, according to the Tax Foundation report. That still puts the couple in the top 20 percent of taxpayers, giving them a tax liability of 8,081, or about 10.9 percent of their AGI (otherwise known as their effective tax rate).

To afford the same standard of living in Orange County, California, the couple would need an AGI of $100,079, putting them in the top 10 percent of taxpayers with a tax liability of $14,506. That represents 14.5 percent of their AGI.

And if they move to New York City, they’d need an AGI of $162,974, putting them in the top 3 percent of taxpayers and giving them a tax bill of $31,139, or 19.1 percent of their AGI.

Is this reason enough to convince people to move away from metropolitan regions like Los Angeles and New York? Perhaps it is for some people. There are benefits to living close to international hubs, including exposure to diverse culture, proximity to the best music, art, and food in the world, and large, close-knit communities and subcommunities. For some people, this is worth the extra expense.

If you want to move to the place where your dollars can make the most of your living, consider these areas:

• Brownsville, Texas
• Pueblo, Colorado
• Fort Hood, Texas
• Fort Smith, Arkansas
• Sherman, Texas
• Springfield, Illinois
• Waco, Texas
• Fayetteville, Arkansas
• Austin, Texas
• Springfield, Missouri

CNN, Kiplinger

The original version of this article, Move Where Cost of Living Is Low, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Money Magazine featured a story about Rick and Amy Mendez, a couple in their early forties with two children, earning an income of $225,000. They have a healthy retirement plan balance, and they needed to borrow from their 401(k) to pay for an emergency. Here is a family of four earning $225,000 a year, with a nanny and two investment properties, that can’t afford to replace the roof in their primary residence.

It’s easy to judge other people’s choices when they are brave enough to feature their expenses in a national magazine. This level of income for a family of four should be enough to cover expenses, save for the future, and handle emergencies, but the Mendezes are running into problems. The writer of the article analyzes the family’s expenses and concludes three changes are necessary in order for the family to put away $25,000 for emergencies: slice the budget, turn off the 401(k) for now, and pay down the credit card bill to the tune of $2,000 per month.

The financial adviser and the article’s author completely overlook that the family owns two investment properties in Florida that are under water. Like many others, the Mendezes succumbed to the perceived easy money available in investing in Florida real estate. When the real estate market crashed, the paper losses have prevented them from acknowledging that they made bad investments and should get out of them.

It’s not clear how much of their $4,450 monthly payment towards mortgages, 401(k) loans, and car loans goes to these two properties, but I estimate they could save at least a thousand dollars per month if they sell. Since the properties are underwater, though, they’d have to come up with the balance of the loan. It’s not clear what the value of the properties are and the remaining loan balances, but this short-term hardship could be worthwhile to prevent long-term problems. With the increased monthly cash flow, they could start building a $25,000 emergency fund.

Do you think they should keep the failing investment properties and wait for the values of the homes to recover?

Money Magazine

The original version of this article, Family Earning $225k Annually, No Emergency Fund, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

A few years ago, a friend of mine quit his job at a bank to focus on his own company. That can be a risky life change by itself, but in addition to his change in income, he and his wife were expanding their family. While I’m sure they would have been fine remaining in their apartment for a few additional years to ensure the new business could provide income, they wanted to purchase a house right away.

The mortgage broker they were talking to must have been very good. When they signed the paperwork for the adjustable rate mortgage, they were paying less per month (not including insurance and taxes) than the cost of rent in their old apartment. The premise could be valid. An adjustable rate mortgage allows you to qualify for a lower rate now while you’re earning less. Despite many studies that have recently declared that real income has been steady or has decreased for most workers over the past decade after taking inflation into account, most people have an impression that they can handle the increase in mortgage cost later because they’ll be earning more money.

For this particular friend, the decision to go with an adjustable rate mortgage paid off. His business found success early and he did not have a problem when the interest rate recently jumped. The situation could have easily gone the other way; in fact, it almost did. He managed to sign a major client at the right time, and it moved his business into profitability. Without the one client, his finances would have been in trouble.

Another friend of mine, when buying his second house, considered an interest-only mortgage. This is another good option to increase cash flow in the short term, but it means larger expenses later on. Unlike adjustable rate mortgages, if you’re paying only interest, you’re not building any equity in your home. In the beginning of mortgage repayment, building equity would be slow, anyway, but it’s helpful to start paying down the principal as soon as possible.

In the days of the runaway real estate market, homeowners could increase their equity just by watching the value of their home increase, but there are few locations where that strategy would work.

Along these same lines, homeowners would often take advantage of double-digit increases in value by refinancing their mortgage and walking away with cash. Enterprising individuals often find this cash helpful for making improvements to their home — and these improvements only pay off in terms of enjoyment of the living space, not future resale value — or investing in their own business.

Adjustable-rate mortgages, interest-only mortgages, and cash-out refinancing aren’t always mistakes. These could be the right options for many people, and several years down the road, one could look back and determine each one was, for any particular person, the best choice. These techniques often probe to be financially devastating if the housing market crashes, your income doesn’t increase as expected, or your business fails.

When plans don’t work out and the mortgage becomes too tough to handle, a family could find itself facing foreclosure.

The original version of this article, Three Big Financial Mistakes That Could Be Devastating, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

The first-time homebuyer tax credit was a major incentive that the government, in collaboration with the real estate industry, initiated to stimulate the economy. It’s understood that the tax incentive worked in the short-term, encouraging more home purchases for a period of time that continued to be expanded by Congress. Nevertheless, the housing market continues to be in a slump. The index of home prices was down again in the most recent reports.

What happened to taxpayers who applied to receive the tax credit? For the most part, filers who included all the required forms received the credit in about six weeks. Anyone who didn’t file the paperwork properly found their applications under review, and the IRS quickly became overwhelmed with the requests. As a result, even taxpayers who filed the proper paperwork and are rightfully owed the credit were faced with delays and problems.

There are still taxpayers to whom the government legitimately owes the credit who haven’t received a check. The government changed the homebuyer credit several times. The benefit morphed from a maximum $7,500 credit in the form of a loan that must be paid back to the government over time, to a maximum $8,000 credit available to first-time homebuyers only that would not need to be paid back, to a credit available also to long-time homeowners rather than just first-time buyers. In addition to the changing form of the credit, the qualifying home purchasing and closing dates changed frequently, as well. Tax preparation experts struggled to keep up with the changing laws.

Making the situation worse, along the way but towards the beginning of the $8,000 credit qualification period, the government changed the set of paperwork required to qualify for the credit. This was likely done to stem a flood of fraudulent applications. The IRS simply could not keep up with the research necessary to validate all the applications, so after weeks passing, some taxpayers received requests for more paperwork. After sending the paperwork in, there were instances where the IRS could not keep the information organized, and taxpayers who were counting on the credit were stuck in limbo.

It was surely a mistake for taxpayers to count on the government to distribute the credit in a timely manner. Many assumed the credit would arrive soon and planned their finances around a potential increase of up to $8,000 from the government. When the $8,000 didn’t come as expected, homebuyers were thrust into an uncomfortable financial position. Looking back, it’s easy now to say one should plan their finances only by what they have in the bank, not by what they expect to receive in the future.

Are you still waiting for the homebuyer credit? Do you think that the IRS could have implemented a better plan if the government wanted to try to stimulate the housing sector of the economy? Was all this credit mess worthwhile now that we see the real estate market is still a mess?

Photo: Images_of_Money

The original version of this article, Are You Still Waiting for the Homebuyer Tax Credit?, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Imagine this: You, accompanied by the sheriff’s deputies, walk into your local Bank of America branch. You tell the sheriff to remove cash from the tellers’ drawers and seize the branch’s furniture and computers. It’s like a dream come true, especially for someone who has been on the receiving end of a bank’s foreclosure.

Now imagine this: You and your wife pay cash to buy your house, never taking out a mortgage. Bank of America, however, believes you do have a mortgage and that you haven’t made any payments. This is not like the issue where a bank can’t prove it is the true owner of a mortgage due to securitization, a situation where someone with a mortgage might be able to get out of paying an obligation because the mortgage can’t be traced to a real creditor. This is a case where a mortgage never existed, but somehow, Bank of America believed the house was owned by the bank. The bank initiates the foreclosure process, forcing you to hire an attorney despite the bank not having any legal standing. Although the court ordered Bank of America to cover your thousands of dollars in attorney fee expenses, the bank doesn’t pay. For months.

A good course of action is to initiate foreclosing proceedings on the bank, and that’s what a couple in this position did. $2,500 may be enough for a bank to repeatedly ignore, but that amount is worthwhile to a household. The sheriff invasion resulted in a check from the bank within an hour, and the check covered the attorney’s fees plus another $3,000.

It is difficult to stand up to banks, even if you know you’re in the right. Large financial institutions have what seems like endless money to throw at problems they want to go away, and another bottomless trough for money to help them maintain a good reputation in the media. While not all consumers need to battle with the financial industry, some do, and those who do are facing long odds.

TIME Moneyland

The original version of this article, Reverse Foreclosure: Man Seizes Bank of America’s Assets, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Several times over the past few years, I’ve asked myself whether I should take advantage of the lower prices for real estate, put my renting history to rest, and buy a house. I’ve brought up the topic several times on Consumerism Commentary, as well. Every time the news media comes out with another wave of reports of the real estate market dropping to historic lows, I think the bargains are here.

I haven’t purchased a house yet because I haven’t decided where I want to settle down. I’m not thrilled about locking myself into a long-term financial commitment until I’m pretty sure where I’d like to spend the next few decades of my life. As almost anyone who has tried to sell their home during the past few years during the real estate market’s fall, moving once you own a home is not an easy process.

Based on the Case-Shiller price index, real estate has now falling further from its peak than it did during the Great Depression. In that instance, real estate prices took 19 years to reach their previous highs. If today’s market echoes last century’s reality, housing prices won’t recover until 2025. Low prices are great for buying — but will they go lower, and if they do, will you need to sell while your house is worth less than the purchase price? These are points that I would need to consider before buying a house. They’re not the most important points, but bad timing could have a negative effect on a family’s personal finances. While you can’t predict the future and time the market, being aware of these issues can help prevent devastating loss.

Fortune Magazine

The original version of this article, A Housing Market Recovery in the Distant Future?, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

As the real estate market was starting to crumble, more banks were using the Federal Housing Authority’s guarantees to continue offering mortgage loans, when Fannie Mae and Freddie Mac were tightening the reins on their guarantees. This was common practice among banks. With loans fully backed by the FHA and therefore the United States government, they were able to sell these mortgages. This effectively passed the risk onto the buyers, most of whom thought they were still light on risk thanks to the FHA.

Well, the United States government now believes that some of these banks lied to the government about the loans in order to receive coverage by the FHA. The government is suing Deutsche Bank for this reason.

Back in 2006, Deutsche Bank acquired MortgageIT, the unit that is the focus of the suit. According to the government, the bank should have seen warning signs that the unit was not properly reporting information to the FHA as early as 2003. Here are some examples of the problems:

In New York in 2002, for instance, MortgageIT loaned money to a borrower who was able to close on the deal using funds that were a gift. MortgageIT did not properly document those funds, and within two months of the closing on the property, the borrower was in default.

In Colorado a couple of years later, MortgageIT endorsed an application by a borrower who had no credit history, a violation of federal rules. Six months later the mortgage went into default, costing the federal government $190,977 in insurance claims. Around the same time in Oklahoma, MortgageIT did not verify that a borrower was closing on the deal using his own money, rather than someone else’s.

The government is seeing “at least hundreds of millions of dollars” from the bank as restitution, and estimates the problems with MortgageIT cost the government up to $1 billion.

New York Times

The original version of this article, Federal Government Sues Deutsche Bank for Mortgages, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

This is a guest article by Dr. Dean Burke, author of The Millionaire Nurse Blog. Many years ago, someone I knew was fascinated with the real estate market in Florida, and he set up an investment company to allow others to invest through him. He promised his investors 20% returns. Needless to say, I didn’t participate and I thought he was a little nuts, but this is what the market was like during the bubble. Thanks to Dr. Dean Burke for sharing his experiences and lessons learned.

Unless you were there, it is impossible to visualize the Gulf Coast of Florida’s beach property boom just a few short years ago.

The Redneck Riviera was making a lot of people rich beyond their imagination. This area known for Spring Breaking bikini babes and beer-buzzed bozos was hotter than a teen at his first wet t-shirt contest.

Realtors were flipping or subdividing tracts of sand and scrubby shrubs and making hundreds of thousands in profit. To hell with 6% commission!

Everyone I knew was playing the game. The talk from the beauty shop to the coffee shop was not about Millionaire Housewives, high school football, or American Idol, but about 1031 property exchanges, setback zones, and building codes…

You might be saying, “Where were the grown-ups?”

Well the bankers were lending money to anyone with a pulse and a signature. In this case, “no doc” didn’t mean being without a physician, it meant no paperwork or proof of income required to qualify for a mortgage. “Step right up!” the carnival barker yelled!

My story

I had been visiting the Gulf Coast since I was a kid. My family rented a small concrete block home for a week every summer. My brothers and I had great fun digging fox-holes, waiting 30 minutes after eating to swim so we wouldn’t die of cramps, and building bonfires at night. When I was teen I kissed my first girl and had my first sip of Boone’s Farm while strolling these same beaches.

When I was able 15 years ago, I bought a vacation home in the same area, and I traded up three times since then.

The property boom hit in the early to mid 2000s. Prices began rising overnight. All my friends were making spectacular money! After watching their success, I wanted a piece of the action. The lot across the street from my beach place went up for sale and I jumped on it. No money down, interest-only, baby! Just a couple of months later with prices rising daily, I put that lot up for sale.

Later that same day, while I was nursing a cold one on the beach, a real estate agent trudged across the sand with a contract in his hand. With only the sweat equity involved in digging two holes to place the for sale sign and a signature, I had a pile of money! As I wanted a place on the bay so I could dock a sailboat, I tripled my money by selling my beach front home. (Sorry kids!)

Six months later I had three other properties, nearly worth a million bucks in all. One of these was my dream lot, a bay-front, with deep water dock — a perfect sailboat parking place!

Flexo suggested I include the details of my thought processes, whether there were any financial calculations that went into my purchases and how the decisions were made to sell. I laughed when I read that. The only calculations were greed on my part, making money. The idea that the lots might go down in value never even entered my mind.

Most of you are probably thinking, “I know how this ends: The Lehman Brothers bankruptcy and a spectacular crash.” You’d be wrong.

The needle that pricked this bubble was born in a little low-pressure weather area off the western coast of Africa. Once the levees broke from the Category 5 power of monster Hurricane Katrina, the nation’s spotlight was on how fragile the man-made dwellings on the Gulf coast were. We were 300 miles from the storm, but it might as well have been in our back yard.

Property values plummeted and the lives of everyone connected to that area of the country were changed forever. Businesses closed. Bankruptcies, foreclosures, and shattered dreams were common stories, all a couple of years before Lehman Brothers fell. The subsequent second-round real estate body blow was like pouring alcohol on an open sore.

I was only a bit player in this theater of the absurd and the sand. I had not mortgaged my future on my real estate venture. I learned many valuable lessons from those heady times. I’m reminded of it every month when I make my payments on land that is worth 30 cents on the dollar now.

I’m not looking for sympathy. I’m a big boy. The more cynical among you will think, “He got what he deserved!” I’m glad to say I have survived those days, and I am a much smarter investor today because of it.

Now I ask myself these questions before any major investments, particularly in real estate. They’ll help you too if you will let my pain be your gain.

• How does this investment relate to my overall goals? If buying a home in two years is your top goal, investing in gold futures may not be the safest place for that money. Make sure you weigh your time horizon and risk tolerance when you are saving for a large investment.
• Is this investment low-risk or speculative? If speculative, make sure it is only a very small portion of your net worth. In my case even with a 60% loss on the value of land I was and am able to make my nut as they say. Make sure your speculative investments won’t take you down with them if you suffer a total loss.
• Who will I sell to? When everyone seems to be making the same investments around you, stop and think who the next buyer will be. If you encounter people making the same investment or gamble as you are, that normally aren’t a part of that world, your alarm bells should ring. You owe it to yourself and your family to consider potential negative outcomes. Can you say, “Bubble?”
• What are the steps and potential outcomes during each step of the project/investment? If large investments makes you nervous, when you consider the investment, create a mind-map on a whiteboard outlining your potential good and bad outcomes. Do this for each step of the project. Get expert help. You can’t predict hurricanes or tsunamis, but when you live on or near a coast, they need to be considered. When you purchase a rental, consider the possibility of a fire or going months without a lessor. When you are investing in an oil company, what happens if oil prices drop or rise by 50%, or in the worst case, there is an oil spill? Think of as many outcomes as you can and weigh them appropriately.
• What is the reward potential? Make sure you understand the possible gains and compare them to possible losses. Is that risk worth taking?
• When will I divest myself of this investment? Know when to cash in your gains or minimize your losses. You know the old saying: Bulls make money, bears make money, but pigs get slaughtered. Don’t be a pig. (Oink oink!)

You will never bat one thousand when it comes to being successful with your money. Losses will happen. The secret is minimizing your catastrophic losses that take you down or take decades to overcome.

I have been an active investor through two investment bubbles. The dot-com bubble of the late 1990′s and the real estate bubble.

Investment bubbles are like being a married guy at a party without the wife, and having J Lo and Katie Holmes all over you. Resisting temptation can be almost impossible, but not giving in is what makes a successful marriage. Resisting the siren call during the peak of a bubble will make you a more successful investor, but it’s damn hard!

With luck maybe I’ll have those lots paid off by the time my future grandkids are grown. They will enjoy their beach property. When I get sand between my toes hopefully I’ll be able to remember the good times I had as a kid and not let my adult stupidity get in the way of those great memories!

The original version of this article, Florida’s Beach Property Boom: A Real Estate Lesson, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

This is a guest article by Amber, the writer behind Blonde and Balanced, a blog about striking a balance in life, health, and money. Blonde and Balanced was included in my list of personal finance blogs you can trust.

Old-school financial gurus sometimes claim that renting is wasted money or that renting doesn’t provide a return on your investment. But renting is starting to gain a little more street cred in light of the recent housing market crisis. Sure, renting doesn’t provide a return on investment, but it also doesn’t come with that risk of loss like home ownership does. There are pros and cons to both types of housing, but many people are realizing that renting isn’t as financially criminal as we used to believe.

I’ve been sending off a monthly rental check for about 5 years. Renting isn’t part of my long-term plan, but it has been a great tool that helped me find my financial footing before taking the leap into home ownership. In fact, I plan to buy a home within the next couple years, but, until then, here are just a few reasons why I’m happy I rent:

Cheap rent. I realize this is not the case everywhere (just ask that “rent is too damn high” guy), but, here in Kansas City, rent is relatively cheap. My rent expense accounts for just 9% of my net income (living with someone helps, but when I lived alone, it accounted for about 21% of my net income). This allows me to save a substantial percentage of my income, putting me in a better position to (hopefully) throw down an awesome down payment when I do buy a home.

Falling home prices. For many of us Midwesterners, buying a home has always been a feasible option –- we don’t have those crushing home prices that you see in some cities. But even around here, housing prices continue to drop, just in time for me to buy my first place. If I had purchased a home right out of college, I probably would have paid more, gotten a higher interest rate, and stretched my finances way too thin. Now, my dream home is well within my financial reach – quite possibly at a fraction of the cost.

Preparing for home ownership expenses. I’m beating my future broken air conditioner to the punch by creating a home maintenance savings account now rather than relying on credit cards when I’m a homeowner. I refuse to become house poor — ever. I believe that premature home ownership is one of the biggest causes of getting buried in debt (I’ve been down that road and I don’t even want to go back). Plus, I want to enjoy decorating, landscaping, and making my new house a home without stressing about spending beyond my means. Having a decent down payment is great, but the financial burdens of home ownership are more than just paying the mortgage.

Financial stability. When I first started renting, I was in debt. I had an $18,000 car loan. I was living paycheck to paycheck. I often worried if I could pay my rent. I was spending more than I earned. Eventually, I wised up and straightened out my financial situation and renting is the tool that allowed me to do this. It wasn’t renting that taught how to be financially smart, but renting is such a small financial burden – in comparison to owning – that it allowed me to fix my finances instead of digging myself into a deeper hole. Had I jumped into home ownership when my finances were so messy, it would have been a heck of a lot harder to dig myself out of that disaster.

No strings attached. While my homeowner friends have spent many weekends on home maintenance activities, I spent my early twenties traveling and enjoying free weekends. Not to say that homeowners can’t have fun, but I’m pretty happy that I spent most of my twenties without the responsibilities of home ownership. I know building and maintaining your own home is rewarding, and I can’t wait to do that in the future, but let’s just say that I wouldn’t have been that great of a homeowner at age 23.

What are your thoughts on renting vs. buying?

Flexo’s note: As a long-time renter, I see the value of renting for many people — more than those who may realize. Contrary to what real estate agents and some financial planners believe, the house you live in is not a good investment. You also can’t ignore the costs of owning a home that build up over your lifetime, and these costs are almost never figured into the “cost basis” when people sell, as they should.

Photo (Kansas City Library): calebdzahnd

The original version of this article, Five Reasons I’m Happy I Rent, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

There are two reasons a potential home seller might balk at selling his house in a down market. First, if the value of the house has decreased past the amount he owes on the mortgage, he’s underwater, and would owe money to the bank after he sells. But even if he has paid off the house, the fear of taking a loss might stop him in his tracks, even if it’s only a loss on paper.

For example, if he purchased the house for $200,000, at the peak of the market, he determined the house value was probably $800,000, and comparable homes are now selling for $400,000. Putting the costs of owning and living in a house aside, he would have a real gain of $200,000, but it feels like a loss of $400,000 from a theoretical peak.

The brain over-emphasizes the effect of a loss, and we are wired to avoid losses if possible. Many home sellers sell their current home at the same time they’re buying another. On average, the disadvantage one has as a seller is offset by the advantage one has as a buyer at roughly the same time. This is why the real estate market is slow to recover, however. People believe the myth about the great financial returns of real estate and rather than sell when they need to, they hold on until they can report that their home ownership was financially successful.

A recent article on NPR’s Planet Money illustrated loss aversion through a coin toss where the winning and losing scenarios were slightly different.

I recently visited Eric Johnson, a professor at Columbia’s Business School. He offered me a sweet bet on the flip of a coin. If the coin came up heads, I would win $6. If it came up tails, I would lose $1. I told him I’d take the bet. But then he changed the terms — if the coin came up heads, I would win $6. If it came up tails, I would lose $4. That bet I didn’t like.

Of course, this is irrational. The bet is still very much in my favor. If I took the bet 1,000 times, I’d almost certainly make a nice profit.

I think the key here is that over time, we know a coin toss will revert to positive performance 50% of the time. Although the overall probability remains the same when you look at one coin toss, there is no time for performance to even out. There is still the chance of losing $4, and it’s a good chance. It’s the same with selling a house. You don’t have the opportunity to sell houses over time so your performance reverts to average.

One problem with this analogy is that while the results of a coin toss are random, your selling price, while perhaps not exact, is relatively well-defined. You know going into the transaction whether you have a paper loss or a gain. While clinging to a house longer than necessary in a market that has fallen is avoiding a guaranteed loss (real or paper), choosing not to take a 50/50 bet when the losing outcome seems too painful is avoiding merely the chance of a loss.

There is also the assumption that the coin toss isn’t rigged. If I offered you the opportunity to win $5,000 if the coin I toss lands on heads or to pay me $4,000 if the coin I toss lands on tails, first you’d ask yourself why I would even offer such a bet. You would consider whether I knew something about the coin that you didn’t know.

I’m sure home sellers often think the real estate industry is rigged. In fact, it is — real estate brokers are the real winners, because they can take a piece of every sale regardless of whether the seller wins or loses. They also have a lobbying group that ensures a favorable environment for real estate transactions.

Would you wait to sell a house at a time when the market is more in your favor, even if it means buying a new house when you’d have to pay more than you would today?

NPR

The original version of this article, The Psychology of Selling a House for a Loss, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

The decision of whether to buy a house with cash or take out a mortgage may be one that most people never have to face. For the most part, American society is comfortable with the idea of going in debt to buy a house for two reasons. First, the value of a house is expected to rise over time, and second, if debt was not available for buying a house, many families would never be in a financial position to own.

If you are blessed with cash available to purchase a home without the help of a lending institution, should you do it? There are certainly many advantages of buying a house with cash, but some disadvantages as well.

Cash advantage #1: no hassle. The process of qualifying for a mortgage is a hassle, even if you show you have significant assets and income available. You need to have established credit for a lender to be able to evaluate its risk in you, but with cash, you are no risk. You save time with paperwork and, in theory, the purchase process will be faster. For a seller, a buyer who presents cash may have an advantage over those who are tied to a mortgage lender’s involvement.

Cash advantage #2: less expensive. You might be able to negotiate a better purchase price when you have cash to show, but there are many other areas you can save money. Closing costs might be less, and without a mortgage you don’t have to worry about paying points. Over time, the bulk of the savings comes from interest. On a $250,000 mortgage at 7% over 30 years, you could pay almost $350,000 in interest. Pay $250,000 up front and save your money.

Cash advantage #3: no payments in retirement. With thirty-year mortgages being the norm, families who wait before buying a house may find they’re still have a balance to pay their lender by the time they retire. During retirement, income could be significantly reduced, making those mortgage payments more difficult to pay. Those with a mortgage should do what they can to eliminate payments before retirement, but if you pay cash, you never have to worry about changes in your future income affecting your ability to hold onto your home.

Cash advantage #4: you’re not a slave. I don’t fully subscribe to the idea that debt is slavery, but when you owe money to someone else, you certainly lose some of your freedom. For example, a Philadelphia homeowner was notified by his lender, Wells Fargo, who may no longer even own the mortgage due to securitization, to increase his insurance policy to covered the full replacement value of his home rather than the house’s market value. The charges would have added $500 to his monthly bill. Although the owner might be able to fix the situation, without a mortgage, Wells Fargo wouldn’t have been harassing him.

Mortgage advantage #1: bigger financial reward. It comes with risk, but if you’re planning to stay in house for several decades, and you do stay, your financial gains could be greater if you finance the purchase. If after ten years the value of the house increases by $200,000, all that increase belongs to you even if you don’t own the home outright. You could even cash out that increase if you need the money for some reason. The other size of this is that if the value of the house decreases, you are on the hook for that loss, and in many circumstances, you could end up underwater, owing the lender more than your house is worth.

Mortgage advantage #2: afford a bigger or better house. Even if you have the ability to buy a house with cash, you may still want to choose a mortgage. If you expect to have more cash on the way, you can use your current assets to help you afford a much bigger home, if that is something that is important to you. With $400,000 cash available today, for example, you could either buy a home without a mortgage or use a portion or all of that cash for a down payment and closing costs. As long as you expect more income in the future to pay for the mortgage payments, you can use today’s cash to your advantage.

Mortgage advantage #3: get tax breaks. Yes, it’s true that at least as of today, there is a tax deduction for mortgage interest. This isn’t as great a benefit as most people believe, however. You get back only a portion of each dollar in interest you pay, and the benefit is limited by income. Even with a middle-class salary, you might be prevented from taking this deduction. Of course, if you pay cash for a house, you pay zero interest, which is much better than paying interest and getting a portion of it back from the government.

Mortgage advantage #4: diversification of assets. Just having the cash to spend isn’t the only consideration. If the house you want costs $450,000 and you have $460,000 in cash ready to go, you will be left with only $10,000 for all of your other savings needs, including an emergency fund. Using all of your cash to buy the biggest house your money can by is putting all your eggs in one basket. If you have enough cash so the home purchase only requires a portion of your assets, you may still consider your financial condition safe, but once you shift all your liquid savings into an illiquid asset like a house, you may have trouble getting cash when you need it.

Would you jump at the chance to pay for your dream home with cash, or would you consider taking out a mortgage even if you have cash available?

Photo: bfishadaw

The original version of this article, Advantages of Buying a House With Cash, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

If you ask a Realtor or a national association of individuals within that profession whether now is the perfect time to buy a house, they would say yes. Of course, their answer was yes a year ago, when average prices were low, and their answer was yes a few years ago, when average prices were at all-time highs. Real estate agents are supposed to be the experts when it comes to the housing market, but they are biased. Whether buying or selling, agents make money as long as the industry is moving.

But I’ve been watching the real estate industry for the past few years. I haven’t zeroed in on a particular location yet, so I’ve been watching the national averages. Money Magazine is saying that now is a great time to buy a house, and they were able to pull off the article without any quotations from real estate agents. If, of course, you can qualify for the mortgage, and you still shop around for a deal, buying a house now might be a good choice.

Notice that I didn’t say that it would be a good investment. There is more than a good chance that the price of your house won’t move up much over the next thirty years. The short boom that we saw in the real estate market might be over, not to return for fifty years or even a century, if ever. Consider the expenses that you pour into owning a home, and you might not even come out with a profit when you sell.

It shouldn’t be the pseudo-investment aspects of owning a house that interests a buyer, it should be the ability to customize your living space and tailor it to what you and your family would like. That’s the primary benefit of ownership, but even that isn’t necessary for many people. Continuing to rent is always a valid option, skipping time-consuming maintenance needs and up-keep expenses, but having the possibility of increasing rent and the the need to rely on a landlord to take care of problems.

Would you buy a home today?

The original version of this article, Is it Time to Buy a House?, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

This is an article written by Sasha, former Consumerism Commentary staff writer. In 2007, Sasha shared her experiences with purchasing and managing residential rental properties and the lessons learned. The articles were published in a series of ten. I’ve re-edited the pieces and consolidated the great advice into one article.

Looking to diversify your investments and take advantage of the current dip in real estate prices? While by no means a passive investment, if you’re up to the challenge, residential rental property ownership can provide not just additional short- and long-term income, but tax benefits as well.

But the trick’s in the buying. An error at this critical stage is one you’ll pay for again and again over the life of the property, so it’s important to be a well-informed and cautious buyer, taking the time to do the necessary research.

My own experience with six rental properties has taught me a few things worth sharing.

1. Buy at the right price

A bargain now will help you to better withstand fluctuations in property value over time so you can profit if and when you eventually sell. Whether working with a realtor or solo, you need to develop a deep understanding of what constitutes a “value” price in the neighborhood(s) you’re looking at. As an investor, you can keep making low-ball offers and wait for the deal you want, but great bargains generally get snapped up, so you need to be able to act quickly once your target’s in sight.

You also need to benchmark rental prices for comparable units in the area, getting a feel for demand. The local classifieds are a great starting point for this, and a few hours of research should give you a good basis for determining what you can charge. Just make sure to factor in for utilities (electric, gas, oil, water, sewer, cable, etc.) if they’re included.

Depending on your personal goals, there may not be enough of a spread between what you will pay out monthly in mortgage, taxes, and utilities and what you can charge. Figure out what your spread needs to be, and analyze every house you consider against this amount. My rule of thumb, since I’m looking to make a yearly profit without much additional out-of-pocket investment beyond the down payment, is that there needs to be at least a $500 difference per month between income and costs.

Of course, a bigger spread is preferable, as it means more profit. If you’ve got a few good options to consider, the spread can aid in your decision-making.

2. Find the right neighborhood

Rental properties don’t always make good neighbors, but there are a few tricks to making it work. Overall, it’s important to find a community where your rental property will have a good chance of being accepted, and the ritziest corner of town may not be it. On the other hand, it’s hard to find and keep good tenants in bad areas, where crime rates may be higher.

I’ve had the best luck with solid working-class neighborhoods, generally middle to lower income areas where tradesmen and even some businesses might reside, intermingled with the houses. One can often tell these neighborhoods by the work vans and trucks parked in the driveways. Not only do the residents understand the value of hard work, they appreciate the effort I invest in rehabilitating and improving my properties. Your presence in the neighborhood should help to make it a better place.

Regardless of what neighborhood you choose, you never want your property to be the worst-looking one on the street, or complaints and possibly citations may follow. If you choose a property which visibly needs maintenance, you should budget to correct these issues within the first year, and ideally prior to renting it at all. This helps to show the township or city officials that you’re one of the good landlords, committed to keeping your property up, and can make a huge difference in your experiences over the life of the property.

Each property you own serves as a reference to your work, abilities, and commitment.

3. Be aware of local rental regulations

In many locales, rental properties are treated more like businesses than residences, and while 8×10 might constitute a proper bedroom in your personal home, it likely won’t be considered such for a rental property. In one local township where we presently own three properties, there are minimum ceiling heights (7′) and square footage (100 sq. ft.) for bedrooms, substantially different from what is required for residential homes. Occupancy is calculated by the township based on the square footage of the unit, so what the local realtor touts as a four bedroom home may only legitimately be a two bedroom home if rented.

Township-enforced renovations can be a massive expense; in fact, I personally know someone who paid nearly $50,000 to get two basement bedrooms and a bathroom upgraded to meet this code. He’d bought the house with a “finished basement” which the previous owners had completed without a permit. Because rental properties are treated as businesses, he was not allowed to do the work himself but had to hire an architect to draw and seal the plans, then licensed plumbers, electricians, and building contractors to do the work.

It is a safe assumption that you’ll need to bring your property into accordance with local rental regulations prior to your earning any income from the property. Knowing the issues, you can budget accordingly.

4. Ensure proper parking is available

In one local township, parking requirements for rental and residential real estate differ substantially. While almost anything goes for residential homes, for rentals, one paved off-street parking space is required for all tenants old enough to hold a driver’s license, whether or not they actually have a license or own a car. A house rented to a family of two fiftysomething adults, an 18 year old son and 20 year old daughter would require 4 parking spaces.

Other jurisdictions may institute a flat, per-property parking space requirement or even a sliding scale based on square footage. More and more municipalities are passing such regulations, which are often conditions for licensure. Landlords are being forced to either retrofit their properties to meet the new requirements or throw in the towel and sell, as some lots lack the space to provide sufficient paved parking.

Besides meeting existing regulations, off-street parking is desirable for landlords seeking quality tenants in areas where cars are de rigeur. People who care about their cars don’t like to park them on the street, so offering a protected parking spot can help you to attract better tenants.

5. Look for simple construction

That Victorian home you’ve been ogling may feature lovely leaded glass windows, but you’ll never find a suitable replacement at the local home improvement store. A slate roof is a beautiful thing to behold, but can be terribly expensive to repair. And if the roof’s very steep, costs could go up even further. A house which has simple, solid construction, where everything’s easy to access and uses relatively standard materials, is generally the easiest and most inexpensive to maintain.

As some building contractors will tell you, the shape of your structure provides a general measure of its complexity. Count the corners of your building. Four-corner buildings are often simplest to maintain and add on to, and it goes up from there.

When examining a potential investment property, consider ease of access to the heating, cooling, plumbing, and electrical systems. A panel or wall behind the shower allows quick access to plumbing in case of a problem, whereas if that shower backs up to another bathroom, you might be looking at removing a whole tiled wall.

Complicated landscaping may be expensive to maintain as well; I look for properties with a simple, small lawn, nice manageable planting bed, and ideally a large rock garden or patio. Less maintenance for your tenants and for you.

6. Beware of houses built on a cement slab

Not having a basement can cost you much more than storage space.

In some places, like parts of Florida and Texas, all houses are slab construction, so real estate investors have no other options. Even then, it’s important to understand the issues with this type of construction, as it can have major financial impact over time.

Generally, in such structures, ductwork, heating pipes, plumbing and electric lines can all be buried in or beneath the slab. If your plumbing pipes are set beneath the cement, to fix a simple leak you may end up jackhammering out the floor. Moisture and drainage issues are exacerbated in structures which are built on a slab. I’ve seen a number of slab homes which are set low to the ground, making flooding more possible and more damaging in areas without proper grading and drainage.

And any time you have a slab home, you’re looking at less living space because you may lose a room to utilities such as the furnace and water heater. It’s a safety violation to house these items within the bedrooms, so they’ll need a room or walled space all their own.

7. Look out for safety issues

An excellent value for the money, a licensed home inspector can help to identify potential safety and maintenance issues and even provide ballpark estimates for correcting these. I would personally never purchase an investment property without consulting one, as too many potential dangers lurk within and behind the walls which can turn your House Beautiful into The Money Pit.

Radon, lead paint, asbestos and mold are four primary concerns, as they pose significant health risks and can be expensive problems, requiring specialists to remediate. My insurance company will not even insure a property which it believes to have lead paint, and I’ve been hearing reports lately about local code officials doing tests which penetrate the top layers of paint to reveal any presence of lead below.

As a landlord, there are certain things you need to pay special attention to in order to prevent potential lawsuits. These include:

• Exterior stairways without handrails or where ice/snow/rain may cause a slip hazard
• Steep steps
• CO and smoke detectors (fire hazard)
• Obstructed doorways or exits (fire hazard)
• Broken windows/glass
• Cracks or unevenness in sidewalks, driveways, or walkways (trip hazard)
• Open electrical circuits, outlets or wires (electrocution hazard)
• Unfenced swimming pools (drowning hazard)
• Lack of GFI outlets near kitchen/bathroom water facilities (electrocution hazard)

As a rental property owner, you have an increased risk of lawsuits overall, so safety is a primary concern, but accidents still happen. Owners often choose to limit their personal liability risk by establishing each property as its own LLC. It is advisable to consult a lawyer to ensure that your other assets will be protected in the event of a lawsuit.

8. Stay close to home

Absentee landlords tend to find out about and resolve problems less quickly, which in turn can make them bigger, more expensive problems. Municipalities are none too fond of absentee landlords, which can also lead to bigger, more expensive problems, like fines and even citations.

Twenty minutes or less is an ideal distance; it allows you to appear involved and available to your tenants and local officials, be a visible part of the community, and respond rapidly when help is needed.

One unfortunate landlord I know attempted to hold down a busy job in Manhattan and found a startup company while managing several properties over an hour away in New Jersey. He invested a chunk of money to fix up his properties, and everything seemed fine until a minor plumbing problem occurred in one of the houses. It was an easy fix involving a five dollar part, but this landlord was late to respond. He didn’t have much luck with the local plumbers he reached out to, and more time passed. One day a plumber finally called back after visiting the house and angrily exclaimed that he patently refused to work under those conditions.

What conditions, you ask? In a house of eight tenants, raw sewage had been pouring into the basement for over two months. The muck was knee-deep, the stench was abominable, and yet the tenants, college students, had never said a word. The house was in foreclosure within the year.

9. Bigger is not always better

As your property size and square footage help to determine your tax rate, an acre or more of land really isn’t necessary. You’ll mow it (or pay to mow it) and pay extra taxes for it, but beyond increasing overall property value, it won’t do much as far as rental income goes unless you have plans to build an addition or another rentable structure on the lot.

Neither will room size. As long as you meet the minimum bedroom requirements required by the township or city, more square footage per room doesn’t necessarily help. 4 small- to medium-sized bedrooms may actually produce better income than 3 large bedrooms.

One of our rental properties featured a lovely but immense bar in its finished basement, which we immediately earmarked for removal. The small extra initial cost has paid off in the long run, especially when we decided to rent to college students. If our goal was to flip the house, we might have left it, but for our intended use it was more of a liability.

10. Utilities can use you up

Utilities can be a major issue for landlords if not set up properly. If you supply utilities to your tenants, you are generally not permitted to terminate these for nonpayment or other issues, and penalties can be severe.

Want to keep the bills in your name but have the tenants pay their portion to you? The law does not generally allow you to collect if they default on these sums, so you may risk losing out if the tenant stops paying their portion of the utility. Plus, you are still required to furnish them with these utilities, even if they fail to pay. Unless you can incorporate a flat fee into the monthly rent figure which covers your expenses even as costs continue to rise, it is best to insist that tenants pay utilities directly, under their own names. Then, in the event of default, you are not responsible.

This means that properties containing two or more rental units need to have split utilities; separate furnace, hot water heater, meters, etc. It is much easier and cheaper to purchase an already-split property than to try to do this yourself, so this is an important factor when you are looking at multiple-unit properties. Duplicate systems will mean more maintenance costs over time, however.

Good luck!

Please feel free to share your rental property experiences with other Consumerism Commentary readers. Learning from each other is one of the most powerful ways to ensure your project succeeds!

The original version of this article, 10 Tips For Buying a Rental Property, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

A family in New York is suing Citigroup. The bank’s mortgage servicing branch, CitiMortgage, is seeking a foreclosure claim against their house. The suit alleges that CitiMortgage does not own the mortgage, and can therefore not foreclose upon the property. The mortgage is owned by Fannie Mae.

The D’Amelio family has been in default on the loan, even after CitiMortgage granted mortgage modifications. They also owe more to the bank that the property is now worth. Declaring bankruptcy didn’t solve these problems, so they turned to the courts.

Fannie Mae says this is standard operating procedure; the servicer handles all collections as well as foreclosures even though CitiMortgage may have owned this mortgage for only a day before selling it to the federally guaranteed agency. The only way this case against CitiMortgage could succeed would be if a judge agrees that the mortgage documentation — none of which points to Fannie Mae as the true owner of the mortgage — is insufficient.

None of this would be a problem if the family had paid their mortgage as agreed. It’s possible that some emergency circumstance arose that would have prevented the family from doing so, but it’s more likely that like millions of other homeowners, they overestimated their ability to pay back the loan over time.

It’s interesting to see these stories of real families affected by the real estate market and their own choices. Eight or nine years ago, an acquaintance of mine, Charles, bought a house with his wife, Donna. His employment situation was iffy at the time while her career on the fast track to nowhere. They were young, newly married and did what society and their families encouraged them to do: buy a house. I don’t know exactly what they paid or their mortgage interest rate, but I do know they purchased a home in an expensive area. The husband told me off-handedly that they would be fine. House prices always go up.

A quick look at some statistics shows that their county now has the most foreclosures and bankruptcies in the state — and it’s not the most populated county. More data are hard to find, but recent average performance (value of median home prices in their town) is bad at -5% in the past few months, and I’d expect that number to be worse aver the past few years. I hope Charles and Donna are in a secure financial position now, as I try to wish only the best for people, but if we assume they’re the average family in their town, it doesn’t look good.

Embattled homeowner to bank: You don’t own my loan, Allan Chernoff, CNN, October 12, 2010

The original version of this article, Who Really Owns Your Mortgage?, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

When I get together with my father, we often talk about our plans: my plans for continuing to live in New Jersey or not and his plans to possibly move out of the state when he retires. One option he’s seriously considering is retiring to Delaware, near the ocean.

He currently lives in a relatively expensive area of the state. I expect that he won’t be struggling in retirement, but when you no longer have a steady income when work ceases, it’s going to be difficult to justify living in the state with the highest property taxes in the nation.

Several of my friends in New Jersey have migrated westward, across the state’s border with Pennsylvania. Their commute might be a bit longer that it would be otherwise, but they’re saving more money every year than they would have been able to if they stayed in New Jersey in a similar house in a similar community.

In a perfect world, the property taxes we pay — and as I renter I do pay property taxes, they’re embedded in the rent as the owners simply pass on the expenses to their tenants — are used to pay for services that benefit the entire community, like schools and emergency services. I have no problem paying reasonable property taxes as I benefit from these services, even if I have no children in the public school system. A good public school benefits the entire community. But how much is reasonable?

When looking at real estate listings, I look for tax payment estimates and other information about the quality of services in the community. Other people I know seem to be blindsided after buying their first house and finding out how much they have to pay to the local government. Do you look at property taxes while you’re looking for a new place to live? How do you weigh the taxes against the services they provide?

The original version of this article, Considering Property Taxes When House Shopping, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

New homes are shrinking. According to the the Census Bureau’s statistics, the median home new size in 2009 fell from 2,300 to 2,135 square feet. Are homeowners shifting away from McMansions? The market is soft. If new homes are smaller, is it a result of what consumers want or what builders can afford? Many new homes are built before buyers are arranged, so I’m not convinced that these figures represent a shift.

I do see that house prices are generally low, and in a rough economy, it may make sense for people to downsize. The market, however, seems to show that homeowners are staying put. Other than during the availability of the homebuyer tax credit, potential first-time homeowners are opting to rent rather than buy. On top of this, mortgage loans are difficult to obtain right now, so those who might consider moving to a house are finding they qualify for less than they’d like if they qualify at all.

Is your house typical? How well do these features of a typical American home in 2009 describe your living space?

• detached, single-family residence
• located in the suburbs
• 6 rooms
• 2 or more baths
• Central air conditioning
• Dishwasher and garbage dispenser

You can take this to the extreme. There has been some hype surrounding tiny houses. Could you live in a space measuring less than 100 square feet? If that is too much space for you, consider living out of your car. I’d like to believe I could manage to fit my life into 100 square feet, but I’ve done well to expand my life, including my ownership of stuff to fit the space available to me where I live. If forced to, I could eliminate my belongings, though living out of my car — a small Honda Civic — may be beyond my ability.

More from CNN Money.

The original version of this article, The Incredible Shrinking House, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

I mentioned recently that I’m considering buying a multifamily home in the area close to the local Ivy League university and renting out the units, and perhaps living in one unit myself. A quick search on Yahoo Real Estate reveals two are available, priced a $665,000 and $420,000. My current lease isn’t finished until July next year, so I’m in no rush to move. But perhaps I should be.

One other fact acting against my thoughts about purchasing a home is my intent to leave my day job in favor of working for myself full-time. Receiving income from a company reported on a W-2 form shows mortgage lenders that I have a stable income, but ironically I could earn more by abandoning the 40 hours I spend each week working for this company and using that time to further build my own business.

Without W-2 forms, mortgage lenders are more wary about awarding loans. I have read that having two years’ worth of tax returns showing income from a business is sufficient for proving income, but any business owner tries to reduce the amount of income on a tax return by deducting legitimate expenses as allowed by the tax code. For the purpose of a mortgage, a business owner might want to show higher income, passed onto the business owner rather than retained in the corporation (not LLC).

So this puts me in a delicate position. A quick run through a mortgage pre-qualification calculator shows that I should be able to qualify for these mortgages considering the cash I have available for a down payment and no current debt. Do I delay leaving my day job behind in favor of keeping my W-2 income or do I press my luck with recent tax returns? Feel free to leave comments with any insight you would like to share.

The original version of this article, Qualifying for a Mortgage as a Self-Employed Individual, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

I’m still a fan of the mobility and flexibility offered by renting a place to live rather than buying. I don’t know where I’ll be living in the next few years, and I wouldn’t want to deal with the expense and hassle of selling a house so soon after purchasing. Perhaps my evaluation of my situation is changing, however.

I like the area where I live. As of today’s thinking, I probably won’t move way from the greater Princeton area unless my girlfriend and I decide to live closer to her family in Queens or Long Island. The borough of Princeton is an expensive place to live, as is the surrounding township, so if I were to buy a house in this area it would be out of town.

Though the decision to buy is influenced by my needs and concerns, it’s always helpful to look at the real estate market in the area. For most non-investment real estate transactions, a homeowner would sell one house and buy another, sitting on both sides of transactions. All things being equal, he or she would not see an advantage in a sellers’ boom market because he or she would also be buying, and the same is true in a buyers’ market as he or she would also be selling. The only time one can really take advantage of a buyers’ market is when they are buying a house without selling one, as one would do when buying a first house.

That’s where I stand right now. Home prices are historically low, even if Princeton has seen a 5% increase in median sale prices over the last year. Although the Case-Shiller Home Price Index is up 3.6% this month, many analysts still forecast low prices for a while.

One option I am currently considering is buying a multifamily house, living in one unit and renting out another. With renting being a popular option right now, and with a location in close proximity to an Ivy League campus, this could be an interesting way to build equity and create new cash flow.

If I decide to move away from the area, I could rent both units in the multifamily house. Managing the house from afar could be difficult, but if there is enough cash flow, I could hire a management company.

The plan relies on finding the right kind of house for the right price. If I do end up leaving my day job, it will be harder to qualify for a mortgage and if I do, I’ll most likely have to pay higher interest rates. This plan may need to be enacted, if at all, before I quit the rat race to work on my projects full-time.

Any thoughts are welcome. Do you think this is a good plan? What would you do?

The original version of this article, Considering Buying a Multifamily House, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

I’m adding to my list another reason I’ll (probably) never buy a condominium. Condos and townhouses often require sellers to pay a fee when sold. The fee is often a percentage of the sale price, such as 1%. I didn’t know about this fee when first contemplating whether I’d ever buy a condo.

Unfortunately, it’s becoming more common for houses to require a similar resale fee. New housing developments are increasingly including a resale fee clause that requires sellers, no matter how many, pay the developer 1% of the sale price for 99 years. The money is intended for the developers, not the real estate agents.

Here’s how this works in theory. A third party manages these resale fees, selling the future income to investors, and provides a lump sum supplied by the investors to the developer. The money up-front helps spur economic development now, at a time when economic development is important, but the “natural” market isn’t supporting the level of development developers want to see. So the developers get immediate cash and the investors get the cash flow as houses are sold and purchased for the next 99 years.

Alternatively, builders can keep the 99-year income stream, avoiding the issue of securitization for investors but missing out on the cash up front.

Like all new fees, they are typically misunderstood by the consumer. According to a recent article on CNN, many homeowners didn’t even know these fees were in their contracts. Many real estate agents are unfamiliar with this practice.

This is yet another cost to consider when determining whether it’s better to rent or to own a home.

The original version of this article, Home Resale Fees, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Here’s the message conservative lenders are sending: Don’t have a baby if you want to qualify for a mortgage.

On maternity leave or paternity leave, it’s common for a family’s income to drop. If income during the leave is classified as disability income, mortgages look at this income as temporary, and they often don’t consider the possibility of the parent on leave return to full-time and full-paid employment.

In this situation, the problem isn’t Fannie Mae or Freddie Mac, the quasi-government agencies that support the mortgage lenders. They haven’t tightened the rules for lending and have no problem with maternity leave. All they require is a doctor’s note and a letter from the employer listing the planned date of return and the full salary. Some lenders won’t consider any income from the individual on family leave.

As a result, it could be difficult for families to qualify for a mortgage at the time they might feel the need it the most — when a new baby is on the way. This is something to keep in mind when planning major life decisions like starting or expanding a family and buying a home.

Need a Mortgage? Don’t Get Pregnant, Tara Siegel Bernard, July 19, 2010
Photo: Hafdis H

The original version of this article, Pregnant Women Are Liabilities to Mortgage Lenders, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

When it comes to walking away from a house and mortgage, wealthy homeowners are doing their part. Not only are those with a $1 million net worth or above more likely to stop payments, but they are also more likely to see their home as an investment and cut their losses.

Of homeowners with a high net worth, more than 1 out of 7 are delinquent with their mortgage payments. Only 1 out of 12 homeowners with a lower net worth are late. These statistics are the result of a survey by CoreLogic. Here is some analysis from the New York Times:

The CoreLogic data suggest that the rich do not seem to have concerns about the civic good uppermost in their mind, especially when it comes to investment and second homes. Nor do they appear to be particularly worried about being sued by their lender or frozen out of future loans by Fannie Mae, possible consequences of default…

“Those with high net worth have other resources to lean on if they get in trouble,” said Mr. Khater, the analyst. “If they’re going delinquent faster than anyone else, that tells me they are doing so willingly.”

For most people, a house isn’t a good investment, but these rules don’t apply to the rich who own multiple properties and expect their own personal brand adds to the value of the house in a way that increases property value at a rate higher than the rest of the real estate market. Some people benefit from viewing their homes as an investment, particularly with today’s low mortgage interest rates.

In addition, many among the super-rich purchase properties through trusts, so their personal wealth is further protected if they decide to abandon their mortgages. For a typical individual, abandoning a mortgage could have drastic repercussions on his or her ability to buy a house in the future.

Biggest Defaulters on Mortgages Are the Rich, David Streitfeld, New York Times, July 8, 2010

The original version of this article, Rich Homeowners More Likely to Walk Away From Mortgages, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Lindsay Binegar, now nineteen years old, has been raising hogs on her family farm in Highland County, Ohio, since she was at least four years old. That was the age at which she showed her first hog and earned $100. Since that time, Lindsey entered hogs in competitions, saving every penny she earned from these shows.

Including her recent winnings at county fairs, Lindsay amassed $40,000 for her education. She is now a freshman at Ohio University’s Chillicothe campus. Her parents agreed to pay for her education if she continued living at home and commuting to school. This arrangement freed her $40,000 for a different investment.

As luck would have it, her father runs an auction service. Through an estate auction her father was handling, he was able to set his daughter up with four-bedroom, two-bathroom, two-story house for $40,000 in their town of Greenfield. According to quick research on Zillow, this is an amazing deal if the house doesn’t need too much work. She plans to rent the house to relatives and use the income $450 per month income to save up for a custom-built house for her and her fiancé.

My first reaction to hearing this news is that it’s a bad idea for someone young to invest a windfall in just one thing. As this is an income-producing property for her, and she had an opportunity to find a house most likely well below market value, it’s hard to find fault. Change just a few variables in the story, and the outcome could be different. If her parents couldn’t afford to send her to college, that saved money might have had to stay destined for her education. If her father weren’t the owner of an auction service, she might not have been exposed to a fantastic opportunity.

Nevertheless, these opportunities worked in her favor, and according to the story, she has made sensible decisions about money throughout her life. You can’t go wrong with buying a house with cash, though it’s best to do only if you’re not spending 100% of your net worth. A cash cushion or emergency fund would be the primary concern and investments for the future a close second.

Photo: The Pug Father
Frugal teen buys house with 4-H winnings, Kathy Lynn Gray, The Columbus Dispatch, May 17, 2010

The original version of this article, 18 Year Old Buys Investment Property With Hog Money, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

On the surface, it seems like it would make sense to enroll in a biweekly mortgage payment plan. In theory, these biweekly mortgage programs offered by lending servicing companies work by allowing you to send half of your monthly mortgage amount every two weeks. As a result, you make two “extra” biweekly payments each year, reducing the total number of months it takes to pay off the mortgage.

There are some misconceptions or disadvantages, though, so it pays to read the fine print before you sign up for one of these plans.

• You may not save on interest. While it sounds like sending a payment earlier in the month will reduce the amount of interest you need to pay, that is not necessarily the case. Furthermore, even if you send a partial payment early, your loan servicing company may just hold onto your funds in their own account before sending one monthly payment to the lender.
• You might pay more. Loan servicing companies often charge extra fees for biweekly payment plans. You may need to pay an up-front fee of over $400. If not, the company will likely charge a transaction fee for each payment you make or a monthly fee for remaining within the program.

If your loan agreement allows it, you would most likely be better off creating your own accelerated payment plan.

• Check with your lender to make sure you will be allowed to send a payments early.
• If you are allowed, ask whether you will be charged a fee for prepaying your mortgage. This fee punishes consumers who want to be more responsible about their mortgage payments.
• Next, ensure that the lender will credit the funds to your loan right away rather than waiting until the end of the month.
• Furthermore, you must indicate that any payment above the amount you owe each month should be applied to reducing your principal, not interest, to reduce the total amount of interest you pay over the course of the loan.

If the lender responds with favorable answers, pay extra each month, ensuring to note on your payment coupon that the extra funds should be designated towards the loan principal.

Don’t forget to consider investing rather than accelerating your mortgage repayment. Depending on your goals, your time horizon, and your plans for leaving your current house, prepaying your mortgage may not be the best financial decision.

The original version of this article, Biweekly Mortgages: Do It Yourself to Save Money, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

This is a guest article by Christian of Money Obedience. If you enjoy this article, please consider subscribing to the MoneyObedience RSS feed.

My parents offered a very important piece of wisdom to me: Even if everybody is doing something, you do not have to do it, too.

Unfortunately I usually applied this advice to the great parties that were going on in town, where “everybody” showed up except for me. Like any teenager, I did not really appreciate the deeper meaning of this sentence until much later. It still doesn’t make much sense in connections with all the great parties that went down without me — maybe I am missing something — but I have applied the saying to many different areas of my life including personal finance.

It is so easy to get caught up in things like the housing frenzy, which seemed to give everybody who was in it overnight riches. Why not participate? “Everybody is doing it. Everybody is making money.” I think I stood aside then partly because my parents insisted often enough that I did not have to participate even if “everybody” else did. The other reason was that I could not see house prices going up for long when new houses were being built left, right, and center. But I am sure some who invested in real estate must have seen the same thing and yet they still invested in real estate.

It’s not like I didn’t feel any pressure to participate. All my in-laws became real estate investors and were getting rich. So, at times I felt stupid when “everybody” was making money hands over fist in real estate a few years ago. During that time my wife and I also bought a home, but we did not follow the prevailing trend to buy as much house as possible.

Instead, we bought a house that was well within our financial means. We did not think of ourselves as real estate investors; we viewed ourselves as future homeowners. My wife and I wanted to buy a house for our family because we needed a home and not a way to easy riches. We bought the house even though we knew that the housing market was in an unsustainable frenzy.

We didn’t feel like we participated in the speculation. We were “real” buyers.

Crazy stuff was happening then, but I could not see myself going along with some of these things. For example, I could never imagine to follow the majority when 82% of all refinancing were cash-out mortgages in the first quarter of 2007. Why would I want to take out a larger loan in refinancing, when I had done so well paying off my debt already? It makes no sense to me personally, but it did to all the people who joined the majority. All these missed parties paid off. I stood aside.

And now I feel like I am outside the mainstream again. Just as it was in fashion to be invested in real estate a few years ago, it now seems to be in fashion to deride real estate in general. After all, our most recent history teaches us that real estate led us to the current economic problems.

We humans have a tendency to give too much value to our most recent experiences which is why it is not so surprising that so many commentators are cautious about real estate investing right now. But let’s be daring and go back a little further than 2000 or 1990. Let’s look at our parents and grandparents. How successful were they in real estate investing?

In days gone by people did not invest in real estate. They, like my parents, got themselves a nice little house with a good enough down payment and then they made their mortgage payments month after month until the mortgage was paid off. They did not know what an interest-only mortgage or a cash-out mortgage was. From what I can tell, my parents did very well with their real estate investing. They ended up living in a house free and clear when they retired, which allows them a pretty comfortable standard of living and which also frees up enough money to indulge our kids with toys.

My parents ended up being pretty successful real estate investors, but they were not true investors. They were homeowners, plain and simple, just like their parents were. This real estate investing technique has worked very well for many decades. It worked until we forgot to understand that our parents’ and grandparents’ real estate wealth did not come from investing. It came from buying a home and paying it off with a mortgage that forced them to pay interest and principal each month. Nothing fancy here. Their house was not a drag on their finances as many argue now, their house was a piggy bank.

One way or another they spent money on living somewhere. Just like we do. But they used their monthly mortgage payments to accumulate wealth over time. These payments were not viewed as a drag on their finances; they kind of became forced savings. How can this make sense when they are paying interest, an expense, and not receiving income?

Here’s an example. Nicole pays $1,200 in interest and a minimum of $350 in principal right now. If we assume that another adequate living space would also cost around $1,200 a month to rent, we can view the $1,200 in interest payment as rent payments. (I am ignoring taxes to keep thing simple.) The $350 reduces the principal of her loan. Eventually she will own the house free and clear without a mortgage attached to it. Her net worth — everything she owns less the stuff she owes — will look pretty good then. And all she did was pay back a loan, month after month after month. But she actually added $350 a month to her net worth or savings without knowing it.

All we need to do is be sensible. We don’t need to gamble on real estate riches. At the same time we don’t need to be scared that buying a house will destroy our wealth for sure. We need to step aside and ignore the prevailing fashion of the times and just manage our own personal finances. That includes buying a house with a solid down payments and making sure that we can afford the monthly payments. That has worked so well for so many generations before us. It should work for our generation, too.

The original version of this article, The Best Way to Invest in Real Estate, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

This is a guest post from MD of Studenomics, a blog for twenty-somethings who want to make more money, have more fun, and get the most out of their savings. Don’t by shy, stop by and consider subscribing.

You graduated from college a little while ago, finally found that first lucrative job, and now it’s time to get out of your parent’s house. Congratulations! Before you pack up your clothes, books, and collection of DVDs, and wave goodbye to your parents and their additional cleaning, cooking, and laundry services, consider the following.

Your credit score

Have you checked your credit score lately?

Your credit score determines whether you’ll be a trustworthy tenant. Pretty much every landlord these days will run a credit check on you to see where your credit score stands. A low credit score can interfere in you getting that basement apartment just outside of the city. Don’t let past decisions dictate where you’ll live in the future.

Your credit score also dictates whether you can qualify for a home mortgage. The lower your credit score, the higher of a risk you become to the bank. If the bank thinks you’re a risky customer, they may charge you a high interest rate, ask for a large mortgage down-payment, or not even give you the mortgage at all. After the credit crunch, this is more likely than ever.

Check where your credit score stands before you decide you to move out.

Your money in savings

How much money do you really have saved up? Will you have to dig into your retirement savings or emergency fund to cover moving costs? If you plan on renting a place to live, do you have enough money to cover a few months of rent if anything were to happen? If you plan on buying a house, do you have more money saved beyond the “down-payment” money?

Where do you want to live?

Your location will dictate how much money you need to have available. If you decide that a condo downtown is the best fit for your lifestyle, then decide to save a lot of money. Moving out in general is costly, but where you decide to live will determine how much money you will need for the day you decide to take the big leap.

The reason behind the decision

Are you moving out because you’re getting married? Are you moving out for a new job? Or are you simply moving out to improve your social life? One of those reasons may not be worth the cost.

Classic view on renting

Let’s challenge the idea that paying rent is throwing money away. You’re not throwing away money by renting! You’re paying for shelter, a roof over your head, a place to sleep, and a place to bathe. If you feel that paying money for a place to live in is “paying the mortgage for someone” then you should stay at home for as long as you can.

I’m not trying to say that renting is better than owning. The decision to rent or own a home should be a conclusion you come to on your own after extensive research and considering all of the factors. Just please shift away from the “throwing money” away mindset and look at all of the costs involved.

How stable is your income?

Sure, you could be earning a decent income today, but how stable is this income? Will you have this job in one year from now? Will you want to switch jobs in the near future? A friend of mine almost purchased a condo downtown a few months ago. He had everything taken care of except for one thing: his job could send him anywhere in the world. It’s a good thing he didn’t purchase the condo because he will be leaving town next year.

The costs involved in owning a home

Are you aware of all of the real estate fees you’ll have to deal with when you own your own home? The costs of home ownership go far past a down payment. Are you ready to pay for homeowners insurance, land transfer fees, moving costs, closing costs and lawyer fees, and the supplies and resources needed to maintain a decent home?

Many of my older friends who purchased a home immediately after graduating college tell me they absolutely regret it. They say home ownership reduces their flexibility and their finances were always tight due to the never-ending home ownership expenses.

If you think buying a home is better than renting, you must ask yourself this: Am I buying the home for the right reasons? I find that most people want to be “home owners” because of information that has been indoctrinated in us since we were little kids. It’s 2010 now. Certain “conventional wisdom” is no longer relevant and the home ownership debate has drastically changed.

Living on your own may be a solitary endeavor, but there’s lots of help available on the internet. Do your research before you make what is one of the biggest decisions of your twenties.

Photo: Seton Hall University

The original version of this article, What You Need to Know Before Moving Out, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Earlier this month, Bank of America changed its overdraft policy in a manner that seems to benefit its customers. Those using the bank’s debit cards for purchases will no longer be able to overdraw their account, generating overdraft fees. Instead, Bank of America will simply decline the purchases. This wouldn’t affect checks and pre-authorized debits, so your rent payment won’t bounce.

Bank of America, after repossessing the wrong house and a parrot, wants to get back on customers’ good sides. The “Making Home Affordable” program was set in motion last year, but banks have been hard pressed to help troubled borrowers. This announcement seems to be a step in the right direction.

This is in the bank’s best interest as well, as modifying loan balances will reduce the chances that borrowers will simply walk away from their homes, leaving banks with the houses — assets they are not prepared to deal with.

Here is what customers need to qualify:

• Customers must have a sub-prime mortgage or certain adjustable-rate mortgage on their house.
• Borrowers must be at least 60 days behind on their payments.
• The value of the mortgage must be at least 120% of the home’s value.
• The home must be the primary residence.
• The amount owed on the mortgage must be less than $729,750.
• Customers must have acquired the mortgage before January 1, 2009.
• The total payment on the first mortgage (including principal, interest, taxes, insurance and homeowner’s association dues, if applicable) must be more than 31% of your current gross income.

Borrowers who qualify will be able to receive a forbearance of mortgage principal. After five years of timely payments, the forbearance will become forgiveness. This will result in a modification of the principal balance, but Bank of America will not adjust the balance below 100% of the home’s appraised value.

If the plan is put into motion and 45,000 borrowers take advantage as expected, and if the bank cooperates, many homeowners will be effectively somewhat bailed out, much like banks and insurance companies. If other banks follow suit and there begin to be results from the Making Home Affordable program, expanding beyond 45,000 troubled homeowners, this could be the “Main Street bail-out” the public has been calling for.

The original version of this article, Bank of America Starts Modifying Mortgages, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Bank of America is controlling the news cycle lately. First, the bank eliminated overdraft fees for debit card purchases. Now, the bank has apologized to a woman for seizing her parrot.

Back in October, Bank of America believed Angela Iannelli was defaulting on her mortgage and she had abandoned her house. The bank ordered a contractor to visit the house to install a new lock and otherwise secure the location. The contractor saw Luke, a blue macaw, and took the pet, believed to be abandoned, away for its supposed safety.

When Iannelli called to rectify the situation with the bank, here is how the conversation progressed, from the Wall Street Journal, where the story was originally reported:

Ms. Iannelli, who owns a diner and works part-time as a bartender, said Bank of America representatives weren’t helpful when she called in to protest. They first denied knowing where the parrot was, and later told her she could go to the offices of the contractor, about 80 miles away, to retrieve the bird herself. Ms. Iannelli said bank representatives also told her they were “tired” of hearing from her, hung up on her and advised her to seek help from the police.

This incident occurred after the owner missed only one mortgage payment. She is now suing for $50,000 for the emotional distress of the event and the week she spent without Luke, in addition to the other actions taken by the contractor. Before the contractors walked off with the parrot, they cut water lines and electrical wiring and poured antifreeze into various drains.

Even if the bank had the correct information and were stepping in to secure a house that was truly in trouble, these actions seem drastic.

Bank Sorry for Taking Parrot, James R. Hagerty, Wall Street Journal, March 11, 2010

The original version of this article, Bank of America Seizes Parrot, Owner Sues for $50,000, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

The market for Hollywood Hills homes of the stars hasn’t been immune to the real estate downturn. Although she purchased the house for $7 million in 2007, the asking price is now $4.59 million. Judging from the photographs on CNN Money, the villa looks like a great place to live.

CNN Money often profiles houses for sale. Occasionally readers see fantastic homes like Scarlett’s, and other times the website features houses on the other end of the spectrum. A few months ago I read a feature about a family that was having a hard time selling their home. It was on the market for six months, but potential buyers would pass it over. From the photographs, it was obvious this family didn’t care for their home. If you want to sell in a tough market, and you want to get a good price, you have to treat the home like a presentation.

Judging from the photographs of Scarlett’s mansion, there is not much she needs to do. The villa sells itself as long as there are enough millionaires ready to buy.

Having your home featured on CNN Money, if it is in good condition rather than a joke, could bring more attention to your sale. Although most of the millions of readers will not be looking for a home in your area, any publicity is good publicity.

Buy Scarlett Johansson’s hilltop manse, Ben Rooney, CNN Money, February 9, 2010

The original version of this article, Scarlett Johansson’s Home For Sale at $2 Million Loss, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

A year ago, a group of investors offered $20 million to buy the Pontiac Silverdome, the seldom-used, dome stadium that used to be the home for the Detroit Pistons and Michigan Panthers. The deal eventually fell through. In a sign of the state of the commercial real estate market, the winning bid for the Silverdome in auction this week was $583,000.

It cost $55.7 million to build the stadium 35 years ago, but today the location where Pink Floyd surprised fans in 1994 by playing Dark Side of the Moon in its entirety for the first time since 1975 is worth less than the new houses down the street from me.

The lucky buyer is a Canadian company that is said to want to bring soccer to Detroit, but Major League Soccer disavowed any knowledge of these plans.

The whole situation seems suspect. What happened in the last year to drive the market price down from $20 million to less than a McMansion? Did the Canadians get a deal that’s too good to be true? Or should this be expected considering Pontiac’s proximity to Detroit, a city in desperate need of economic recovery?

Photo credit: Dave Hogg
Silverdome sale price disappoints, Mike Martindale, November 17, 2009

The original version of this article, Pontiac Silverdome Sold for Less Than a House, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

It’s official. Today President Obama will sign a bill into law that extends the $8,000 First Time Home Buyers’ Tax Credit, recently set to expire on November 30, until April 30 next year. The tax credit, originally part of the American Recovery and Reinvestment Act of 2009 was intended to stimulate the real estate industry, and Congress has been talking about extending the credit for months.

1.8 million home buyers have qualified for the $8,000 first time home buyers’ tax credit so far or will qualify by the end of November. According to the National Association of Realtors (who have a vested interest in seeing the credit be extended and expanded) says 335,000 of those home buyers would not have purchased a new house if not for the credit.

With house prices still lower than their highs and not much activity in the market, the industry wants more stimulation. And the industry is getting more than the $8,000 stimulus. Formerly, the tax credit was available only to home buyers who hadn’t owned a house in the past three years. The new bill adds a $6,500 tax credit for current home owners who buy a new house, and who have lived in their current house for at least five years. The extensions comes at a cost of $10.8 billion over 10 years according to the Joint Committee on Taxation

In order to qualify for either credit, the purchase contracts need to be signed by April 30, 2010 and the closing must take place by June 30, 2010. The value of the purchased house must be less than $800,000. There is an income limitation as well, but it has been increased with the passing of this bill into law. If your adjusted gross income is above $125,000 (single filers) or $225,000 (joint filers), the maximum credit you are allowed to claim is phased out.

The extension of the home buyers’ credit was included within H.R. 3548 (Unemployment Compensation Extension Act of 2009), a bill which increases unemployment benefits for Americans for up to 20 weeks.

Do you think this extension is a good idea or with the economy beginning to improve, should we cease creating more stimuli?

Photo credit: pnwra

The original version of this article, President Obama and Congress Extend the $8,000 Home Buyers’ Credit, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

The $8,000 tax credit for first-time home buyers is set to expire at the end of November, but lawmakers don’t want this benefit to end. While there have been some positive signs in the real estate market, the current credit hasn’t done much to stimulate house prices or the economy overall. All year, some senators and representatives have been suggesting improvements designed to further jump-start the real estate industry, none of which have been passed yet. Here are some of the enhancements they have been considering.

• Extending the deadline from November 30, 2009 to May 30, 2010 or November 30, 2010.
• Expanding the credit to all home buyers rather than just those who have not owned a house in the past three years (otherwise known as “first-time” home buyers).
• Increasing the credit from $8,000 to $15,000.
• Eliminating the income cap for qualification of $75,000 (or $150,000 for married filers).

These changes, if signed into law, would redirect the focus of the credit from the average consumer who needs a little boost to purchase a primary residence to investors and speculators. Flippers would still be discouraged because the bills currently under consideration in the House and the Senate both call for paying back the credit if the house is sold within two years or if the purchaser is not a primary resident sometime within two years.

For many people, $8,000 is not a big enough incentive to buy a house if they aren’t financially ready to do so. I don’t think increasing this to $15,000 would change much. This credit, if the changes become law, is a bailout of the housing industry, just like Cash for Clunkers was a benefit for the auto industry.

The original version of this article, Congress Plans to Extend the First-Time Home Buyers’ Tax Credit, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

My wife and I enjoy our apartment, but we’re preparing for the day when we can make the jump to a house. We could use the extra space, and we’re ready to get away from some of the ticky-tack regulations and rules that landlords love to use.

Financially, however, our preparation is lacking. It isn’t because we’re not trying, but we’ve decided that we’d like to have a sizable down payment and know exactly what we’re getting into. We haven’t had much debt in our marriage so far, and so in some ways, we’re reluctant to dive in.

For this reason, buying a foreclosed home is something that has been very interesting to us. I was first sucked in by hearing radio commercials announcing homes for sale for just $12,000 or $22,000. I naïvely thought, “wow – $12,000? We can swing that. We’ll be in a house in no time!”

Turns out, such was not the case. While properties going for those prices are available, most foreclosed homes can be found going for between 20-40% off the value of the home, according to AOL Money. While this isn’t rock bottom, it’s still quite a bit more affordable than a full-priced home.

According to the same AOL Money article, there are five tips that can make buying a foreclosure a realistic choice for many potential home buyers.

1. Find a property. The article recommends checking two sites: Foreclosure.com and RealtyTrac. Both charge a fee, but they each list thousands of properties. The best places to look are areas that are places that have a high grouping of “distressed properties.” Doing a bit of research about the local economic situation can help as well – you’ll obviously have better luck in areas with more foreclosures.

2. Skip the auctions. At an auction you’re usually buying a home without seeing it first. Before you make any serious offers on a property you’ll want a full inspection, and that’s hard to do with properties that are auctioned off by a court. You may also be responsible for back taxes on the property, something that might not be disclosed during the action. The best thing to do is to wait for the bank to put the home back on the market. They’ll usually pay off any taxes or debts, and fix the home up a bit to attract potential buyers. This is a much safer way to buy.

3. Know local home values. As the article states: “Just because a home is being sold b the bank, doesn’t necessarily mean it’s a bargain.” If you find a property your interested in, use a site like zillow.com to compare values of the homes around it to make sure that you’re not getting ripped off.

4. Get Financed Before You Shop. Apparently many banks won’t make a loan for you to buy a ‘distressed property,’ so it’s a good idea to get pre-approved for a mortgage before you start seriously shopping for home. Other banks base their loan on the condition of the property, so to avoid any problems, get your financing set up first.

5. Get an Inspection. I’ve already mentioned this earlier, but an inspection is key. You want to know as much as possible about a house, and paying for a professional inspection is worth it. Homes in foreclosure can be hiding serious problems, since the previous owner probably didn’t have money to make major repairs, or even perform routine maintenance.

With an inspection you’ll know not only the condition of the home, but what kind of repairs are needed and how much you can expect to pay for them.

While we’re still a while from seriously shopping for a home, we’re planning on checking out foreclosures for sure. Any money we can save on a home would be a leg up financially, and put us that much closer to being debt free again.

What thoughts or experiences do you have with buying a foreclosed property?

The original version of this article, Is Buying a Foreclosed Property Realistic?, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

A few years ago, a coworker formed an investment partnership in speculative real estate. He promised investors a 10 percent annual return and was using the capital to invest in Florida real estate, earning 15 to 20 percent overall. As most of the real estate had not even been inhabited or built yet, the investments were pure speculation. I haven’t been in contact with this individual, but I am wondering how this business is doing in this real estate market.

If you have a mortgage on a house you purchased recently, there is a good chance you now owe more on this loan than your house’s market value. These chances are even greater if you bought into the speculative markets in Arizona, Nevada, or Florida like my former coworker.

Owing more on your loan than the house is worth is not the worst financial situation, but it is risky. If you need to sell your house, you would still have to raise more money to pay off the remainder of the loan. If, on the other hand, you are lucky, you can remain in your house long enough to continue paying off the loan and to wait for home prices to return to the average rate of appreciation of about 3 or 4 percent. Eventually you could come out ahead.

If you find yourself in this position and you care not to be, you can make the time work harder for you rather than against you by increasing the payments towards your mortgage. A pure analysis of the numbers might say that it’s better to invest in the stock market rather than pay off your mortgage faster, but that doesn’t account for the risk of staying in a house whose loan is under water, and that risk can be measured differently by different families in different situations.

Robert Kiyosaki popularized the idea that a house is a liability. He is, of course, technically wrong. A house, and anything you own is an asset, while a mortgage, and anything you owe, is a liability, despite any marketing materials that try to redefine the words. But when your mortgage is higher than the market value of your house, you have negative equity, and that asset is not looking so helpful on your balance sheet.

This negative equity is mostly a result of speculative investing. The news that so many homes are under water invites criticism of home owners who bought a larger or more expensive house than they could afford and have now suffered the effect of a downturn in the real estate market or interest-only mortgages than have now adjusted to include principal payments. But that is only a small problem in this market, it is the speculative investing that accounts for the under water loans.

The areas that were identified as the largest contributors to the total number of home loans under water were the locations that saw some of the biggest increases in home prices as investors gobbled up as much property as possible. These investors intend on selling more frequently than a typical home owner, so they are more vulnerable to the market downturns that result in negative equity.

Are you under water with your home loan? Are you doing anything about it now or are you waiting for home prices to return?

Almost one-third of home loans under water, Emily Glazer, MarketWatch, August 13, 2009
Photo: respres

The original version of this article, One-Third of Home Loans are Under Water, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

“Now is a great time to buy.” That has been the advertising mantra of the National Association of Realtors regardless of the state of the housing market. The NAR certainly has a purpose; its mission and vision is clearly displayed on the organization’s website: “The core purpose of the NATIONAL ASSOCIATION OF REALTORS® is to help its members become more profitable and successful.”

The NAR looks out for its due-paying members. Notice that the mission of this non-profit organization is not to help consumers either find bargains when buying a house or to help sellers find the highest bidders. Real estate brokers, particularly those who qualify as Realtors (which according to the organization, should be represented in all uppercase letters, include the registered trademark symbol, and be pronounced in the unnatural American English combination of phonemes “REAL-TORE”) stand to be more “profitable and successful” by increasing the number of transactions they broker.

From what I understand about commissions, a 6% commission is often split between the buying agent and the selling agent, and if the agent is part of a realty company, the 3% is split with the company. A real estate agent holding out for a buyer’s asking price of $250,000 rather than $220,000, a difference of $30,000, stands to increase his income approximately $450. That seems hardly worthwhile if it takes several months before the asking price is met. The $450 is hardly an incentive for the broker; he could do better by closing the deal and moving on. On the other hand, the $28,200 (the $30,000 in price difference minus the 6% paid to the agents) is a significant difference for the seller. This just illustrates that real estate agents have little incentive to work hard for either the seller or the buyer except to create a good relationship in order to foster referrals.

That’s not the point. The point is that the National Association of Realtors’s only goal is to encourage more real estate transactions, and this is why they have been saying that, “Now is a great time to buy,” no matter what’s going on in the world around them. This is also why any data provided to the public by the NAR should be regarded as marketing rather than a true gauge of the economy.

For a well-accepted measure, media generally turn toward the Case-Shiller Price Index (CSPI), measured by Standard & Poors (a company with its own conflicts of interest as well). The CSPI shows that home prices increased for the first time in May. Other positive data include June numbers: new housing starts and existing home sales were both up 3.6% and sales of new homes were up 11%.

Is this a sign that the housing crisis is over? It must mean that there is increased confidence in the ability to find the right price as well as increased availability of loans.

There are some problems, though. Unemployment continues to rise, so consumers may find themselves in financial trouble. That could result in fewer purchases and more mortgage defaults. The increase in purchases may be due to speculators trying to snag deals rather than families moving from apartments to houses. Even if we are at a bottom, the numbers could mean that real estate is leveling without significant increase for some time.

What do you think? Are we headed for a recovery or are there still dark clouds ahead?

Looking for a Housing Recovery, Casey B. Mulligan, New York Times, July 29, 2009.

The original version of this article, House Sales Improved in June, But is the Housing Crisis Over?, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

The real estate recession doesn’t discriminate. While foreclosures have soared to one out of 84 households over the course of the first six months of 2009 and the Obama administration is considering more aid to help families in this situation, the threat is also affecting famous properties.

The owner of the famous Watergate Hotel in Washington, D.C., Monument Realty, has defaulted on its loan. The lender, PB Capital, wasn’t able to agree on new terms for the loan, and the city’s foreclosure notice expires today according to the Washington Post. The property, made famous by President Nixon, is going up for auction next week.

Are you bidding? I see a lot of potential in this property, despite the fact it has been empty for a while, due to its iconic status. And if I see the potential, there is a good chance a number of savvy real estate investors do as well, driving up the price on the auction block. But who has the money?

Photo credit: brownpau

The original version of this article, The Watergate Hotel is in Foreclosure, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

Update: The first-time home buyer tax credit has been extended and expanded. Click here for the latest details. The information below is now out-dated.

The Senate is considering a number of changes to the $8,000 first-time home buyers credit. Spurred on by Sen. Johnny Isakson from Georgia, the adjustments being considered seek to expand the credit to spur the real estate industry.

Here are the changes some Senators would like to make to the original law.

Expand the maximum credit from $8,000 to $15,000. When the first-time home buyer credit was first suggested as an amendment to the Senate’s 2009 Stimulus Bill, home buyers would stand to receive a credit worth 10% of the purchase price of the house up to $15,000, and the credit would be distributed over a course of two years. This amendment did not end up in the final law. The limit was reduced to $8,000.

Eliminate income limits for the credit. In the current law, the amount of the credit phases out when the taxpayer’s modified adjusted gross income is over $75,000 (single) or $150,000 (married) and fully eliminated when income reaches $95,000 or $170,000.

Make the credit available to all home buyers. Home buyers qualify within the “first-time” label if they have not owned a home in the past three years. The current credit is limited to the first-time home buyers, but the new legislation making the rounds would change the rules so any home buyer would receive the credit.

These changes will benefit many people who are deciding whether to buy a house in this market. It should continue to increase activity in the real estate industry and provide more work for real estate agents. It could, however, encourage buyers to spend more for a house than they believe it is truly worth.

Real estate investors (speculators) will also like these new rules for the tax credit if they become part of the law. Overextended consumers and real estate speculators led us to overpriced real estate values, a bubble was formed, and eventually deflated or collapsed. Will these changes to the law, if enacted, just put the real estate industry back into a precarious position or will they put is back on the right path?

The original version of this article, Extending the $8,000 First-Time Home Buyer Credit to $15,000, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.

The latest data show again that you shouldn’t expect to make more money from buying and selling the house you live in than you would from investing in stocks. In fact, you could do better with government-issued inflation-protected bonds. This isn’t just a result of the recent decline in home prices, 19% over the past year. The long term figures show that real estate barely beats inflation.

This doesn’t consider the annual expenses you pay to maintain and live legally in your home, like insurance, association fees, and taxes. In order to compare return from the sale of your home with that from a sale of any other investment, you need to consider the total cost, including the above as well as closing costs, broker fees, and the amount you pay the people who stage your house with fake furniture when you sell. People I have talked to like to take their selling price, subtract their buying price, and state that as their real estate profit, ignoring all the costs they wouldn’t have had if they hadn’t purchased their house.

Gurus have long touted real estate as the best method for “getting rich,” but this concept does not compute if your only purchase is the home in which you live unless you get quite lucky. And unless you rent when you sell your house or downsize to a smaller house or a less expensive location, you won’t be able to enjoy the profit, if any.

Rather than looking at your own home as an investment, consider it a cost center that you should try to reduce as much possible to make the most of your purchase.

Is Your Home A Good Investment?, Brett Arents, Wall Street Journal, May 27, 2009
Case-Shiller shows slowing in home-price decline, Reuters, May 26, 2009
Photo credit: jblyberg

The original version of this article, Your House Is Not a Good Investment, is copyrighted by Consumerism Commentary.

If you enjoyed this article, follow @flexo on Twitter and visit Facebook for more updates.