1031 Exchange

Are you an seller or investor looking to sell a property, buy a new property, but want to avoid paying capital gains or recapture taxes?

Have you heard of 1031 exchange? This is a process where you are redistributing the equity of one property into another investment, to defer additional taxes.

Here are some simple facts on the 1031 process;
1. Sell property & identify new purchase within 90 days.
2. Find a like kind/replacement property you want to acquire. (Must be equal or greater value).
3. Reinvest all equity into the new property OR apply equity to a higher valued property.

This transaction is similar to a trade, where the equity is transferred to a new property, rather than received as proceeds, and taxed.

We have had clients sell a long term investment property, for a new construction investment, sell their investment, and apply the proceeds towards a portion of an investment or, apply the equity of one property to the purchase three new properties.

As part of the exchange process, the purchase property must be identified with in the specified time frame, and the owner may not receive cash or other benefits from the sale.

Using a Qualified Intermediary to complete this process is highly recommended, given the complicated nature and timing of the transactions.

If you have more questions about completing a 1031 Exchange, our team has completed these types of transactions on our personal properties, and for clients. Contact us today, for more info!

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When is the best time to sell my house?

Sellers always want to know: “When is the best time to sell my home?”. Many automatically think that spring is the best time: after winter is officially over, when their yards look the best, and as kids are finishing their school year. Surprisingly, putting your home on the market in the winter, specifically from January to March is more advantageous. According to a study by Redfin, this theory was confirmed. In their research, they tracked list to sales price, and days on market from October 2010 to December 2014 across several real estate markets. After analyzing four years of research, Redfin concluded that winter months offered sellers: higher percentage of “above asking” sales prices, less competition with other homes and more serious buyers than other times of the year. Along with potentially higher prices, homes were also on the market less time than other points during the year.

Redfin’s study also concluded that if sellers want to get more than their asking price, they have a better odds listing their home in December through March, compared to June through November. The reason for this, is simply competition and inventory available to buyers. When more housing options are available through the summer and fall months, buyers can choose between a number of homes. While some markets may differ, housing markets across the country saw better sales prices, in early months, compared to later in the year. Additional info on the Redfin study can be found here: Best time to list?

Although each individual seller’s situation and home is different, if you would like to know more about the best time to sell your house, contact us today for more details.

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Top Posts for Relocation Resources When Moving to Washington, DC, or Northern Virginia

Continuing our “Best of” Series, we have posted below links to some of our most useful relocation resources for clients. Even the most seasoned mover usually has the same same concerns and surprises when arriving in the DC metro area:

Commuting – DC is forever making “Worst Traffic” lists. You can NOT assume that 1 mile = 1 minute for commute times around here. Triple that ratio is a more accurate assessment.  We do, however, have an extensive, if crowded public transit system including metro (subway), bus lines, MARC and VRE trains, and soon, lightrails. Before choosing a neighborhood, log on to a mapping site like this one that will show you the traffic cameras along your route (be sure to check it during what you expect would be your normal commuting hours).  And of course, a dry run of your commute will teach you quickly what to expect.

Schools – Agents are somewhat limited in the questions we can answer about schools; We can’t for example, answer qualitative questions like “Is this a “good” school?” A great resource, however, is GreatSchools.org. Our area in general is fortunate to have many Newsweek-ranked “Best High Schools in America.”

Renting vs Buying – The toughest decision is whether to rent or buy. A good rule of thumb is that if you plan to be in the area less than 3 years, the closing costs on the purchase and sale will make it difficult to break even on a purchase (depending on your tax bracket, since a large chunk of home ownership costs are tax deductible, while rent is not).  So a better way to think about this question is actually “How long do I need to stay in this property to break even?”  One of the best rental calculators out there is this one from the New York Times, which answers that “How long?” question nicely.

Prices – One thing you can count on is sticker shock. Start your search early by looking online to see what places go for in different neighborhoods (keeping in mind the commute time discussed above.) If you’re searching for rentals, check out our page here. Or, if you’re ready to start looking for a place to buy, you can use our search tool here (our search tool has all brokers’ listings, not just our own).

If you need help with your move to the Greater Capital Area, we’d love to help you.  Just contact us by clicking here.  

More Resources: Learn more about the Wethman Group.

More Resources: My Move to DC Relocation Resources including a free relocation guide

 

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FAQ: Can my Parents Give Me a Gift to Help with my Down Payment?

I work with a lot of first time buyers in the DC area, which is a very expensive market and thus many clients have their parents help out either with down payment assistance or co-signing the loan. The most important thing is to get a trusted lender involved very early in the process. Lenders sometimes have different sets of guidelines by bank and also by loan product. It’s important to choose an appropriate product (e.g., 30 year fixed FHA, or 30 year fixed conventional) early in the process. Sometimes gifts can be ‘seasoned’ in the recipient’s account and used as a down payment, but if it arrives too late in the process it may cause problems with the loan approval.

There’s a big misunderstanding about gift taxes. For gifts below a certain amount, no filing is due to the IRS, and for above a certain amount a filing is due BUT taxes may or may NOT be due! It depends on the amount of the gift, how many recipients there are, and whether the giver has reached his or her lifetime exclusion. Parents often mistakenly assume they will be taxed on every gift above the reporting threshold, and thus want to structure it as a loan but that is one of the worst things they can do. If it’s structured as a loan then the lender will count it as debt and it will affect the recipient’s debt-to-income ratio and could very well result in a rejection by the lender. The key is to speak with your tax preparer early to determine whether the gift is taxable, and then speak to a trusted lender.

Need a recommendation for a CPA or a lender? Contact us.

Other Resources:

Attend a free first time home buyer class

Choosing a Lender

Search the entire Multiple Listing Service

 

 

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Top Buyer Resources

Over the years we have accumulated quite a mass of blog posts. There is so much information out there that sometimes it can be difficult to find information when you aren’t sure where to begin!  Though we do have a search box on the right hand bar, sometimes it’s easier to have the links laid out. So, to help our new buyers, here is a list of Top Blog Posts to help you get started.

Getting Started / Choosing an Agent:

Tips for Choosing a Realtor

Tips for Couples Buying Together

Attend a Free First Time Home Buyer Class

Resources for Relocating to the DC Area

 

Open Houses & Searching for Properties:

Our Search Site / Multiple Listing Service (all properties including those not listed by Keller Williams)

Understanding Condo Fees

Are Short Sales Worth It?

Risks in Buying a Foreclosure

School Reviews

 

Contract to Close/Settlement:

Buyer’s Closing Costs and Spotting “Junk Fees”

What is Title Insurance & Do I Need It?

How far Below List Price Can I Offer?

 

Have other questions?  Just contact us to start your DC area home search.

 

 

 

 

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Shadow Inventory and the Foreclosure Process in Virginia vs Maryland

The Washington Post had a few good articles this weekend about battling foreclosure. One article, in particular, highlighted the differences in approach by Virginia and Maryland. Starting in 2008, Maryland lawmakers passed laws to give homeowners more time to try to work out solutions with lenders; these measures included waiting periods, counseling, and required mediation. These laws, combined with the fact that Maryland is a judicial foreclosure state, slows down the process.  While this is great news for the people being foreclosed on, it often just delays the inevitable, and has affected Maryland’s real estate recovery. According to the article, Maryland ranks as #4 for longest duration of a foreclosure, with average days of 634. Virginia, on the other hand, is a non-judicial foreclosure state, which results in very fast foreclosures, averaging 132 days, the 4th fastest in the nation. (The U.S. average is 348 days.) Virginia can foreclose so quickly because at settlement, home buyers sign a deed of trust that allows the lender to foreclose outside of the court system.

I’m often asked by potential home buyers whether we can expect a wave of foreclosures and how to take shadow inventory into account. The foreclosure process in Virginia provides high visibility into the shadow inventory; one need only look at the publicly filed notices of default, and if the home owner doesn’t work out a deal with the lender, it will become real estate owned by the bank. At that time the tax record will reflect the change in ownership and you can be sure the bank will be trying to sell that home at some point. The timing remains an issue; banks don’t want to flood the market with foreclosures, thereby depressing all prices.

In Maryland, homeowners could stay in their homes for many months, or even years, before that home becomes real estate owned. They could well resume making payment or complete a successful short sale within that time. Notices of default are still used but the foreclosure process itself will likely take more than a year, providing a number of options (not to mention rent- and mortgage-free living) for home owners.

The bottom line for home buyers? Virginia pulls off the band aid quickly, resulting in short term pain to the market, but the end will arrive more quickly. Maryland slows down the process hoping that home owners will find a solution or otherwise resume making payments. We can expect a much slower rebound there. So when someone asks me: “Are we at the bottom?” I must reply with the question: “In which state?”

More Resources: Mortgage Bankers Association “Judicial Versus Non-Judicial Foreclosure”

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Tips for Choosing a Realtor

The Washington Post had a great article in this weekend’s Real Estate section called “Buying a Home? Here are a few tips.” In addition to addressing financial items like checking your credit score and getting a pre-qualification letter from a reputable lender (not just any lender—a reputable lender), the author had a section on selecting “one full-time, experienced Realtor with whom you get along.”

Read that again because every word is important: One. Full-Time. Experienced. Realtor. With whom you get along. 

That sentence packs a lot of punch. 

The author did a great job of explaining each criteria, but I want to add a few of my own suggestions because choosing the right Realtor can help mitigate all of the other risks in the process—that’s what makes it arguably the most important step in your process. While I could go on for days about choosing a Realtor, I’ll limit my advice to 3 tips:

Experienced: You’ll have to define your own level of “experience” required. Is it years in the business? Transactions completed? Transactions the team completed? I would argue that one of the best gauges is the number and quality of transactions completed in the past 12 months that are similar in price and location to where you think you will be looking/selling. I’m NOT saying to hire the “neighborhood expert” that every agent seems to label themselves regardless of whether they actually live OR work there. And agents with extremely high numbers of transactions tend to have junior associates to whom they will hand you off, so be sure you’re looking at the experience of the agent who will actually be looking at homes with you and working on your contract.

Getting Along: I would take this a step further and say you have to trust them. If you don’t trust your agent, get another agent. Ask for a reference who has bought or sold within the past six months. Then ask that reference, “Have you given this agent’s name to anyone else? If no, why not? If yes, can I speak to that person?”

Finally I’ll add another tip about “getting along.” You also need to be confident in their ability to explain things to you quickly and simply. In short, they must be able to educate you about the process and the decision points. Buying a house can be scary. There are dozens of pages of legalese, and decisions often need to be made quickly. How organized is this person? Do they take the time to answer your questions? Do they return calls, texts, or emails promptly? What hours and days are they available to you? No one can be expected to work 24/7, but contract negotiations often happen outside of normal business hours, and it’s important that deadlines are met. It’s stressful enough to make big decisions on a deadline, you don’t want to make them in a vacuum. 

 

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Buyer’s Closing Costs

Update as of December 2015: Please note the HUD-1 has now been replaced with a CLOSING DISCLOSURE, and GFEs have been replaced.  Contact us for more info or to discuss the differences in these documents!

Many buyers are aware that there are fees related to the purchase of a new home—a rough guide is 2.5% to 3% of the transaction value—but what are these fees, and are there ways to minimize them?

First, a few clarifications. Both buyers and sellers have closing costs in a transaction. The sellers’ costs are typically much higher than the buyers’ fees because the sellers pay the commission for both real estate brokers. These fees are typically paid at closing—they come out of the sellers’ proceeds, and the buyers can either pay cash, or can negotiate to have their portion of the closing costs paid by the seller (read more here.)

For now, let’s focus on the buyers’ fees. Your lender should provide you with a Good-Faith Estimate (GFE) when you apply for a loan. This GFE is essentially an estimate of your “HUD-1” form, which you will receive at closing. Each lender has their own preferred format, but you should be able to compare apples-to-apples by looking at the section headers, or, even better, the line-item numbers. It’s important to note, though, that lenders only control certain sections, while others may be simply based on their own experience. When comparing lenders, it’s important to focus only on the line items that the lender actually controls.

The fees vary by jurisdiction, broker, and settlement attorney, but below is a good way to categorize them:

  • Pre-paids: These are generally required by the lender, and may include insurance, property taxes, and interest. Another common prepaid item is condo/HOA fees. These vary based on the day of the month that you close, since they are pro-rated between buyer and seller.
  • Points: A point represents 1% of the loan balance and are charged by lenders. This, along with the fees, can easily amount to thousands of dollars, so it’s important to discuss this with your agent and your lender.
  • Fees: These are fees charged by real estate brokers, settlement attorneys, and lenders, and are the toughest to judge for “reasonableness” without experience. These vary widely, particularly among lenders. Some real estate agents will pay their broker’s fee on your behalf—be sure to ask them. For lenders, whose fees can be substantial, it’s important to know early in the process what they’ll charge. These fees can generally be found on your Good-Faith Estimate in the 800 section, but look in the 1300 “Additional” section, too. Broker’s and attorney’s fees are scattered throughout the closing statement sections.
  • Title Insurance: This is paid by the buyer and, depending on the policy, can amount to thousands of dollars. It’s a one-time charge that covers you in the event of a problem with the chain of ownership. See my post on how to save some money with title insurance here. This fee is addressed in the 1100 section.
  • Government and Transfer Charges: These are fees that are paid to the local jurisdiction and can be quite substantial. For example, in the District of Columbia, the transfer taxes (paid by the seller) and recording taxes (paid by the buyer) are 1.1% each. Northern Virginia sellers pay $1 per $1000 in value for their transfer taxes.

This is just a high level summary of some of the most common items on a HUD-1, so be sure to ask your agent to walk you through the expenses and strategize with you on how to minimize your costs! Read more about how to spot “junk fees.”

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Can I make an offer now if I don’t want to settle for several months?

It’s a tricky thing to time a home purchase with the expiration of a lease.  Often buyers ask me: Can I make an offer on a house I like now even though my lease isn’t up until later this year to minimize the overlap?

Typically contract to close will be 30-60 days. There are several reasons for this.

The first is your loan.  You can not lock in an interest rate until you have a property (the letter has a rate, but if you read the fine print it will say somewhere that it’s ‘subject to’ an acceptable property…at that time they give you whatever the current rate is.  Once you find a property, a lender will lock you in for 45 days for free, and beyond that you need to pay a rather hefty fee (thousands of dollars).  For that reason, most buyers look to close within 45 days of contract.

Most sellers obviously want a quick close as well (unless you pay a premium to make them wait), so it’s rare to see a closing that is many months away on a resale.

Occasionally sellers will want a ‘rent-back’ or post-settlement occupancy agreement, wherein they reimburse the buyers for their costs to stay in the property for up to 60 days past settlement.  More than 60 days will create problems with your lender, as that’s typically the time frame after which they will consider it an ‘investment property’ and your loan terms will be different.

Buyers should also remember that the first mortgage payment isn’t due until the 2nd full month after you settle.  So, for example, if you settle in April, then your first payment isn’t due until June 1.  This is because you make mortgage payments in arrears, rather than in advance like you do with rent.

Of course every situation is different, but an experienced agent can help you utilize some of the contract’s clauses to minimize any overlap between your lease and your mortgage.  Every situation is different, so contact us to discuss your rent-to-own transition or attend a free first time home buyer class.

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I Got My Condo Docs – Now What??

In Virginia, buyers of condominiums and properties within a homeowner’s association have a three (calendar) day review period to review the “resale package” or “condo docs” following a ratified contract.  In the District buyers have three business days.   (Typically these are not available in advance because associations charge a fee, and most sellers are reluctant to incur that fee before receiving an offer.   Several items in the package are also time-sensitive, so if the package is too old then sellers will need to pay for an updated package, so most sellers choose to wait until the offer is received before ordering.)

Sometimes the documents are electronic or online, or often they come in a big binder for your reading pleasure.   Some of the items that are supposed to be included* the resale package are:

–          Bylaws, rules, and regulations of the community (e.g., pet, noise, and rental policies)

–          The annual association budget

–          Two months of Board minutes

–          A statement from the property manager about whether the unit is currently in compliance with rules (do NOT assume that if there is a violation the seller will remedy it prior to settlement!)

–          Master insurance policy

*Unfortunately sometimes items are missing from the resale package.  You can ask for the missing items, but it does NOT extend your three day window for rescission.

There will be a lot of information to read through in a short amount of time, so I recommend buyers first prioritize these three items:

–          Review the rules and regulations to make sure you can live with them.  Even if you’ve verbally been told otherwise (e.g., “oh, no one actually carpets over the hardwoods and it’s never a problem” or “there are lots of owners with dogs even though the policy says no pets”,  or “of course you can install a washer/dryer.”  These are the rules and you should be prepared to have them enforced.  There are no guarantees that a lax Board will always remain lax.

–          Look at the percentage of units that are more than 30 days past due on fees.  Could it be indicative of a financially strapped community with short sales and foreclosures to come?

–          Compare the reserve balance to the engineering study, which is a study that estimates the remaining useful life and cost to replace or repair for community items such as parking lots, roofs, and common areas.  Engineering studies are typically performed every five years.

–          Is there a move in fee or capital contribution required at settlement?  This is becoming a big trend for condos to assess buyers a fee to help fund their reserves, sometimes it can run into the thousands of dollars.

The three day period can be a stressful one, because it’s difficult to get more details if needed in such a short amount of time.  Property managers are often restricted from giving information to non-owners, further complicating the ability to get details related to a buyer’s concerns.  The remedy is to negotiate with the seller for an extension of the period, or to void the contract, so it’s best to read the documents immediately upon receipt to identify any potential issues early.

More resources:

Search the MLS for properties

Contact us to discuss your home search

Attend a free First Time Buyer Seminar

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