Thoughts on the Washington, DC, and Northern Virginia Real Estate Market » Seller Resources

FHA to cut Seller Contribution to Closing Costs to 3% of Sales Price

Katie Wethman — Fri, 04 Jun 2010 15:33:04 +0000

Within the next few months, it’s going to get a little tougher for FHA buyers. Starting sometime this summer, FHA will make official its announced policy of limiting the seller contribution to buyer’s closing costs (aka “seller subsidy”) to 3% of the purchase price, down from 6%.

What fees make up the buyer’s closing costs?

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

Prepaids – These are generally required by the lender, and may include prepaid insurance, prepaid property taxes, and prepaid 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 and 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. 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 is in the 1100 section.
Government and Transfer Charges – Paid to the local jurisdiction. These can be quite substantial—for example, in the District of Columbia, the transfer (paid by the seller) and recording taxes (paid by the buyer) are 1.1% each. Northern Virginia sellers just had big increase (from $1 per $1000 in value to $5 per $1000) in their transfer taxes.

In our local DC and Northern Virginia area, traditionally closing costs have run about 3% anyway, so the impact will likely be minimal for most buyers in our area. But for those buyers who are struggling to come up with cash for the down payment AND closing costs, this reduction could put a last minute wrench in their purchase. Plan accordingly.

Reasons to Sell Your Investment Property in 2010

Katie Wethman — Wed, 12 May 2010 16:28:25 +0000

Attention Investors: I’m about to give you 8.8 reasons to sell your investment property in 2010. Actually I’ll give you 5 reasons, and then another 3.8 reasons. 8.8 reasons that will net you an additional 8.8% when you sell your investment property. Guaranteed! What am I talking about? Capital gains taxes.

Many investors are already aware that capital gains tax rates for most brackets are due to increase from 15% to 20% in 2011–so your profit is 5% less if you sell January 1, 2011 versus December 31, 2010. 5%!

But many investors haven’t yet realized that, buried in the health care bill that recently passed, for those above certain income limits, there is an additional 3.8% surcharge on real estate investment profit starting in 2013.

Of course there are ways to avoid these taxes–many investors will consider pursuing 1031 exchanges, but if you’re hoping to liquidate some of your real estate holdings, you’d be well advised to consider doing so in 2010.

Another reason to consider selling now? Low interest rates. Buyers have more purchasing power than they’ve had in years thanks to historical low interest rates within the conforming loan level limits. But these rates won’t last forever, and buyers are taking advantage. A flood of inventory in the upper price ranges ($1,000,000 and up) in our area is expected in the coming years, which will create competition in those brackets for years to come, as financing remains tight.

If you own a Northern Virginia investment property and would like to keep 8.8% more profit by selling in 2010, contact Katie Wethman, CPA, MBA, Realtor for a free analysis of your home’s value.

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More Resources: Free Market Report for Your Property

Selling a Home AFTER the Tax Credit Expiration

Katie Wethman — Mon, 10 May 2010 13:17:08 +0000

In this month’s video “This Month in Real Estate” from Keller Williams, a survey shows that first time home buyers accounted for 42% of February’s real estate sales, and investors accounted for an additional 19%. But now that the tax credit has expired, does that mean the end of the road for sellers?

Definitely not! We’re still in the spring season, and there are still plenty of buyers out there. Sellers need to price their home correctly, which means knowing the trend in your neighborhood. Consider the advice I gave in this BobVila.com article “What’s My House Worth?”. Sellers might also consider a pre-sale inspection so that they know what to expect in the negotiation of concessions (as I suggest in this moving.com article). Finally, consider ALL offers. Consider an offer the opening try by a buyer (who may be testing the waters “just to try” a low offer), and work with a potential buyer to come to an agreement. ALWAYS make a counteroffer — you never know where it will go.

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Does the Health Care Bill Have a Tax on Real Estate Sales?

Katie Wethman — Mon, 26 Apr 2010 16:27:52 +0000

In a word, yes. But according to FactCheck.org, few taxpayers will be subject to the new tax. But beware DC and Northern Virginia homeowners…the numbers indicate that more of us are at risk of being subject this tax.

Few people realize that buried in the recent health care legislation is a tax that affects home sales–3.8% to be exact. As most homeowners know, one of the primary benefits of selling your home is that a significant portion of any profit–$250,000 for a single taxpayer and $500,000 for a married (filing joint) taxpayer–is completely tax free if you’ve lived in the home two out of the last five years. Yes, you read that right. Completely tax free. And that part is STILL true.

The part that’s new is a tax on the profit above that exemption amount for taxpayers in certain brackets. If a single taxpayer makes more than $200,000, or for marrieds above $250,000, they are subject to a new 3.8% tax on the profit above that exempted amount starting in 2013.

Knowing the DC area has several of the highest per capita income counties in the country (four of the top ten, in fact), and given historical returns on real estate in our area (yes, even after the bubble burst), there are quite a few homeowners in our area who could get hit with this tax.

For example, let’s say a single homeowner purchased in 2001 for $300,000 in North Arlington. That taxpayer’s home might now be worth $600,000 (which is not unusual for someone who purchased prior to the big run-up in prices we experienced from 2003-2006). If that taxpayer makes more than $200,000 in AGI, she will be subject to tax of 3.8% * (300,000 profit – 250,000 exemption) = $50,000 taxable profit = additional $1900 tax on the sale of her home (in addition to capital gains taxes) .

Plan those sales accordingly, especially you long-term homeowners. If you have significant appreciation in your property, and are above those income limits, you may want to ‘cash out’ between now and 2012 to save 3.8%.

If you’re thinking of selling your Northern Virginia or DC home, contact us to discuss how we approach real estate from a different angle.

Update 7/17/2010: This issue is finally getting some press, sort of. WaPo has an article entitled “Debunking Rumors of a Housing Sales Tax.“ Despite the headline, the body of the article proceeds to spell out the circumstances under which there IS a tax on home sales. Just because people under certain income limits or profit margins aren’t charged the tax doesn’t mean that the tax doesn’t exist for other people. Maybe we need to work on the definition of “rumor”??

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Getting into the Minds of Today’s Buyers

Katie Wethman — Fri, 23 Apr 2010 12:32:38 +0000

I would describe today’s real estate market for most of our area as ‘transitional.’ That is, we’ve shifted from a very strong buyer’s market back towards a more balanced, healthy level of activity. Tax credits and low interest rates have spurred high buyer activity. But very low inventory has created frustration amongst those ready, willing, and able buyers. After all, the real estate market is like any other market: supply vs. demand.

But today’s buyers, despite having less negotiating leverage than they did just a year or two ago, are very different than the buyers of 2005, or even the buyers of 2000; they are jaded. They’ve seen a lot: They’ve seen friends take the plunge and lose tens of thousands, or even more, in equity very quickly. They’ve read for years now about people getting swindled in their mortgage terms and losing their homes. They’ve read about money pits. And they aren’t going to make the same mistake. They want the perfect house, and they want it in perfect condition, at a fair price. So how can sellers get into the heads of today’s changed buyers and get their home sold quickly without breaking the bank?

This was the subject of Moving.Com’s article “How to Think Like a Buyer When Selling Your Home.” The tips are basic, yet critical and the underlying theme is the same: Try not to think of the property as your ‘home’ anymore…it’s an asset that you are trying to sell for the highest price, in the shortest amount of time, with a minimum amount of hassle. Realtors are skilled in helping you think this way (why do you think we always switch from calling it “your home” to “your property” after it’s been listed for sale?)

I’m quoted in the article a few times for some of the ideas I practice with my sellers (depending on the situation, of course.)

It’s so difficult for a seller to put themselves in a buyer’s shoes. I always encourage my sellers to go with me to view the ‘competition’ – buyers are going to be comparing their home against similar ones nearby, so they need to see first hand what’s out there. Still, sellers often think “but my house is different” so one thing I recommend in that case is to hire a third party for their opinion—not theirs, and not mine as the agent’s. For example, have a pre-inspection so that an inspector can calmly describe what will be seen as defects in the house, and have a pre-sale appraisal for an independent fact-based presentation on what the home is worth versus its competition. Finally, having a professional stager brought in to describe how to ‘neutralize’ the house so that a buyer can envision themselves living there is key

If you’re thinking of selling your Northern Virginia or Washington, DC, home, and you need advice on how to get the highest price, in the shortest amount of time, with a minimum amount of hassle, call us.
More Resources:

Choosing a Listing Agent

Marketing Your Home

Automated Reports: How Much is My Home Worth?

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Bedrooms Defined

wethmangroupadmin — Fri, 09 Apr 2010 17:20:03 +0000

Every night, you put on your pajamas and head to your bedroom for some shut-eye. But is the room you’re sleeping in really a bedroom? Just because that’s where you have your bed and where you drift off to dreamland doesn’t necessarily make it a bedroom, at least in the eyes of our local and state governments.

In Virginia, the minimum requirements for calling a room a “bedroom” are established by the Uniform Statewide Building Code, which follows the International Building Maintenance Code (IBMC) but offers a few amendments to that code. Throughout the Commonwealth — including our immediate areas of Arlington and Fairfax counties and Alexandria — a room must have an area of at least 70 square feet to be considered a bedroom. If more than one person occupies the room, add 50 square feet for each additional occupant. Ceiling height must be no less than 7 feet.

Emergency egress is also required, and must go directly outside. The exit (whether a window or door) must have a minimum area of 5.7 square feet, or big enough for a firefighter or other rescue personnel in full gear (including an air pack) to be able to carry you to safety. There is one exception to this rule: if the room is at grade level, the minimum size is 5 square feet. In addition, emergency exits may measure no more than 44 inches from the floor to the bottom sill. Also, bedrooms can not constitute the only means of access to other bedrooms or habitable spaces and can’t serve as the only means of egress from other habitable spaces.

In Fairfax County, at a minimum, there must be two means of exit — one of which must go directly outside — for each bedroom. So, for example, if your in-law suite in the basement is accessible by only a door leading to or from the outside, it’s not really a bedroom, but just a clever way of keeping the in-laws at a distance.

Just to make things really interesting, the IBMC also has lighting and ventilation requirements for all habitable spaces, including bedrooms. Get out your calculator and measuring tape for this:

Every habitable space must have at least one window facing to the outside. The total glazed area for every habitable space must be a minimum of 8 percent of the floor area of the room. So, if you have a floor area of 70 square feet (the minimum required and certainly small by today’s standards) your window area must be at least 5.6 square feet.
For ventilation, every habitable space must have at least one openable window with an area equal to no less than 45 percent of the minimum glazed area requirements. So if we use our example above, the openable area of our window must be at least 2.52 square feet.

The rules are pretty much the same in Washington, DC, as far as size and height requirements of emergency exits from bedrooms are concerned:

emergency exit area must measure no less than 5.7 square feet
height from the floor to the bottom of the window sill can be no more than 44 inches
minimum size of 70 square feet

Most real estate agents and home buyers expect a closet in a bedroom, as well. But in Virginia and the District, it’s not included in the building codes. That’s right—you don’t need to be able to hang up your shirts or store your shoes to call it a bedroom. The local building codes are there mainly for safety, not to make sure you’re guaranteed creature comforts. Many older homes (and there are quite a few in our area) don’t have closets in the bedrooms but were clearly intended to be sleeping areas. Some homeowners get around this by permanently installing an armoire.

So it’s not so easy to tell if a room is indeed a bedroom. If you have any doubts, call your local codes enforcement office and ask. Or call us…we travel with tape measures and calculators.

All information deemed accurate but not guaranteed.

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What Do I Need to Do To Get Ready To Sell My Home This Spring?

Katie Wethman — Fri, 22 Jan 2010 02:17:22 +0000

Spring is coming early to the DC area. Buyers are out there! Low prices, low rates, and the imminent expiration of the $8000 first time home buyer credit have them circling and looking for the right property, in the right condition, for the right price. And for those properties that are positioned and marketed properly, this could be your best shot at a smooth and quick transaction. But putting your home on the market takes a significant amount of preparation.

The first 30 days your home is on the market is absolutely critical, because those buyers who are circling will come look—once—and if your property is not exactly right then they will just continue their circling, and likely will never return to your property. You will anxiously watch the days on market tick up, and the price tick down. Buyers ARE buying, but they expect a property to be in pristine condition right out of the gate.

To catch the biggest buyer waves, typically you should plan on putting your home on the market in March or April. This year, however, I think there’s a very strong argument to go out early for the reasons outlined above—buyers ARE out there. However, you can’t just throw your home into the MLS and expect the buyers to pounce.

Here’s a short list of things you should be doing now to get your home ready:

* De-clutter. I can’t stress this enough. If it’s not something you use every day, get it out of sight. Put away out of season clothing. No collections of knick-knacks, no personal photos, no college degrees or awards. You want the buyer to be able to imagine themselves in the property, and trust me, buyers are easily distracted by your personal items. Don’t pile things into closets and cabinets—buyers look there too. Get things out of the property and into storage if you have to. Same for extra furniture pieces. Less is more.
* Paint & Clean. A fresh coat of paint does wonders, and is cheap. And clean like you’ve never cleaned before, especially the kitchen and bath.
* Make all minor repairs. The buyer is going to make you do them anyway and it will be cheaper for you to do it now.
* Start monitoring the market, both broadly and in your specific neighborhood. Pricing is absolutely critical, and you need to be realistic. Work with an agent to start getting property updates now.

When you’re ready to put your home on the market:

* Consult a stager. I hire both an interior stager and an exterior landscape consultant for my listings. They look at your property with fresh eyes and have extensive training in how to create a neutral, yet welcoming canvas for buyers.
* Photos, photos, photos. Buyers start their search on the internet, and if you don’t have photos they will skip your house completely. Use professional photographers, or at a minimum, a wide-angle lens if you (or your agent) insist on taking them personally.
* If your home has unique features, consider how to best market them. For example, if the house has an unusual floorplan or is bigger than it looks, consider including professionally drawn floorplans in with the photos. (I do this for some of my listings.)

If you’re interested in hearing more about how to get your home ready, or want to learn more about the home selling process, contact us for an appointment.

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FAQ: High Investor (Low Owner-Occupancy) Ratio Condos: How Can I Buy or Sell?

Katie Wethman — Wed, 02 Dec 2009 18:07:18 +0000

One of the most common issues a condo buyer or seller faces in obtaining financing is meeting the owner-occupancy ratio required by lenders or the FHA. Owner-occupants means the units are actually occupied by their owners as primary residences, rather than those owners who choose to rent out their units. Renting units out is particularly popular with long-time owners, who bought a unit years ago, used the equity to buy a bigger property which they moved in to, and kept the original condo as an investment property. A good way to build wealth, but now causing headaches for other owners in the building.

The tightening of the credit markets in the past few years has been particularly hard on condos. Even long-standing buildings in the most popular parts of the Washington area are now facing problems with financing. This obviously matters to buyers because it’s difficult to get financing. Many condo owners, however, don’t realize until they go to sell that it’s an equally big problem for them—if loans aren’t available at competitive market rates, then the pool of potential buyers becomes very, very small.

FHA has always been harsh on condo lending (see post here for more). They currently require at least 51% of the units to be owner occupied as one of the many hoops they make condo buyers jump through. New rules on the horizon call for this to be reduced to 50%. That same set of new rules (which has been delayed in implementation several times) calls for the pre-sale requirements of new construction projects to be eliminated. Currently, at least half of a project must be pre-sold before FHA will do loans in a building.

But in today’s climate, even conventional loans can be difficult to get in a low owner-occupant ratio building. Many conventional loans (or rather, the investors who purchase those conventional loans) require the building to be 60% or even 70% owner occupied! If the loan is Fannie Mae or Freddie Mac eligible then certain requirements apply as well. Who would have thought that conventional loans, with their larger down payments, would be stricter than FHA?!

So what can you do if you are a seller trying to sell (or refinance) your unit in a high investor ratio building or a buyer trying to buy one?

First, ask your lender whether the condo is subject only to a limited review, rather than a full review. Many lenders aren’t aware of the limited review option. In a limited review, the lender doesn’t even ask for the occupancy percentage.

Next, see if there are any REO (bank owned or foreclosed) units in your building. Recent changes allow lenders to count REO as owner-occupied.

While these rule changes may help, if the ratio is still too high, then as a seller you have no choice but to find a buyer who has all cash or is willing to take on a non-30-year-fixed mortgage, for example a 5/1 ARM or 7/1 ARM. Rates are low enough now that you have a shot at that, especially if you are able to offer the unit at a low enough price that a buyer is willing to take the risk. And as a buyer, the 5/1 or 7/1 is not a bad option if you don’t plan on staying in the condo very long, or as long as you have reasonable caps on the interest rate hikes going forward.

If you’re looking for a top notch lender to help you refinance or purchase in a high-investor building, please contact me. I recently refinanced my own condo which fell in between 50% and 75% owner occupancy so faced some of these challenges. And if you need to sell your high-investor condo, let’s talk about your options and how a marketing plan might need to be adjusted.

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Why is the $6500 home buyer tax credit important?

Katie Wethman — Sun, 15 Nov 2009 16:50:03 +0000

By this time, most people are aware of the extension and expansion of the $8000 first time buyer tax credit, and many even know about the new “category” of “first time buyers” who are eligible for a $6500 credit. You can read more details here. Income limits were raised (previously $75,000 AGI for a single up to $125,000), and the new deadline is April 30 (under contract).

These changes obviously made a lot of buyers very mad; those who purchased in 2009 but didn’t meet the income eligibility now look like suckers (but take heart…at least you had low prices, fantastic interest rates, and likely a lot more choice in inventory than today’s buyers have.) And what about those souls that purchased back in 2008 when the “credit” was just a $7500 loan? (Again, take heart…low rates, low prices, and you really did have the pick of the litter on inventory. Just look at the inventory lines on this graph of Northern Virginia Homes for Sale and compare the 2008 line to today. What good is a big credit if everything available to buy is not worth buying?)

With inventory so tight, why do we need an extension and expansion, and on top of that a new category (the so called “move up” buyer, though in reality it could just as easily be a “move down” buyer, or even just someone who wants to convert their current residence into an investment property)?

The first reason is that the DC area is unique with its suddenly tight inventory. DC has long been predicted to lead the nation’s real estate recovery given the incredibly strong job market, well above average incomes, and stimulus money flowing freely.

The second reason is that the pool of buyers has dwindled towards the end of the credit period (which was due to expire at the end of this month) so we needed to find a way to increase it again. Why didn’t this initial rush of buyers lead us to a full recovery? Again, it varies by area…the progress towards a stable market in DC was much more evident than in the rest of the country. But two complicating factors: (1) the pool of entry level housing dropped too quickly and buyers were left circling and competing against other buyers for remaining homes and (2) much of the inventory they were buying were vacant, foreclosures, or short sales–meaning that those sellers were not, in turn, trading up to buy the next level of housing. So the recovery stalled at the entry level price point (in our area, I’d approximate this at $450k and below).

The extension and, more importantly, the new category attempts to address the second issue in particular. First, now that a higher AGI buyer has an incentive, that category might be buying up inventory in the “next tier” of pricing, driving a recovery up the ladder, so to speak. Second, by creating a new category of credit eligible buyers–the $6500 crowd–it’s likely that those trading up will also be selling their entry-level homes in order to afford their new purchase, relieving some of that inventory pressure on the first time buyer category. So in other words, just as the $8000 stabilized entry level pricing, the hope is that the $6500 will stabilize “trade up” level pricing.

But those people are all underwater on their homes and can’t sell, you say! Ah, the eligibility restrictions cover that: one must have owned and occupied the property for 5 of the last 8 years (meaning they purchased in 2004 or earlier), and while there will certainly be some who cashed out equity and are indeed underwater, there will be many more who have plenty of equity in their property and want to use this opportunity to move into the home more appropriate for the next stage of their lives. This last point, of course, might not play out if those owners decide to hold on to their current property as an investment, and simply buy a second property. I suspect the people who do that will be limited though: the AGI limit, even when raised, along with the $800,000 maximum purchase price will limit people in the DC area from taking full advantage of that.

It will be interesting to see how this all plays out, but I suspect we’ll see an increase in the entry level category of inventory in early 2010, both from continuing foreclosures, trade up buyers, and simply sellers who recognize that the market at the lower price points in our area has stabilized and maybe is even on the upswing in certain neighborhoods.

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Ready to start your home search? Contact us to be notified of our next free First Time Home Buyer Seminar or to meet for a cup of coffee to discuss market conditions where you want to buy.

Thinking of selling? If you have a property priced below $450k or so and in a desirable neighborhood, there very well could be a lack of inventory. Sell “high”, and use the proceeds (along with historically low interest rates) to buy “low” at the next pricing category. Read more below:

Sign up for a free MLS Market Snapshot to see what’s been going on in your neighborhood (Northern Virginia, DC, and Maryland only)

Buying & Selling at the Same Time: Part III

Katie Wethman — Fri, 13 Nov 2009 02:31:39 +0000

Read the first two posts in the series here (Home of Choice contingency) and here (Home Sale Contingency).

Our next tool is a two-for-one: Occupancy Agreements. There are Pre-Settlement Occupancy Agreements and Post-Settlement Occupancy Agreements (aka Rent-Backs).

Occupancy agreements help facilitate a buyer’s or seller’s move date when it doesn’t coincide with a settlement date. They essentially act as pseudo-leases, with one party as “landlord” and another as “tenant” (though it’s important to note that those words are not used explicitly. Landlord-tenant relationships create all sorts of new requirements, especially in DC.)

Why would a seller need a rent-back? Usually it’s because of the timing of receipt of funds. Often a seller needs to proceeds from a sale in order to buy their next home. But in some jurisdictions, like Virginia, funds are not released to the seller until the deed and mortgage are recorded at the courthouse, which could be days after settlement. Even if proceeds are received the same day, banks often put holds on checks so the cash may not be immediately available to a seller. (The timely transfer of funds is the reason that many sellers will request a particular settlement company, too.)

Why would a buyer need a pre-occupancy agreement? Generally because their lease timing or their own sale (in the case of a move-up or move-down buyer) doesn’t coincide with settlement.

What protections does the “landlord” have during an occupancy agreement? For one, a deposit, just like in a lease, plus a clause that any damages will be paid for by the “tenant.” There’s a walk through of the property at settlement, and also one at the conclusion of the occupancy agreement.

There are a lot of other clauses in a standard Pre- or Post-Occupancy Agreement. Make sure you discuss the risks with your agent.

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