How the tax bill potentially will affect homeowners

This past weekend, the GOP passed its tax plan along party lines, despite heavy opposition against it in CA. I was wondering how the new plan might affect homeowners, and my friend Jay Vorhees at JVM Lending had the perfect answer. See his summary below!

The bill has a provision to cap the mortgage interest deduction to loan amounts of $500,000 or less. To be clear, borrowers will not be ineligible for the mortgage interest deduction if they owe more than $500,000; borrowers will only be able to deduct interest that accrues against $500,000 of their mortgage, no matter how large it is. Here are some observations:

1. Only 5% of all mortgages are over $500,000. And the vast majority of them are in California. Hence, it is unlikely that we Californians will get a lot of sympathy from middle America. But this also explains why there is so much concern in California.

2. How much will it actually hurt borrowers? For a $1 million home (not a lot in coastal California) with 20% down, a borrower will have an $800,000 mortgage. This means that $300,000 of that debt will be ineligible for the mortgage interest tax deduction. If the interest rate is 4%, the borrower will not be able to deduct $12,000 of interest from his or her income for tax purposes. If that same borrower is in a 40.5% combined tax bracket (33% Federal, and 7.5% State), he or she will lose $4,860 in direct tax savings. That is real money for anyone.

3. Current borrowers will be grandfathered, meaning they will be able to continue to deduct interest against a $1 million mortgage (or $1.1 million if they have an equity line). This provision will likely hurt inventory, as this will create another disincentive to sell. 

4. Standard Deduction Doubling: This is the bigger issue for real estate in general, as most lenders and Realtors aggressively sell the tax benefits from buying a house. If the Standard Deduction for married couples doubles to $24,000, most taxpayers will not be eligible to take advantage of the mortgage interest deduction (it would only make sense if their mortgage interest and other itemized items exceeded $24,000; a $500,000 loan at 4% would only accrue $20,000 of interest). 

5. The real estate lobby is extremely powerful. This is the biggest factor of all. The real estate lobby (that includes builders) is exceptionally powerful, and most of the lobby is opposed to the above-referenced provisions.

I always find Jay’s perspectives insightful with helpful information. Jay wrote this prior to the bill being passed by the Senate. Now that it has been passed, here are a few of my own observations:

  1.  There is a lot of jockeying of blame between the two parties (status quo).
  2.  If it was so negative, why did the Senate Bill get passed so quickly?
  3. The Senate and House will now go back and forth on all the details to get final approval before it goes to President Trump. Changes can still be made or it could possibly fall apart.
  4. Back to Jay’s last point – there is a very strong lobby that still can push change.
  5. I see this continues creating a disincentive for people to sell. It used to be that on average people moved every 7 years; that number has now increased to approximately every 20 years, thus the continued low inventory.

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Never let a buyer take possession before closing

Picture this: the odds and ends of a real estate transaction you’re involved with are taking longer than expected to tie up. Whether it be a miscommunication between the realtors, legal issues, or uncontrollable circumstances, you just want the home to close escrow.

So, you have already moved out and agree to let the buyer move in over the weekend since you will be closing on Monday or Tuesday. Even though the final forms have been signed, you won’t close for a few more days. You figure, “Heck, whats the harm?”

Oops. What if there is a financial or legal issue that crops up? Worst of all, what if the new buyer starts making changes to the home and they – or someone they hire – gets hurt on the property before it is officially theirs? What happens if there is a fire? I know of one situation where the seller allowed the buyers to put their belongings in the garage and there was something flammable and it started a house fire. Do you think those buyers still bought the house?  No, the sale did not close and the seller was left dealing with a mess and no house to sell.

Now that is a heap of trouble, tripped up by a tangle of confusing liability. What you thought was an act of goodwill has just turned the final few steps of the transaction into an absolute nightmare!

Even if this scenario seems unlikely, it is still possible. And that is reason enough to never let a buyer take possession of a property before the closing is completed. Crazier things have happened!

A realtor’s job is to protect the interests of their clients and a good agent will counsel you against having a buyer or their belongings in your property prior to the transfer of title.
If you think you might want to buy or sell in the near future, feel free to reach out to me for an organized, knowledgeable, friendly ally in the real estate process! You can always reach me at my website under the contact tab at www.kristinlanham.com.

How do appraisers value a property?

Our friend Jay Vorhees at JVM Lending has posted another great blog recently about appraisers. I have taken some liberty with his original blog and modified it to some of my personal experiences. Check it out below!

Lenders are not ever allowed to communicate directly with appraisers. They are only allowed to order appraisals through an Appraisal Management Company, which in turn contacts the appraiser. This arose out of the mortgage meltdown in the efforts to prevent fraud.  Overall, I think it hurt the buyer because the cost of appraisals rose.

Realtors, however, can communicate directly with appraisers and I highly recommend that they do so.  I meet the appraiser at the home, provide them with the comps I used to come up with the list price and let them know how many offers I had and the offer price of them.  It is important to be nice, and not tell them ‘how’ to do their job, but provide them with data that they may not have.

Below is the criteria appraisers use for Comparable Sales Data guidelines.

1. Size: Comps need to be within 20% of the size of the subject property. For example, they usually cannot use a 1,300 square foot comp for a 1,000 square foot subject property. Likewise, they cannot use a 700 square foot comp for a 1,000 square foot property.

2. Distance: Comps need to be within one mile of the subject property, and not over any major barriers like a freeway or a river.

3. Same Town/City: Comps need to be in the same city as the subject property in most cases, even if the comp is less than a block from the subject property.

4. Closed: Comps need to have closed in the last 90 days. Pending sales and listings are not acceptable.

5. Lot Size: Lot sizes must be accounted for too. If the subject property is on a small lot of 6,000 square feet, for example, a comp and a 12,000 square foot lot will have to be downwardly adjusted significantly in most cases.

6. Adverse Influences: If the subject is on a busy street or abuts a school, a freeway or an industrial area, valid comps will need to have similar adverse influences or they will make adjustments to equalize the value.

7. Bracketing Comps: Valid comps need to “bracket” the appraised value. Hence, at least one comp needs to be priced higher than the appraised value, and one should be priced lower.

At the end of the day. Appraisals are still subjective based on the appraiser’s interpretation and experience. Most of the time they are trying to do their best, and as markets shift, they have to adjust. They do not always have some inside information about a neighboring sale or a credit and if you can make their job a bit easier, I find everybody’s job becomes a bit easier.

I should also note that Mortgage Bankers have AMC – Appraisal Management Companies, where they can cherry pick the appraisers that are in the pool, even though they can’t talk to them about value.  These are usually much better than the big banks and that is a whole other story that only frustrates me….

Looking for your dream home?

1154 Glen Rd. in Lafayette has it all. As realtors, we occasionally get preview invites to see a home before it goes on the market. Last Thursday, there was a private viewing of this spectacular home with wine, cheese and homemade chocolate chip cookies baking that created a cozy feeling.

 

 

 

 

 

 

 

This coveted Happy Valley street is one of my favorites. The home was originally built by Nobel Prize winner Glenn Seaborg in 1951. The current owner completely remodeled it in 2009, adding on this high-beamed family room to the original L-shaped layout.

I love how this stone fireplace is the centerpiece of the living room. The current owner is a real estate agent and has a knack for remodeling homes, living there for a while, and then moving on to the next project. In this case, the same street just a few doors down will get the next updates to this mid-century neighborhood.

Two of my favorite features were the Jack-n-Jill bathroom where there is a laundry shoot cabinet to the laundry room on the other side, and the mud room next to the garage, as well as another outdoor entrance to store the backpacks and shoes upon returning home.

 

 

 

 

 

The master bedroom was added on with high, vaulted ceilings, doors to the pool area and an amazing bathroom. All this can be yours for $3,650,000. For more information and better photos, check out this home here.