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Archive for September, 2010

How Much Can I Afford to Buy?

Thursday, September 9th, 2010

The other day I was in a convenience store and happened to strike up a conversation with the store clerk about building homes. She was a young lady, but her question was a common one.  HOW MUCH CAN I AFFORD TO BUY?

With all the changes in the mortgage industry, getting pre-qualified might seem more like a mystery than it needs to be.  He is a simple worksheet to help you calculate how much  house you can afford.

1. What is your yearly gross income?  $__________ Example $         80,000

2. Multiply your income by .4 (40%)     x                  .40 x                  .40

3. Total                                                                $_________                       $        32,000

3. Divide total by 12                                     $_________                        $    2,666.67

4.Deduct all your monthly payments* $_________                        $      - 454.00 (300 car, 154 credit cards)

5. Total                                                                $_________                       $      2,212.67

* Credit cards, car payments, school loans, lines of credit, etc.

6. The amount you have in line five (ex. $2,212.67) is an estimate of the total monthly payment you can have for your mortgage including principal and interest and the monthly taxes and insurance escrows.  Prior to the market crash, some mortgage companies were approving loans at debt to income ratios of 50-55%. All those folks are the people who have lost their homes. The problem with ratios this high is the first time the car breaks your bankrupt. A 38-40% debt to income ratio is much safer and is the historical range used for more than 30 years, before all the insanity. Of course, if you can have a lower debt to income ratio all the power to you.

The next step is to break down the total monthly payment available for a mortgage payment. This gets a little tricky, but hopefully this makes sense.

7. Deduct the monthly home owners insurance amount $_________                       $       -100.00

(Example is based on estimate of $1,200 yearly home owners insurance. You can call your insurance agent to get an idea of what your homeowners insurance will cost you)

8. Deduct the monthly real estate tax amount                     $_________                       $       -250.00

(Example is based on estimate of $3,000 yearly real estate property taxes. Most county web sites have the ability to look up property taxes on-line.  Look up similar properties you are interested in to get an idea of what the property taxes will be.)

9. Subtract Line 7 and line 8 from line 5                                 $_________                       $      1,862.67

The final step is to find out what the amount of line 9 will support in terms of actual purchase price. This will vary based on interest rate, loan term and number of payments per year. For this exercise, I am using the standard 30 year amortization period and twelve payments per year. For the interest rate, I’ve includes a few sample interest rates here, to give you an idea, but you can also use excel to do more what if exercises. Excel has a built in loan amortization tool.

To complete this next part, take the amount of line 9 and divide it by the amounts per thousand below.

10.  4.5% = $5.067 per thousand  $_________                       $     367.608 = 367,608 Purchase Price

11.  5.0% = $5.368 per thousand   $_________                       $     346.995 = 346,995 Purchase Price

12. 5.5% = $5.678 per thousand    $_________                       $     328.050 = 328,050 Purchase Price

13. 6.0% = $5.995 per thousand    $_________                       $     310.703 = 310,703 Purchase Price

It is staggering what two percentages points in the interest rate makes in terms of (gained or lost) purchasing power.  In our example, we see more than $55,00 difference in purchasing power.  It makes sense to buy now doesn’t it? Rates are at the lowest point in more than 30 years. Also, seems kind of stupid to loose that property you really want over $5,000 in principal doesn’t it?

OK, I will get off my soap box and get back to the final step. The final step is adding your down payment amount (cash) you plan on putting down. Different loan programs require different minimum down payments. For example, FHA requires a minimum of 3.5% down payment. Other programs require ten percent down payment and others even twenty percent.

If you know the the minimum down payment requirements you can divide the numbers about by the inverse percentage (example: 3.5% down = divide by .96.5%).

14. Add Down Planned Down Payment $_________                       $    38,555 (346,995/.1 = for a 10% down payment)

15.  Used Line 11 example                          $_________                       $ 346,995

16. Total                                                             $_________                       $ 385,550

If you are using FHA, the closing costs become part of the amount you can qualify for. What this means is that you need to deduct the anticipated loan closing coasts from your targeted purchase price.  If you are using other loan programs, you may need extra cash for closing costs. It is best to check with a mortgage loan officer for specifics.

Health Care Reform Bill Levies 3.8% Tax on Sale of Residential Real Estate

Tuesday, September 7th, 2010

IS IT TRUE? WILL THE RESIDENTIAL REAL ESTATE BE TAXED 3.8% AS PART OF HEALTH CARE REFORM BILL?

Recently, a friend of mine mentioned that the new health care reform bill was going to include a 3.8% sales tax on the sale of homes. I think I blurted out, “you’ve got to be kidding me!”  Of course, I had to come home and research the details.

Before I got to doing the research, I had all kinds of expletives circled around in my head. Thankfully, they stayed inside there. Other thoughts included; could our leaders in Washington really be that stupid? Hasn’t the housing industry already gone through enough trauma? Why would Washington want to kill the real estate business and therefore the economy?

My research did verify the new health care reform bill does in fact have a provision to charge 3.8% sales tax on the sale of homes, but there is much more to it than that though. The 3.8% real estate sales tax only applies to single tax payers making more than $200,000 or joint taxer payers making more than $250,000 AND you wouldn’t pay on the first $250,00 in profits for a single tax payer or $500,000 in profits for a joint tax payer.

Whew…I was worried there for a minute.  All the residential real estate I own has dropped 40-50% in value so no need to worry about profits. For many us real estate types, it will be many years (if ever) before we work off carry forward losses from real estate activities of the last several years, so income thresholds aren’t an issue either.

My friend made it sound like it was a straight dollar for dollar 3.8% sales tax, which would have been the single stupidest thing Washington could have done since the beginning of the republic. I am never glad to hear Washington is tinkering with the market in which I earn my living, but I am glad to know that this 3.8% sales tax will only applies to profits over 500k for joint filers. The 500K profit threshold pretty much eliminates most home sales unless the homes are selling for millions of dollars, which is a very small percentage of homes.

I think the potential bigger issue may be commercial properties owners where buildings that cost millions of dollars could easily appreciate a small percentage but increase in value $250K or $500K in net terms. The year you report the sale your income would in fact be increased by the net profit from the sale of the building.  For example, a retired couple on a fixed income could sell a commercial property from a business they once owned. Even thought the couple is on a relatively small fixed income, the sale of the building would trigger them into the 250K income class when the profit of the sale exceeds 750K. Again, this might not happen that often, but one thing we know for sure…Washington put the provision in to raise revenues and that it will.

Is Air Quality Important? Part #3

Friday, September 3rd, 2010

WARNING – YOU ARE BREATHING TOXIC CHEMICALS RIGHT NOW.

In part #1 we looked at radon and learned radon in the home is responsible for an estimated 20,000 lung cancer deaths each year.

In part #2 we looked at mold and learned nearly all chronic sinus infections afflicting 37 million Americans are a result of molds. Molds have been linked to a 300% increase in the asthma rate over the past 20 years and 20 million people, including over 6 million children, have asthma, accounting for over 10 million outpatient clinic visits, nearly 2 million emergency department visits and nearly 4,500 deaths annually (2000).

I think we can safely say Air Quality is very-very-very important in homes, but in case your still not convinced today we look at formaldehyde.

Formaldehyde is colorless but is not odorless like radon. It used in the manufacturer of many products including building materials such as particleboard, plywood, fiberboard, textiles, glues, insulation and carpet.  It has a pungent (new car) smell and its use is widespread (46 billion pounds in 2005) , yet presents significant health concerns.

Formaldehyde can cause watery eyes, burning sensations in the eyes and throat, nausea, and difficulty in breathing and has been linked to several forms of cancer including leukemia.  A 2009 report by the National Cancer institute reported that “workers exposed to higher amounts of formaldehyde had a 37 percent greater risk of death from blood and lymphatic cancers, and a 78 percent greater risk of leukemia than those with lower exposures.”

Not the kind of stuff you want to expose your family to, yet Formaldehyde is found almost everywhere. In fact, you are probably breathing Formaldehyde right now!

Sadly, The EPA has been dragging its feet for more than ten years.  On June 2, 2010 the EPA posted the IRIS (Integrated Risk Information System) Toxicological Review of Formaldehyde-Inhalation Assessment external draft for comment. Some day, the EPA will take action on all of this, but in the meantime you are on your own. Keep in mind when a house built to code it is perfectly allowable to use products with Formaldehyde.  Is that what you want for your family?

Answers to Quiz from last Post:  Question #1 – True, Question #2 – True, Question #3 – True, Question #4 – True

Is Air Quality Important? Part #2

Wednesday, September 1st, 2010

What is more important next time you buy a home, Air Quality or Granite Counter-Tops?

In part #1, we talked about radon and the fact that more than 20,00 lung cancer deaths per year are attributed to radon. Yes, I wrote that correct, 20,000 per year annually! If that isn’t enough to curl your toes, today we begin to look at mold and the major impact it is having on health.

Without going to too much of the gory details, there are numerous types of mold and it seems mold is present almost everywhere. It is in the air we breath, to the foods we eat. Most molds do not appear to pose a major health problem, but there are some molds that are not as friendly. Some mold can cause serious health issues; one such mold is black mold often found growing in homes. Sensitivity to mold is highly individualistic, but children and the elderly are typically at increased risk.

“According to a 1999 Mayo Clinic Study, nearly all chronic sinus infections (afflicting 37 million Americans) are a result of molds.  A 300% increase in the asthma rate of the past 20 years has been linked to molds (according to 1999 USA Today Cover Story).”

“The CDC reports more than 20 million people, including over 6 million children, have asthma, accounting for over 10 million outpatient clinic visits, nearly 2 million emergency department visits and nearly 4,500 deaths annually (2000). Asthma is the most common serious chronic disease of childhood, and the third-ranking cause of hospitalization among children under 15. In 2003, an estimated 12.8 million school days were missed due to asthma.31 The estimated cost of treating asthma in those under 18 is $3.2 billion per year.”

“Allergic response to mold include runny noses, itchy-watery eyes, coughing, sneezing, and throat irritation to more severe symptoms caused by chronic conditions such as sinusitis and asthma.” http://www.toxic-black-mold-info.com/moldhealth.htm

I have read a number of articles that says mold is on the rise, but they claim they don’t know why. In my humble, but expert opinion, it doesn’t take rocket science to understand why. Funny thing… since the mid-1980′s building codes began to change requiring much tighter and tighter building envelopes. Since that time mold has become increasingly a bigger and bigger problem in homes.  Tighter building envelopes create the conditions for moisture (homes can’t breath), one of the critical elements for mold to grow.  All it takes is a nail hole, a rip in the vapor barrier, glue missing someplace , gaps around electrical outlets, any number of construction imperfections and we all know that construction installation is 100% perfect, right?

Compound this with homeowners not even knowing they have HRV or ERV systems that need maintenance. When was the last time you maintained your mechanical fresh air system? Once I had a tornado reconstruction job and the customer complained about  high moisture in the house, so we investigated. We discovered the HRV system had not had the filters cleaned since the house was built more than ten years prior. We knew this because the seal had not been broken. The HRV was literally packed full with dust, dirt and debris (Sorry Steve).  The HRV was not working properly, which meant all moisture being created in the house could not leave and no fresh air was circulating. Do you think the conditions for mold were present? You bet. Mechanical ventilation is great, but it requires regular maintenance.

Then there is always the pursuit of greed that gets in the way too. About five years ago, I bought a bunch of beautiful executive houses from a certain national builder. I quickly sold them all except one which I proceeded to rent. After several years the tenant moved out and we had to paint the home and do some routine maintenance. Towards the end of the repairs, I was inspecting the house and noticed the exhaust fan in the upper hall main bath ran all the time. I tried to the wall switches, but they wouldn’t turn the fan off. Naturally, I thought something was wrong. I called in an electrician to check it out and he informed me the fan was “hard wired” and was the cheap way some builders address fresh air circulation code requirements. I couldn’t believe what I was hearing. By code, the house is completely wrapped in plastic and does not have an  HRV or ERV fresh air system. Instead, the bathroom exhaust fan serves to meet building code.  The builder saved $1,500 (this was a supposedly $400,00 house), but in my mind the builder should have their license revoked permanently.  This national builder put thousands of occupants at risk and the buyers probably have no clue.

Bottom-line, mold is a major problem, even in new home construction today.  Building to the minimum building codes is still creating the conditions for mold to grow and create sick houses. There are better solutions, which Amaris employs.

Before we end todays blogging post, let’s take a test:

1) Some new homes have mold starting to grow the day they are delivered? True / False

2) Newer homes (post 1980) have more chance to have or grow mold? True / False

3) Your home may have mold, even if you can’t see it? True / False

3) Mold is dangerous to our health? True / False

Next up Formaldehyde and get answers to the test above.