Rethinking Home

The last two months of the new normal stay at home has led many homeowners to rethink the way they live in their home.  It has now become an office for working at home; a school for children; a gym to stay in shape; and a place for recreation.

The repurposing has people evaluating whether their home still meets their needs or if some changes are necessary.  In some cases, adult children have moved back home, and, in others, there are parents who have moved in for the first time.

Staying at home and sheltering in place is necessary but how much togetherness can one family take and how long is it going to last?  Temporary is stretching into longer than expected and even when vaccines and treatments are discovered, will things really go back to the way they were?

A home is a place to call your own; to raise your family, share with your friends and to feel safe and secure.  Covid-19 has changed the scope of feeling safe and secure at home and may now be considered a sanctuary of safety more than ever before.

Many of the chief economists in the country feel that real estate will likely lead the country out of this recession.  The housing market is experiencing low inventory and has for almost a decade.  Building has not kept up with demand and prices of existing homes have continued to go up; 8% over last year.  

With 30-year mortgage rates at close to 3.25% and prices expected to continue to rise, an investment in a home can fit your needs and show returns in satisfaction, comfort, enjoyment, and monetary value.

If you are going to be spending more time in your home for all the reasons mentioned, maybe now is the time to consider finding a home that better suits your needs. It can be done in a responsible and safe manner using an online meeting with your real estate professional.  Find out what is available and what the process entails to protect you and your family.

 

Mortgage Forgiveness

During the mortgage meltdown that caused the Great Recession a decade ago, some homeowners lost their homes to foreclosure or constructed a short sale to get out from under the debt.  In most of the cases, the lenders forgave all or part of the debt owed them.

Similarly, in the early 90's after the failure of the Savings & Loans in the U.S., thousands of homeowners lost their homes in the same way but back then, the policy of the IRS was to consider the forgiven debt as income.  Today, it is still considered income which means that a homeowner could lose their home because they could not afford to pay for it and to make matters worse, they would owe income tax on the debt relieved.

The good news is that in 2007, Congress passed the Mortgage Forgiveness Act and it has continued to be extended with its current expiration of 12/31/20.

The amount forgiven for income tax purposes may not be the same amount owed to the lender.  Mortgage forgiveness has a limited exclusion for discharged home mortgage debt for a principal residence only; it does not include second homes or investment properties.  Only the amount of mortgage debt that can be treated as acquisition indebtedness in included.

In the example below, a homeowner purchased a home and refinanced the home five years later at 80% of the market value.  The new loan proceeds were used to payoff the original mortgage and make $30,000 of new capital improvements.  The revised acquisition debt is the acquisition debt at the time of refinance plus the capital improvements made with the loan proceeds.

The new $400,000 loan produced $39,417 of home equity debt which is not considered acquisition debt.  Home equity debt is money borrowed on a home and can be used for any purpose, but it may not be tax deductible or considered acquisition debt.  Acquisition debt is money borrowed to buy, build or improve a principal residence subject to a $750,000 limit.

Assume that the borrower never made a payment on the new loan.   If the new loan went through foreclosure while the Mortgage Forgiveness Relief Act is in effect, the forgiveness would be limited to the acquisition debt of $360,583 and the remaining amount of $39,417 would be considered income and subject to tax.

This article is meant to inform homeowners of liabilities associated with foreclosures and possible remedies that may be available.  This example is meant to illustrate the portion of a loan that could be forgiven.  Taxpayers should always consult their tax professional regarding their specific situation and the way the law would apply to their situation. For more information, see IRS Publication 4681.

 

Example
Purchase Price ... 5 years ago	$400,000
Mortgage at time of purchase ... Acquisition Debt	$360,000
Fair Market Value ... Today, 5 years later	$500,000
Refinanced 80% - Loan to Value	$400,000
Replaced unpaid balance - current acquisition debt	$330,583
Capital improvements made with loan proceeds	$30,000
Revised acquisition debt	$360,583
Home equity debt ... difference in refinanced amount and acquisition debt	$39,417

 

 

Convenience at a Cost

The convenience of selling your home without the hassle of getting it ready, putting it on the market, showings, open houses, negotiations and repairs comes at a cost ... a significant part of your equity. 

The companies, referred to as iBuyers, that buy homes from sellers are for-profit organizations.  They expect to make a profit from sellers who are willing to discount the proceeds they'll realize as an alternative to the conventional method of selling a home for people who need a quick sale.

The promotions for these companies generally state that you can receive a cash offer in a few minutes after putting your address online.  The discount can be between 10 to 18% compared to normal selling costs from 6 to 9%.   The cost to a person with a $100,000 equity could be as much as ten thousand dollars.

Even after you have accepted an offer, there can be contingencies in the contract that allow the company to inspect the home to discover the condition and reassess the offer to possibly make even more deductions.  If the seller isn't willing to accept them, the buyer can withdraw from the sale without penalty.

This appears on the surface to be a friendly, accommodating service but it can be an adversarial situation.  The seller wants to maximize their proceeds and the buyer wants to buy it as cheap as possible.

Compare this to working directly with a real estate professional acting as your agent.  They have to put your interests above their own.  They have a fiduciary duty of care, integrity, honesty and loyalty in their dealings with you.  Other duties include confidentiality, disclosure, obedience and accounting to the seller.

In this traditional model, your agent will provide you with the facts of what homes have sold for in the area and their opinion and recommendations on what the most likely sales price will be.  Your agent will provide you an estimate of the sales expenses based on different sales possibilities. 

They can advise you on work to be done prior to putting the home on the market, staging so your home will show at its best and estimate the time it will be on the market.  Based on low inventories in some price ranges, it could be surprisingly short.

As an owner, you made an investment in your home in cash and maintenance.  You are entitled to maximize your proceeds based on the risk taken to purchase a home instead of renting.  The convenience of a quick offer has a cost to it.  You need to compare the two alternatives to see which one benefits you the most based on your individual situation.

For more information, download the Sellers Guide.