Renee Medema’s Blog

In a recent article “Is It Time to Buy Real Estate?” written by Vicki Gerson at Bankrate.com, Vicki provides statistics from Standard & Poor tracking that shows prices down 7.7 percent nationally in November 2007.  She also provides statistics from the National Association of Realtors that reports sales of single-family homes down by 13 percent in 2007.

If the average home price is down and sales are down as well, should a buyer automatically assume that it’s the right time to buy?  Buyers markets and sellers markets have varied drastically over the years based on financial advisors opinions.  Some stages in the economy offer higher promise for an upswing and other stages are more difficult to predict.  When we make decisions related to real estate, do we base our decisions on our opinions of what is best for us or do we base decisions on other people’s opinions of what is best for us?  If you haven’t asked yourself the question before, now is the time to ask this question.

People’s opinions vary greatly when it comes to financial and investment markets.  A good piece of advice worth noting is to take everyone’s opinions and then form your own based on your individual circumstances.  When buying your home, buy a property that you want to come home to so to speak.  You should feel comfortable and proud of your home and there should be plenty of room for you, your family and an extended family if planned in the near future.  When buying an investment property, buy a property that will yield a profit.  The larger the profit, the better the investment as long as it is within your budget.  The proposed idea seems simple enough, but often times people try to do too much at the same time and purchase a home (primary residence) and then attempt to yield a profit from it similar to an investment property.

Today’s market does not provide an easy-to-determine swing and because of that, a good recommend would be to purchase property only if you are purchasing investment property.  Whether you are buying a second home or a property that you plan to rent, this is the perfect market to add to your real estate investment portfolio.  On the other hand, if you are planning to upgrade your primary residence and are hoping to buy a larger reduced price home that will require a contingency to sell your current property, today’s market is not going to be friendly.  The time to upgrade your home would be when you have a large amount of equity built up and it is a seller’s market.  The substantial equity in your current home in addition to the top dollar that you will get from the sale of your home will put you in a great position to negotiate a larger home of your dreams.

An effective way to “spring clean” your home is to start by removing anything that you have not used within the last year.  Additional helpful tips are listed below for specific areas of your home. 

Yard/Landscaping - Remove excess items in your yard that clutter the area surrounding your home.  A yard and the landscaping within it should bring an added eye appeal to your home.  Most people notice the yard or landscaping before they notice the home itself.  Spruce up your yard or landscaping by adding a few low-maintenance items if you are not a gardener by nature.  Small additions can make a big difference.  If you have extra time and enjoy yard work, put your best effort into it.  It is true that small additions can make a big difference, but it is also true that a beautifully landscaped home is much easier to sell.  Put as much effort into the outside of your home as you do the inside of your home and the value of your property will rise to its highest potential. 

Garage - It’s time to clean out that “extra space” in the garage meant for your car.  Try to consolidate as much as possible by getting organized.  Spend a small amount of money on organizers, shelving units, wall storage or racks.  If you are able to stack containers along one side of the garage, this will free up a lot of floor space.  Also, hang items like bicycles, smaller tools, outdoor toys, etc. on racks or hooks attached to the wall to create floor space.  Every little bit of extra space that you can manage to create is beneficial. 

Kitchen - Clean out “extras” from your kitchen that you never use (i.e. formal glassware, formal dishes, ancient crock pots/serving dishes).  Pack all of these items away and put them in the basement or a crawl space.  Since you seldom use these items, it is not worth crowding the cabinets.  Organize your cabinets according to the spaces that you perform duties.  Put the cooking utensils near the pots/pans, the spices near the stove, the Tupperware near the refrigerator, the eating utensils near the dishes and the cleaning supplies all in the same place.  It will help to have everything handy when you are cooking, storing, eating and cleaning.  If everything has a place, the entire family will be more likely to put it back where it belongs. 

Closets - Get the most out of your space by installing shelving and hooks in closets and also storage racks on the door.   The main guideline to follow when organizing a closet is to assemble everything inside like a puzzle, but also keep everything readily accessible.  If you have a large area on the floor, store heavier or bulk items there.  Put the things that you use most often on the waist-level through the eye- level shelves.  Store as much as you can in each and every available space, but always keep in mind that you should be able to find it by looking directly into the closet without having to move everything to get to it.  Try to keep closets organized according to their location in the house (i.e. front hall closet should not have clothes or bathroom towels in it).  Use each closet for its intended purpose and you will be able to better organize the items going into each closet. 

Bathrooms - Change the décor in your bathroom in the spring to lighter colors.  It will give everyone a “pick me up”.  The best way to organize a bathroom is storage containers and shelving.  You should have several types of storage containers, some for smaller items and some for larger items.  Put related items together in each container and this will allow everyone to easily find items.  If you have room for a shelving cabinet, add that to your bathroom and use it to store towels and larger items like blow dryer, hair straightener and curling iron.  You should always have a place for these types of items or they will end up permanently on the top of the counter. 

Bedrooms - Change your bedding in the spring, it’s an affordable way to spruce up your home and give yourself the feeling of change without having to invest in new furniture.  Organize closets in the bedroom so that each and every article of clothing has a hanger or space in a drawer.  If it is difficult to put an item away, people will often times avoid the hassle and find a convenient hiding spot.  Arrange the furniture to allow enough room to get around each side of the bed.  One of the biggest drawbacks to making the bed is not being able to easily access each corner to tuck the sheets.  Make your bed every morning.  This phrase might remind you of your childhood days and your mom’s repetitive demands, but having the bed made makes a huge difference in the overall appearance of the room.  It’s the first thing YOU and everyone else notice. 

Children’s Play Room - Spring cleaning the children’s play room is something that should be considered fun, not a chore.  Take this time to filter out all of the toys that the children have not played with in over a year.  Include an additional 10% of the toys to help avoid clutter and donate all of the worthy items to charity.  This will be a great exercise for your children to learn how to give to the needy, relearn the specific place that each toy should be returned to and also make room for new toys that will be acquired in the upcoming year.  It is especially important to assign a specific place for each and every toy or piece of furniture.  Understandably, this might be a burdensome task to initially complete the process.  However, once you organize everything appropriately the first time, it will be the children’s job to put all of their toys away each and every time they play.

The City Council of the City of Chicago ordained an amendment to Sections 3-33-030 and 3-33-060 of the Municipal Code of Chicago stating:

¹ “Pursuant to Section 8-13-19 of the Illinois Municipal Code, 65 ILCS 5/8-3-19, as amended, a supplemental tax at the rate of $1.50 per $500 of the transfer price, or fraction thereof, shall be imposed on transfers taking place on or after April 1, 2008, for the purpose of providing financial assistance to the Chicago Transit Authority (CTA).”

The supplemental tax will not be applied to persons 65 years of age or older as long as he/she occupies the property as a principal dwelling place for at least one year and the transfer price is $250,000 or less.

Prior to April 1, 2008 buyers were required to pay $3.75 per $500 for transfer tax on real estate property.  The additional $1.50 per $500 supplemental tax increase will require the sellers to contribute to the transfer tax.  The total amount owed to transfer real estate property will be $5.25 per $500, equivalent to more than 1% of the property value.  Considering the current housing market, this was not the best possible solution to help the CTA’s deficit.  It is understandable that housing and transportation are related in a City, but requiring homeowners to pay additional taxes to support a deficit in the transportation system is as unrelated as increasing taxes on groceries to provide additional funds for the public library.  It is important to understand that not all home buyers/sellers living in the city use public transportation. 

The increase in the tax might lessen people’s willingness to buy and sell or make them reconsider the value of the property.  In today’s current market, buyers/sellers need every advantage and all the encouragement that can be afforded to keep them active in the market.  It is the only way we are going to be able to avoid additional downfalls in the trends of the housing market.  In December 2007, approximately one out of five hundred-twenty homes had gone into foreclosure in
Chicago.  Although that number is leveling off because of assistance from the federal government, it’s important that our actions city-wide encourage people to stay active in the real estate market. 

  ¹http://www.cityofchicago.org/city/webportal/portalContentItemAction.do?contenTypeName=COC_EDITORIAL&contentOID=536911200&topChannelName=HomePage

President Bush approved a program on August 31, 2007 that allowed homeowners to refinance their homes through the U.S. Department of Housing and Urban Development (HUD), Federal Housing Administration (FHA).  The program is called FHASecure and it allows certain homeowners who meet specific criteria to apply for approval to refinance their homes.  Homeowners who will qualify must have non-FHA adjustable rate mortgages (current or delinquent and regardless of reset status).  The refinanced mortgages are FHA-insured and are based on the value of the property and how much the homeowner owes the lender, not on the current status of the mortgage.  This program was specifically set in place to assist homeowners who have adjustable rate mortgages, interest rate resets or balloon payments and after the rates were adjusted could not afford the increased payments.

The following lists several comments taken from a statement by Secretary Alphonso Jackson, U.S. Housing & Urban Development regarding the FHASecure Program:

“FHASecure has helped more than 100,000 families stay in their homes.  Homeowners are cutting their monthly mortgage payments by an average of $400 a month compared to their exotic subprime loans.  Over the past five months, FHASecure has helped about 500 families a day close on their new government-backed loans.  From September to December 2007, FHA helped pump nearly $45 billion of much-needed mortgage activity into the housing market, more than $13 billion of which was through FHASecure.  FHASecure remains on pace to offer refinancing to 300,000 families by the end of this year who are making on time payments or cannot afford their payments now that their teaser rates reset.”

On February 7, 2008, Gary Washburn, a Chicago Tribune reporter wrote an article City tax hike puts cap on CTA bailout.  In his article, he states “Aldermen held their noses, swallowed hard and demanded that members of the military and disabled veterans get free rides, but ultimately voted to complete a Chicago Transit Authority bailout by hitting city property buyers with a 40 percent transfer tax increase.”

A real estate transfer tax is paid by a buyer in a real estate transaction to transfer a title to real estate in Illinois.  The deed is filed for recordation and the recorder of deeds collects the tax through the sale of revenue stamps, purchased by counties through the Department of Revenue.  The state of Illinois transfer tax rate is $1 for each $1,000 of value.  In addition to that, counties and cities are also able to assess an additional transfer tax at a rate determined by the county or city.

Currently, the transfer tax rate for the City of Chicago is $7.50 for each $1,000.  Now that the vote has been made to increase the tax rate, as of April 1, 2008 the new rate will be $10.50 for each $1,000.  In simple terms, a buyer purchasing a $350,000 property will pay an additional $1,000 for the real estate transaction.

Although there are benefits that come along with the tax increase, they are not related to real state or real estate transactions.  The funding is being used to “help cover CTA employee pension and health costs”, Washburn states in his article.

This change could (or at least should) affect decisions investors make when considering how often new investments should be made.  If investment property is being turned over 4-6 times per year, this profit margin will definitely decrease due to the added expense in the transfer tax.  The appeal to “flip” properties might be less if your profit margin decreases significantly.

The majority of people are nervous to delve into today’s real estate market.  Sellers are frustrated that they can’t sell their homes, quite a few people are going into foreclosure and buyers are leery of purchasing property when the possibility exists that the value of homes could continue to decrease.  Smart investors on the other hand view today’s market as a great opportunity to make money.

The best scenario that I would suggest is purchase a property that has gone into foreclosure, rent it until the market turns around and then sell it for approximately $30K-$50K more than the original purchase price.  In addition to making $30K-$50K on the transaction, you will also receive added income from the equity accrued (paid by the renter) and tax deductions.  Currently 1 out of approximately 400 homes are foreclosing in Illinois.  This number has been steadily increasing the past few months and that means finding a decent foreclosure that doesn’t need a lot of work will be fairly easy.  It’s one of the few times in the real estate market that you are able to “pick and choose” your investment properties and have a variety of foreclosures to choose from before making a decision.

The second best scenario that I would suggest is purchase a foreclosure, live in it until the market turns around and then sell it for approximately $30K-$50K more than the original purchase price.  This scenario may involve selling your current home or renting it, but will allow an opportunity for individuals who currently own a property to invest into a second home while the market is “investor friendly”.  This may be important if maintaining more than two properties is impossible for those people who have busy schedules and can’t afford to dedicate a large portion of time to a real estate investment.

Attention single women investors!  Do not limit yourself to considering only foreclosed homes, instead look into foreclosed condos as an easier way to handle maintenance issues for renter.  Keep an eye out for high assessments because that will create problems with maintaining low rent and in turn cause difficulty attracting renters.

Beginning January 1, 2008 in Illinois buyers and sellers should be aware of the new Illinois Radon Awareness Act which applies to sales transactions for residential real estate.  The law states that sellers must supply the buyer with two documents before the buyer will become bound on the contract to purchase the property.  The first document is a pamphlet entitled “Radon Testing Guidelines for Real Estate Transactions”.  The second document is a form that the seller will have to execute entitled “Disclosure of Information on Radon Hazards”.

Radon gas is a odorless, colorless radioactive gas that is produced by naturally occurring uranium in the soil.  The gas raises from the ground into the air and into homes.  Radon is the leading cause of lung cancer among non-smokers and about 1 out of 15 homes in the U.S. are estimated to have levels exceeding national safety standards.  Although sellers are not required to test for radon or to reduce levels if they exceed national safety standards, buyers should be aware of this law and negotiate reasonable terms when purchasing residential real estate.

In addition to the new Illinois Radon Awareness Act, sellers have been responsible since 1996 for providing a Lead Paint Disclosure to the buyer.  One thing that is not mandatory for the seller to provide is the home inspection report, but it is highly recommended.  Home purchases are substantial investments and should not be taken lightly.  Every buyer should receive the disclosures listed above and require a home inspection prior to purchasing a potential property.  Not every buyer feels that a home inspection is necessary, but the minimal cost of a home inspection is well worth knowing the quality of the home and being able to enjoy it for many years to come.

President Bush is stepping in to offer additional assistance for homeowners who are finding foreclosure the only option.  In addition to several federal interest rate cuts in the past few months and assistance for Federal Housing loans, Bush is now proposing a freeze on introductory “teaser” mortgage interest rates on subprime mortgages for qualified homeowners for a five year period.  The assistance would be limited to eligible homeowners, including the following criteria: homeowners currently living in their homes, homeowners who have not missed any payments at the lower rate and homeowners who have taken out loans between 2005 and July 30, 2007 with rates that are scheduled to rise in 2008 and 2009.

A part of the problem is our “credit” industry that provides immediate gratification in return for a consequence to be paid at a later time.  Most Americans do not have the discipline to wait for gratification and find themselves in a rush to be as good or better than their neighbors.  This widespread problem exists in our economy and branches out in almost every area from home loans to car loans to credit cards to payday loans.  The broader picture is for individuals to learn the amount of expenses they can incur within a monthly period and then discipline themselves to stick to that amount.  The mortgage industry is not the sole problem and we should not put the blame fully on them.  Some of the blame should also be put on the consumers who do not want to discipline their spending limits and are eager to find second and third rate companies that will offer more money at higher interest rates that the consumers know they can’t afford.  Consumers should not allow themselves to be lured into signing their name on the dotted line for loans that are well beyond their spending limits and the mortgage industry should not be qualifying consumers for “no money down” loans.  Statistics have proven that loans that require “no money down” typically will end up in default and the consumer’s credit suffers as a result.  If the mortgage industry wanted a guarantee that they would get their money, they would be more careful about extending these kinds of loans. 

In addition to the problems with “no money down” loans, consumers re-finance and take out home equity loans further extending themselves financially.  Some consumers have put themselves in a position that they owe more on the home than the current value of the home.  Once in this position, the consumer is locked into payments until the equity of the home rises or enough of the loan is paid off and the consumer is able to sell the home and break even.  To further this scenario, this consumer is now required to find a “no money down” loan if they decide to purchase another home.  The best answer to solve “credit” problems is for consumers to become educated and stick to spending limits that are reasonable.  Second and third rate subprime mortgage lenders would not be in business if consumers weren’t signing on the dotted line.

The turn in the market has driven smart sellers to re-evaluate their listings.  Selling a home can be a very time consuming and emotional process, especially if you have found your dream home and are ready to move onward and upward.  When you happen to be selling your house when the market is a “buyers market”, the process can become frustrating and financially burdensome.  There are some basic things to remember when putting your house on the market to ensure that your home sells within a timely manner. 

Do Research – figure out how many comparables are in your area and what the asking prices are for those properties.  Estimate the appropriate selling price for your home based on the comparable asking prices, the amount of comparables, how fast the comparables are selling and how fast you want/need to sell your home.  Check out open houses in your area to see if the comparables have the same qualities, upgrades and value that your home offers. 

Be Reasonable – it is understandable that you “know” the quality of your home and all of the investments that you put into it, but a buyer is looking at your home for the first time not knowing anything about the history of the property.  One perspective is to think about any showing of your home as a blind date.  Imagine how picky you are when you first meet someone and try to determine whether they might be a good “fit” for you.  In the same way, if a buyer has 10 dates a week, it’s much easier for them to be picky about the small stuff. 

Time it Right – most “Midwesterners” know that when the cold hits, everyone hibernates.  The end of November through the first week of January is probably the worst time to sell because of the cold weather and the holidays.  You may get a few determined buyers that will come out to take a look, but the likelihood of finding a buyer and closing the deal during those months is low.  A recommendation would be to take your property off of the market during this time and re-list it the second week of January.  Properties that have been listed for a shorter amount of time are more attractive. 

Tidy Up – the phrase in real estate “location, location, location” is just as important as the phrase “declutter, declutter, declutter”.  The first thing that buyers will see when they view your home is the exterior.  It is very important to have the exterior of your home appealing to the eye.  If a buyer drives by or looks at your home on-line and they don’t like the outside, they will not be motivated to check out the inside.  Less is more when you are showing your home and the least amount of furniture and “extras” will make your rooms appear larger.  Your home should be clean and well lit whenever you have a buyer walk through.  It might be a good idea to do small fixes as well – tighten loose door handles, vents, screen doors, cabinet handles, drawers and do minor paint touch-ups, etc.  First impressions last a long time. 

Be Creative – offer incentives for buyers.  I’ve heard that one motivated seller offered to refund the entire amount of the selling price when the seller passed away, theoretically offering the house for free.  Other sellers have offered discounts or purchases (free plasma TV, a bottle of wine each month or free pizza for a year) that accompany the sale of the home.  Other buyers have set up auctions for their homes, listing it slightly-moderately below market value and then auctioning it off to the highest bidder.  The auction creates advertising exposure for the property and allows for higher marketability.

It appears that mortgage applications are on the rise in spite of the recent scare from sub-prime mortgage companies tightening the reigns on lending standards.  Certain people have been forced to refinance to obtain lower monthly payments and that is one contributing factor to the increase in applications.  Some home buyers are trying to take advantage of the recent interest rate cuts and widespread availability of homes to purchase.  Investors are also using the “buyers market” mentality to focus on purchasing better properties at more affordable prices, getting a higher value for every dollar spent.  Although current interest rates are higher than they were last year, a number of people still see the potential in the market.  The average mortgage interest rate that we have been fortunate enough to have in the past few years (5-7%) is closer to a record breaking number than the average mortgage interest rates that have historically been the norm (7-9%). 

“Less than perfect credit” buyers are now looking for alternate means of financing since the sub-prime lenders have raised lending standards to the point that the majority of these types of buyers no longer meet the standard criteria for financing approval.  One creative financing strategy that has panned out to be a successful approach for buyers is FHA loans.  FHA loans are more lenient for buyers who have had credit problems or issues in the past.  A few examples of FHA guidelines that differ from conventional loans are as follows: 

• A buyer needs to be able to prove stable monthly income, regardless of the specific type of income  (for example, part-time income could be accepted if the length of employment proved to be significant)
• Loan-to-value ratios are 97% and gifts can be used toward the 3% required down payment
• Mortgage insurance premium of only 1.5% of the loan amount is required
• A buyer who filed bankruptcy two years ago can apply for a FHA loan
• A buyer who experienced a foreclosure and resolved it three years ago can apply for a FHA loan