Orange County, California Real Estate Information

We humans have a natural craving to simplify the complex. This same instinct, which explains why legends, films and fairytales from every culture tend to boil down to heroes vs. villains, also explains why so many buyers and sellers desperately seek rules of thumb for making the often scary, rarely simple decisions they face.

Reality check: your real estate transaction is not a children’s story. Grown-up life is complicated, as are money matters and relationships. Since real estate involves all three (being a grown up, money and relationships), smart buyers and sellers should cast a suspicious eye at super simple real estate rules of thumb.

Let’s take a handful of the most persistent ones head on, and decipher which of them are fact, and which are fiction.

Rule of Thumb #1: Location, location, location.  Fact or Fiction: Fact.One of the elemental truths of real estate is that almost everything can be changed about a home - except its location. By the same token, location is essential to our ability to afford and enjoy living in a place, given that it impacts everything from:where our children go to school (and whether or not we have to pay for it), how much time and money we spend getting to and from work, our safety, the beauty, quiet and convenience of our surroundings and the recreational, shopping and cultural options which do - or don’t - become part of our daily lives. 

Location impacts whether you hear train tracks or birdsong in the morning, whether your neighbors bring you cookies or bring you drama when you move in - it can even impact your career and job prospects. The deep, numerous impacts of where we live on our experience of a home, in turn, give location a powerful role in driving whether we can resell our homes - and for how much.

The critical importance of location is one real estate rule of thumb that grows more true over time. However, the specifics of what makes a location desirable have and continue to evolve rapidly. For example, urban homes with super-short commutes to bustling job centers have grown more and more interesting to buyers as their prices have come down and gas prices have gone up.

Rule of Thumb #2: It costs more to buy than to rent your home.  Fact or Fiction: Depends on where you live.Just today, Trulia released its latest Rent vs. Buy study, showing that in 98 percent of American cities, it's actually less expensive to buy a home than it is to rent!  Of course, the type of home you might want to buy could be more pricey than what you’d be satisfied living in as a rental, and buying a home requires an upfront chunk of dough (i.e., down payment and closing costs) that renters don’t have to come up with. 

But the age-old would-be buyer objecion that “I can’t afford to buy a home” is now frequently shattered by the reality that when you take all things into account, buying a home at today’s prices and interest rates can actually cost the same or less than renting at today’s relatively high rental costs in many areas. 

That said, if you live in San Francisco or New York City, chances are good that it does actually cost more to buy than to rent. But if you live elsewhere, it behooves you to actually do the math, factor in the massive tax advantages of homeownership and see which is truly more expensive for you.  And make sure your decision accounts for the massive opportunity costs you might incur if you don’t take advantage of today’s prices and rates to buy a home of your own and start building equity - something you can simply never do as a tenant.  

Rule of Thumb #3: List it high, to give yourself bargaining room.  Fact or Fiction: Fiction.The fact of this matter is that if you are selling a home in a strong buyer’s market, your competition is steep. The home that presents the best value for the price is the one that is the most likely to sell. Listing your home higher than what you know it’s worth is a surefire way to alienate that relatively rare specimen: a qualified buyer with a sense of urgency who might otherwise be interested in making an offer on your home. Smart buyers who are ready to leap off the fence into homeownership do their research, and may have seen dozens - even hundreds of online listings before they make an offer.  If your home is overpriced, chances are good that they’ll pass your home up, even if they like it, waiting for you to get a clue and cut the price. 

There are simply too many other great homes at great prices on the market. Overpriced listings are much more likely to be a source of prolonged stress and handwringing to their owners than a source of successful sales. 

If you're tempted to list your home high, there’s something else you need to be aware of: the sweet spot phenomenon. Homes that are listed too high sometimes go through one, maybe even several, price cuts before they hit a sweet spot - the price at which buyers are drawn to the value like moths to a flame, sometimes even generating multiple offers over the discounted price (but below the original list price).  Here’s some good news: you don’t have to wait months and months and go through the agony of showing upon showing and price cut upon price cut to get your home’s list price to the sweet spot where it sells.  

Work with a local agent who has a strong, recent track record of selling homes, quickly and at or near their list prices, in your area. Then, trust their pricing advice. (You might find it easier to trust them if you select your agent after speaking with several.) It’s the most efficient way to leverage local market expertise to get to your home’s pricing sweet spot, quickly and with minimum drama.

Rule of Thumb #4: Always offer 10% below the asking price.  Fact or Fiction: 100% baloney. I mean, fiction.Few decisions in real estate are so nerve-wracking as that of how much to offer for a home. These days, we search online for comparables, try to suss out their similarities and differences between those homes and our target property, run some more numbers - there might even be a spreadsheet or two involved. We ask our agent to talk with the listing agent, get a feel for the seller’s motivation level and figure out whether there are any other offers, then try to factor the competition level and any credits or bank involvement into our thinking. We touch base (again!) with our mortgage broker to understand how rates have changed since our last conversation and exactly what the monthly payment will be if we offer X or Y or Z.

And at the end of all that, buyers often still feel like the final decision about exactly how many dollars and cents to offer for their home amounts to something like licking their finger, sticking it into the wind, and just picking a number.  And that just seems wrong, for a decision so important.

So it’s no wonder that one of the most frequently asked questions I personally receive is the request for the perfect rule of thumb of how much below asking a buyer should offer, given today’s market dynamics. My answer is now what it always has been and will be: sorry folks - move along - no rule of thumb to see here.

Every state, county, city and neighborhood has a different dynamic - as does every listing. Every seller, bank or individual, has its own particular motivations, situational constraints or influences (like how much they owe on the home, or the need to split proceeds between divorcing or sibling co-owners) and thought processes. If the seller feels they listed the place at an uber-low price, they might respond very differently to a particular offer than a seller who gets the same offer, but felt like they were building cushion into the list price.  If the home is in a neighborhood where most homes sell for more than the asking price, or the property has multiple buyers vyying for it, even a full-price offer might get laughed at.

Long story short - the specifics of each listing’s situation absolutely must be taken into account when deciding how much to offer, along with the comparable sales data and the buyer’s own (a) financial concerns and (b) motivation level for getting the home.

Rule of Thumb #5: Listing your home as a FSBO will save you some dough.  Fact or Fiction: Fiction (with the occasional exception).I know some will argue this point, but the data is unequivocal: homes listed for sale by owner (FSBO) simply sell for less than similar homes listed by agents. From my own observations, I’d also argue that FSBO listings often simply don’t sell at all, and many end up listed by an agent after wasting months and months of the seller’s time.

The fact is, listing your home for sale by owner might save you the commission you would otherwise have paid to a listing agent. But the FSBO sellers who are successful generally do offer to pay the buyer’s broker’s commission, so the prospect of saving the full 5 or 6 percent agent commissions is more realistically the prospect of saving 2.5 or 3 percent.

Beyond that, the smartest FSBO sellers also often end up:

all services that are frequently included in an agent’s services.  And even those FSBO sellers still forgo the objective pricing advice and marketing expertise that a good, local listing agent would bring to the table, all included in the commission. 

Fact is, many sellers who don’t hire an agent, but do cobble together a similar level of professional services and account for their own time spent on a FSBO listing, soon see that they’re not actually saving much money at all. And even those who think they can save soon see that there’s no savings if the house doesn’t sell - a common fate of FSBO’s on today’s market.

Sellers who already have in hand a buyer who is ready, willing and qualified to buy their home are the best suited for selling by owner, with the help of legal, title and escrow professionals, in my opinion. Most others should at least talk to several agents, discuss whether there’s any flexibility on commissions and be honest with themselves about what the prospect of marketing, preparing and selling the home DIY would really look like, before assuming that they’ll save a ton of dough by listing it FSBO.

Chicago continues to be the most searched for housing market at REALTOR.com, according to February search data. There was little change in the top 10 searched housing markets in February compared to the prior month, except Tampa-St. Petersburg-Clearwater, Fla., moved up in the rankings from No. 7 to No. 5.

The following are the top 10 most searched for housing markets at Realtor.com in February: 

1. Chicago
Median list price: $189,800

2. Detroit
Median list price: $84,900

3. Los Angeles-Long Beach, Calif.
Median list price: $325,000

4. Philadelphia, Pa.-N.J.
Median list price: $225,000

5. Tampa-St. Petersburg-Clearwater, Fla.
Median list price: $144,900

6. Phoenix-Mesa, Ariz.
Median list price: $174,900

7. Atlanta
Median list price: $154,900

8. Dallas
Median list price: $194,500

9. Orlando, Fla.
Median list price: $154,500

10. Las Vegas, Nev.-Ariz.
Median list price: $122,900

Economists say the housing market is starting to heal, but too many people aren't aware of it because they're judging a housing recovery on the wrong sign: What’s happening with home prices. 

Paul Dales at Capital Economics says higher prices won’t be the sign that the housing market is on the mend — that can be a lagging indicator — but rather an increase in overall home sales. And that's showing signs of improvement: Existing home sales in 2011 rose to 4.26 million compared to 4.19 million in 2010. In the last six months alone, home sales have increased 13 percent. 

As a recent article at Fortune points out, “The evidence reminds us that perhaps we should change our expectations of what a housing recovery might look like, particularly following a crisis marked by record foreclosures and a financial crisis that sent the economy into one of the deepest recessions. The recovery we have been anticipating is defined more on the rate at which the glut of vacant properties comes off the market as opposed to any steady rise in prices, which some think won't happen for another few years.”

Source: “The One Number to Watch for a Housing Recovery,” Fortune (March 20, 2012)

Beginning in 2007, foreclosures rocked the real estate world. Like an out-of-control freight train, they began decimating the market, peaking in 2009. Myths and rumors began propagating like mushrooms as consumers struggled to understand the new reality. Although many misconceptions have come and gone, we still encounter five myths on a regular basis.

1. There is going to be a flood of new foreclosures to the market.

This rumor has appeared every year since 2008 and has been routinely debunked. However, recent announcements that the Feds reached a settlement over the robo-signing scandal have reignited speculation. The idea is simple: Since the cork is now out of the foreclosure bottle, we’ll soon see another flood of REOs inundating the marketplace.

My personal opinion: don’t hold your breath.

Banks have learned that if they control inventory, they can affect local prices. By releasing homes in measured amounts, they realize higher prices than if they released a glut of homes. In addition, they’ve learned that if they can mitigate their losses by agreeing to a short sale, everyone wins.

2. You can go directly to a bank to buy a foreclosure.

Every few weeks I’m asked how to buy foreclosures direct from a bank. Someone knows a friend being foreclosed on and they want to step in and grab the house before it hits the market. Don’t we all? In reality, banks have a simple system – they first offer properties on the courthouse steps. The rest they assign to asset mangers who then hire local real estate agents to put them on the market along with all the other homes. Want an REO? Pay cash at the courthouse steps or get in line witheveryone else when they hit the local MLS (Multiple Listing Service).

3. You can get a killer deal by submitting lowball offers on foreclosures.

You would think this myth would be dead by now. Unfortunately, like Elvis sightings, it just won’t go away. Here’s the truth: Banks want REOs sold in 30 days or less, so they typically appear on the market priced slightly under comparable properties. If the property doesn’t sell quickly, the bank will lower the price after about 30 days. Lowball offers are ignored and are, quite frankly, a waste of everyone’s time and effort. You might get a deal by offering a lower price on a foreclosure that’s been sitting on the market for more than 90 days, but remember that there are good reasons it’s gone unsold for so long. And even if you have cash, your lowball offer won’t be accepted —seriously.

4. You can’t use foreclosures when doing an appraisal.

Or short sales, for that matter. That is no longer true. In fact, in many neighborhoods, that’s all that’s there. Therefore, foreclosed or distressed sales represent the actual value of homes in the area and HAVE to be used to appraise other properties. Don’t like it? Get over it. Times have changed and the ways neighborhoods are valued have changed as well.

5. Foreclosures are only affecting the bottom end of the market.

This used to be true. However, while foreclosure rates on the lower end of the market have actually decreased, they’re actually increasing on the upper end. According to Daren Blomquist, vice president of RealtyTrac, the market share of foreclosed homes under $1 million is shrinking, but those among properties valued over $1 million are rising – up 115% since 2007. And foreclosures on properties valued upwards of $2 million have increased by 273%. While some well-known jet-setters have melted down and lost everything, others are choosing to strategically default. They see it like liquidating a poorly performing portfolio – they have enough resources to cut their losses and move on. Historically, banks have been reticent to foreclose high-end homes and absorb a large loss, but defaulters are now forcing their hands and mansion foreclosure rates are moving on up.

Myths control behavior, and this has never been truer than in the housing market. Savvy agents will work hard to educate their clients, debunk myths, explain market trends, educate with solid facts – and actually close transactions.

A 3.8 percent levy on certain investment income was included in healthcare legislation two years ago, and now misinformation about the tax’s application to home sales is being passed along over the Internet and e-mail, throwing some prospective home sellers into a panic. In actuality, very few owners will be affected by the new tax taking effect in 2013.

The tax will only be on investment income of upper income taxpayers. Included in the definition of investment income is capital gains from home sales above a certain amount and for households whose income is above a certain amount.  This means individuals who make $200,000 a year or more, or married couples who earn at least $250,000 a year are affected. Additionally, the tax is only applied to home sales if the proceeds exceed $250,000 for an individual, or $500,000 for married couples. And there still are other income and tax particulars that are considered before the 3.8 percent tax is triggered. 

The National Association of REALTORS® recommends that members become familiar with the tax, but avoid coaching their clients on the policy because the amount of tax will vary from individual to individual as the elements that comprise adjusted gross income differ from taxpayer to taxpayer. NAR has published a brochure on how the tax works, which is now available online.

Download the 3.8% tax brochure (PDF).

Source:NAR and "Realtors Say Despite Efforts, Tax Rumor Keeps Spreading," Glens Falls Post-Star (NY) (03/10/12)

Banks are more willing to agree to a sale at a lower cost than a home owner’s mortgage balance in order to avoid having the property fall into foreclosure, which can be more costly for a lender. 

In the fourth quarter of 2011, there were more than 88,000 short sales, a rise of 15 percent compared to a year prior. In all, short sales made up 10 percent of all home sales sold in the fourth quarter, according to recent data released by RealtyTrac.

On the other hand, bank-owned homes dropped 12 percent year-over-year (to 116,000), making up 13 percent of all home sales during the fourth quarter.

The average short sale in the fourth quarter sold for $184,221, according to RealtyTrac. The average foreclosure, on the other hand, sold for $149,686. 

Banks are now more willing to do short sales and that trend will likely “show up in more local markets in 2012 as lenders recognize short sales as a better option for many of their non-performing loans," said RealtyTrac CEO Brandon Moore.

Meanwhile, during the fourth quarter, 24 percent of homes sold — nearly one in four — were in some stage of foreclosure, either already bank-owned or already winding through the process, RealtyTrac reports. The number is slightly down compared to a year prior when foreclosures accounted for 26 percent of all home sales, RealtyTrac reports. 

However, Moore says he expects foreclosure sales to rise this year, "particularly pre-foreclosure sales, as lenders start to more aggressively dispose of distressed assets held up by the mortgage servicing gridlock over the past 18 months.”

Source: “Foreclosures Made Up One in Four Home Sales,” CNNMoney (March 1, 2012)

Strict adherence to the legal requirements of Section 1031 of the Internal Revenue Code is required for a successful exchange. Investors should be aware of four basic requirements when entering into a delayed exchange, and should seek the advice of a tax accountant or attorney to ensure proper adherence to the tax code. The four basic requirements for a successful exchange are:

Property Qualifications
The Internal Revenue Code states that the properties involved in an exchange must be held for productive use in trade or business or for investment, and they must be “like-kind”.

Timeline
The IRS provides a maximum of 180 days to complete an exchange. The timeline begins upon the close of escrow (COE) of the relinquished property. The new property (or properties) must be acquired on or before midnight of the 180th day. No Exceptions! In addition, the IRS requires that all potential replacement properties be identified by midnight of the 45th day of the exchange.

Identification
Identification of all potential replacement properties is required on day 45 of the exchange. Identification must be in writing and the description of the properties must be unambiguous. The IRS provides two rules for identifying replacement property:

• The 3 Property Rule The 3 Property Rule allows for identification of any three properties, of any price, anywhere in the United States.
• The 200% Rule The 200% Rule is an option for identifying more than three properties. With the 200% Rule, four or more properties can be identified. However, the combined value of all properties identified cannot exceed 200% of the property sold.

Tax Deferral
To defer 100% of the capital gains tax liability, two requirements must be met

• Reinvest all the Cash - all the cash that was generated from the sale of the relinquished property must be reinvested into the new property or properties
• Purchase Equal or Greater in Value - the new property (or properties) must be equal or greater in value to the property sold.

If at any time during the exchange, the taxpayer or his agent has receipt or control of any portion of the sales proceeds, this will generally result in gain recognition so please make sure to contact Asset Exchange Company to set up the 1031 Exchange account prior to the close of escrow. 

The 1031 Exchange continues to attract keen interest from California's Franchise Tax Board (FTB).  This from the FTB web site:

"As we begin 2012, one of our top audit issues continues to be like kind exchanges, also known as 1031 exchanges."  The Franchise Tax Board states that common audit issues include:

• Taxpayer receives cash or other property (boot) in the exchange but does not report the boot on their return.
• Taxpayers do not meet identification or other technical requirements of IRC Section 1031.
• Relinquished and/or replacement property are not held for investment or for productive use in a trade or business (i.e. property is used for personal purposes or is held primarily for sale).
• The taxpayer who transfers relinquished property is a different taxpayer than the party who acquires replacement property.

The Franchise Tax Board also makes a note to point out that any gains from California property stay with California regardless of where the replacement property is acquired.  That means if a relinquished property is sold in CA and then replacement property is acquired in Texas and later sold in a taxable transaction, the California Franchise Tax Board will require taxes paid to California.

If your clients are considering buying or refinancing a home, you should let them know that the Federal Housing Administration (FHA) will soon increase mortgage insurance premiums on FHA home loans.

The Department of Housing and Urban Development (HUD) announced it would increase the annual mortgage insurance premium (MIP) by 0.10% for FHA loans under $625,500. This would raise the fee from 1.15% to 1.25% of the total loan amount. This annual premium increase — which is broken down into monthly payments — takes effect April 1, 2012.

In addition, HUD announced it would raise the FHA's upfront annual mortgage insurance premium (UFMIP) from 1% to 1.75% effective April 1, 2012.

Starting June 1, 2012, the MIP for FHA loans over $625,500 will increase 0.35%, raising that fee to 1.50% of the total loan amount.

The primary reason for the changes is to bolster capital reserves for FHA's Mutual Mortgage Insurance Fund. Congress has mandated the fund keep 2% in reserves. Last year, that reserve had slipped to 0.2%. The changes are expected to generate about $1 billion annually for the fund.

The increase in mortgage insurance costs applies to the purchase or refinancing of all FHA loans regardless of the amortization term or loan-to-value (LTV) ratio. The increases will not apply to borrowers already in an FHA-insured mortgage, a Home Equity Conversion Mortgage (HECM), and other special loan programs to be outlined in a forthcoming FHA Mortgagee Letter.

For your customers considering refinancing or making a purchase, they might want to act before the new mortgage insurance premiums take effect.

Thirty-four percent of home sales in January were paid for with cash, according to Campbell Surveys and Inside Mortgage Finance. And housing experts say the growing number of cash buyers on the market -- who are often investors -- can be a good thing in removing some of the overhang with foreclosures. 

"I think a lot of people are throwing in the towel and deciding they would rather invest in real estate than have their money in a deposit account in the bank," Tom Popik, research director at Campbell Surveys, said about the increase in cash buyers in the market. 

The advantage of coming with cash to a real estate transaction is that cash buyers don't have to worry about qualifying for the more stringent underwriting standards by lenders that have kept so many other buyers out of the market recently. They also have less concern about appraisals derailing a deal, another common problem plaguing many real estate markets. 

That means it can be a challenge for financed buyers going up against cash buyers on the same house. A lender "might turn down a higher purchase price made by someone they feel has a questionable ability to get the mortgage," says Bob Davis, executive vice president of the American Bankers Association.

Because of that, some housing experts have criticized the upswing in cash investors as pushing home prices down even more, since banks may be more willing to take an offer for a foreclosure for a little less from a cash buyer if it means they can get it off their books quicker. 

But Richard Green, a professor at the University of Southern California's Lusk Center for Real Estate, says it's probably worth any potential trade-off.

"These cash buyers are mopping up inventory, and that's probably the most important thing that can happen right now," Green told Realty Times. "You're not going to see a recovery in prices until inventories return to more normal levels."

Source: "Cash Buyers Squeezing Out Traditional Home Seekers," Realty Times (Feb. 27, 2012)