What the FHA Appraiser is looking for

The goal of all prospective properties is to meet or exceed the FHA Minimum Requirements to be eligible to qualify for the FHA residential mortgage.  It is the job of the appraiser to inspect the subject property for any possible defective conditions.  Defective conditions are deemed unacceptable and are not eligible until the defects or conditions have been the remedied and the probability of further damage is eliminated. 

Defective conditions include poor workmanship, defective construction, and evidence of continued foundation settlement, excessive dampness, leakage, rot, decay or termites and any other readily observable condition that impairs the safety, sanitation or structural soundness of the dwelling.

Major components of the dwelling that are inspected include roof, heating and air, siding, structure, electrical, plumbing and foundation.

The roof structure should be sound with no sagging or irregularities. There should be no missing shingles and no evidence of leaking.  Attic spaces must have proper ventilation.

The heating and cooling unit should operate correctly and have no loud sounds or unusual doers.  Lights should turn on and off normally.  There should be no electrical wiring exposed at any time.  All plumbing fixtures must operate normally with no observable signs of leakage.  Any “operable element” that has reached the end of its useful life within two years should be replaced.  

There should be no holes or damage to the siding, structure or interior walls.  There should be no wood frame or siding touching the ground.  There should be no evidence of termites.  Homes built before 1978 should have all defective paint scraped and repainted.  There should be no broken windows, doors and steps, steps without handrails, and blocked doorways.

The foundation should not have significant cracking or any pooling of water near the foundation.   Proper water drainage away from the foundation is essential.  Homes with crawl spaces must meet a minimum requirement of 18” and should be free of debris, dampness and mold. 

The final required repairs are all repairs necessary to preserve the continued marketability of the property and to protect the health and safety of the occupant.  Repairs costs are estimated and the work must be performed before the loan can close.

There are other site and external requirements exist that can disqualify a property, but in most cases if the home is located a typical residential area, than the eligibility lies within the subject dwelling which in most cases can be repaired to meet or exceed FHA Minimum Requirements.

1031 Exchange Properties

Any Real Estate property owner or investor of Real Estate may now wish to consider an exchange when he/she expects to acquire a replacement property following the sale of their existing investment property.  An exchange of “like properties” enables the owner to defer or avoid all of the capital gain tax due upon the sale of the original property, currently at 15%

A 1031 Exchange, also known as a tax deferred exchange is a method for selling one property, that’s qualified, and then proceeding with an acquisition of another property (also qualified) within a specific time frame.

The process of selling a property and then buying another property is a generally considered a standardized sale and buying situation.  The “1031 exchange” is unique because the transaction is treated as an exchange and not just as a simple sale. It is this difference between “exchanging” and not simply buying and selling which, allows the taxpayer(s) to qualify for a deferred gain treatment. Basically, sales are taxable with the IRS and 1031 exchanges are not. US CODE: Title 26, §1031. Exchange of Property

The IRS code is clear that a Qualified Intermediary must be chosen and act as independent organization whose only contact with the exchanger is to serve as an intermediary for the transaction. The Internal Revenue (IRS) Code requires that the person or entity serving as (QI) cannot be someone with whom the exchanger has had a former business or family relationship prior to the transaction. A Qualified Intermediary is a neutral but essential third party that prepares the 1031 exchange documents. When selecting a QI you should make sure they are bonded and insured. Fees for this type of transaction may range anywhere from $750 – $2000 to do an exchange.  Most CPA’s and Attorney’s specializing in Real Estate or Taxes can also perform this service.

Although the 1031 exchange of the IRS code offers an excellent opportunity for Real Estate investors by means of deferred tax exchange, investors also needs to be careful as there are a number of things that if included as a part of the exchange, that can still trigger a capital gain tax bill.

The real estate property you purchase should have a mortgage debt equal to, or greater than the property you are selling. In the rare case that the real estate property you buy has a lesser mortgage debt amount than the property sold, the difference in the mortgage value will be taxable to you.

In this situation that the seller of the property refinanced the property and you happen to assume the new higher debt. You are allowed to finance it through a new loan or you can add cash to the deal and the added cash offsets the debt relief on the property sold by you.

If the seller is paying cash for any repair charges that are required by the buyer then the amount paid by the seller towards the repair charges are considered as a cash excess and would also be taxable.

Investment property and personal residence property are not considered “like kind” property. So if you are buying a four family unit as part of a 1031 exchange, and then use one of the units as your personal residence, then 1/4 of the property would be considered as a 1031 exchange excess and you will have to pay taxes on that.

Often an investment property includes appliances such as stoves, washers & dryers, refrigerators etc. If these items are included in the sale you can end up paying capital gain taxes for these appliances. Appliances are not considered “like kind” property.

There may be other situations and conditions that apply. Such as extended time frames, damaged properties or other types of “unlike kind” property criteria. Investors should always perform their due diligence and consult with their accountant and attorney to discuss both the benefits and possible tax liabilities involved.*

* The information presented in this article is meant to inform and is not intended to give legal or tax advice.

Understanding Capital Management

Money. Every business needs it. It is required for start up and continues to be required throughout its operation. Without money or the equivalent a business can not get started and any existing business dies.

 

Companies must obtain the needed money primarily by borrowing it or by insuring a debt investment such as a note or a bond. Banks and bondholders expect to be repaid and typically on a fixed date.  Therefore a company’s survival may hinge on meeting such obligations.

 

There are good and bad reasons to borrow. If every borrowed dollar earns a positive return over and above the cost and interest payments than the reason is likely good. If it originates from greed, ego or a desire to breathe life to a poorly planned project than the reason is likely to be a bad one.

 

Financial analysts for corporations distinguish between business risk and financial risk. While business risk is the uncertain income that originates from the companies, cost of production and customer base, financial risk represents the additional uncertainty imposed on the shareholder because the company uses fixed debt securities to pay for its productive assets.

 

Not so long ago, people realized that lending and borrowing were potentially hazardous activities and should be undertaken cautiously and even then only to finance productive investment that provides a means of repayment. This idea is not as popular today with a generation of people being taught to believe that business success results from the use of other people’s money and borrowing is a necessity to make money and stay ahead of inflation.

Although there is some truth to this, the important matter of financial risk is still generally disregarded.

 

If there is any question about this, one can easily recall the recent financial crises and well publicized companies that failed ultimately due to their inability to meet their debt obligations.

 

Even companies that don’t have to borrow long term notes must still exercise tight controls on all income and expenses to achieve long term and lasting success in the market place.

 

Here are few important management formulas for the business owner to consider.

 

Working Capital

 

[i]Liquidity is the ability of a company to pay its debt as they come due. As you might expect, lenders and others are interested in the working capital of a company which is essentially the difference between the current asses and current liabilities.

Current Assets – Current Liabilities = Working Capital

 

Current Ratio

 

The current ratio allows us to compare the liquidity of a company over time. The popular rule of thumb is 2:1 to generate adequate cash flow however many types of businesses have traditionally operated at lower figures. Liquidity is examined monthly or more often if the ratio is low. 

Current Assets / Current Liabilities = Current Ratio.

 

Debt to Assets

 

Also called the Debt Ratio compares what is owed to the value of the assets used by a company. This ratio tells lenders what percentage of a company’s assets are financed or leveraged. As long as some equity exists, the debt ratio is below 100%. If debt is greater than 100% than from a practical standpoint the business is bankrupt.

Debt to Assests = 100 x Total Liabilities / Total  Assets

 

Turnover of  Working Capital

 

This ratio measures the complex relationship between buying and selling. Maintaining a low value insures availability of cash to sustain operations. A ratio that is allowed to grow too high on the other hand could make the company vulnerable if the business climate becomes adverse.

Turnover of Working Capital = Net Sales / Working Capital

 

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[i] Source: 101 Business Rations, McLane Publications, Sheldon Gates, 1993

Converting Your Property to Produce Income

           Should you consider planning on converting your home to generate additional income? In slow times, the additional income can help to cover your mortgage or household expenses. 

 The first thing to consider before converting is- Is it legally permissable? Check with local zoning boards first to see if approval is needed to convert a portion of your home to an “accessory dwelling unit” or apartment.  

Ignoring local zoning rules can be costly and the penalties of putting in an illegal apartment can negate the future possible income.  If your home is in a community with a property owners association, you should also check with them as some private subdivisions may have restrictions even if the city or county does not.

Is it practical and feasible to convert the property to an apartment unit? Homes that have a hillside walk out basement tend to  be more practical to convert then a second story which may need additional plumbing and electric for an upstairs kitchen and the cost of a making a separate entrance.

Would be landlords should also ask themselves if they are willing to give up some of their privacy, as some units may share common walls or areas such as stairways or hallways. Tennant will likely use a common driveway and some additional site work may be necessary for adequate parking.

Owners should be aware of what units similar in size and utility are leasing for and if there is an adequate demand in their area.  If the rental market is slow, you may need to reduce your price at first to attract long term renters.  Realtors that offer property management are very knowledgeable about their local market and may be able to help you determine what features are desired by tenants and what your unit should rent for.

 

 

Sources:

Hot Springs Appraisal Services,  May 2010

Realtors Magazine, February 2010

 

Loan money for Fixer- Uppers

 

Purchasing a house that needs repairs is often a catch-22 situation. This is because the bank won’t lend you the money to buy the house until repairs are made and the repairs can’t be done until you have purchased the house.

A new HUD’s 203(k) program is available that can help you with this dilemma and allow you to purchase or refinance a property and include the cost of making the repairs and improvements in the loan. The FHA insured 203(k) loan is provided through approved mortgage lenders nationwide.

The down payment requirement for a purchaser is about 3.5% of the total acquisition including the repair costs.

The potential homebuyer locates a fixer-upper and executes a sales contract after doing
an analysis of the property with their real estate professional. The contract should
state that the buyer is seeking a 203(k) loan and that the contract is subject to a loan
approval based on the required repairs.

The homebuyer then selects an FHA-approved 203(k) lender and includes a detailed cost estimate on each repair or improvement.  An appraisal is then performed to determine the value of the property after the renovation.

If the borrower passes the lender’s credit-worthiness test, the loan closes for an amount that will cover the purchase or refinance cost of the property, the remodeling costs and the closing costs. The amount of the loan will also include a reserve of 10% to 20% of the total remodeling costs.

At closing, the seller of the property is paid off and the remaining funds are put in an escrow account to pay for the repairs and improvements during the rehabilitation period. Escrowed funds are released to the contractor during construction through a series of “draws” for completed work.

To find approved 203k lenders in your area go to 203k lenders search. To find out more about this type of loan go to

203K Rehab LoanInsuran- HUD

Things your Insurance May Not cover

There will always be gaps in home owner’s insurance coverage that you can’t do anything about.  Insurers aren’t going to cover you for a nuclear accident, for example, no matter how many companies you ask.

  “Exclusions” in coverage vary by the insurer, but if when something goes wrong, it may be way too late to begin learning about your policy.

If you know about some of them in advance, you may be able to switch carriers or buy extra insurance to stay protected.

Mold and water damage

When Ed Mc Mahon won a 7.5 million dollar lawsuit against his insurer over mold that he said sickened his family, a huge increase in mold-related claims occurred and which led insurers to eliminate or at least reduce their exposure.  Many insurers also limit how much they’ll cover for water damage.

In some cases, you may have trouble getting coverage for a home that’s had water claims in the past.

 

Sewer backup

Sewage backups are frequently not covered by home owner’s policies unless you purchase a special rider.

 Many homeowners who experience this particular disaster try to get their cities to pay for the damage, but governments typically aren’t liable unless the homeowner can prove negligence — and is willing to go to court over the matter.

A cheaper solution?  Buy the rider for $50 to $100 if you are not covered.

 

Neglect

Insurance generally covers sudden and unexpected losses such as damage from a falling tree but not losses from termites rodent infestation or a plumbing leak that never got fixed.  Insurers expect you to take care of any problems in the home and prevent any damage from getting out of control.  If it does, you may not be covered.

Bruce Johnson, author of "50 Simple Ways to Save Your House," recommends you conduct regular inspections of the exterior and look for cracks, decay or water damage.  Also check the condition of the roof,  the basement or crawl space for possible hidden problems.  Home maintenance problems left unchecked only get more expensive over time.

To learn more about other items that may be excluded from your policy, read the article, 10 Things your Insurance May Not Cover.

 

What is a Green Product?

 

What makes a product Green?  Multiple criteria often apply- for example a product may be considered green for more than one reason:

The website http://www.buildinggreen.com publishes Environmental Building News and Green Specs Directory that lists product descriptions for over 2100 environmentally preferable products and is assembled according to the following criteria:

i.                     Products made with salvaged recycled or agricultural waste content

·         Salvaged materials

·         Post -Consumer  materials

·         Pre –Consumer materials

ii.                    Products that conserve Natural resources

·         Products that reduce materials use

·         Certified Wood Products

·         Rapidly renewable products

·         Products that have exceptional durability or low maintenance requirements

iii.                  Products that avoid toxic or other emissions

·         Natural or Minimally processed products

·         Alternatives to ozone-depleting substances

·         Alternatives to hazardous products

·         Products that reduce or eliminate pesticide  treatments

·         Products that reduce storm water pollution

·         Products that reduce impacts from construction or demolition activities

iv.                  Products that save energy or water

·         Building components that reduce heating and cooling loads

·         Equipment that conserves energy and manages loads

·         Renewable energy and fuel cell equipment

·         Fixtures and equipment that conserve water

v.                    Products that contribute to a safe, healthy built environment

·         Products that do not release significant pollutants into the building

·         Products that block the introduction, development or spread of indoor contaminants

·         Products that remove indoor pollutants

·         Products that warn occupants or health hazards in the building

·         Products that improve light quality

·         Products that help control noise

·         Products that enhance community well -being

 

 

New Energy Building Standards

 

 

 

There continues to be a proliferation of green building initiatives nationwide. To date, there are 31 states, 112 cities and 12 federal agencies that have some sort of green building statutes.

 The National Green Building Standard is the first and only agreed-upon standard that covers residential properties, including apartments, condos and the residential portions of mixed-use developments, as well as land development and remodeling and renovation. Until now, multifamily firms interested in sustainable development have had to follow guidelines designed for high-rise commercial properties or single-family homes

Multifamily developers who want to take their projects green now have a set of guidelines to refer to, with the recent approval of the National Green Building Standard by the American National Standards Institute. The ANSI endorsement, which lends credibility to the standard, was the last necessary hurdle in its development process.

Expected to be published this spring, the standard was crafted according to ANSI’s strict guidelines by the National Association of Home Builders and the International Code Council, with input from a consensus committee comprised of builders, architects, product manufacturers, regulators and environmental experts. The NAHB Research Center directed the work of the committee and provides certification for green projects.

A number of housing bills brought forward last year sought to tie federal requirements with green building. Among the federal proposals in 2008 were new green building requirements for Hope VI projects and more energy efficiency requirements for building codes in several HUD programs. The 2009 stimulus package has a large allocation to green, and requires that states receiving grant money must update their building energy codes.  This year, comprehensive energy and climate change bills are expected to be brought to Congress.

 

Additional Links

 

 

Energy Star Programs and Products

http://www.energystar.gov/

 

 

US Green Building Council

http://www.usgbc.org/displaypage.aspx?cmspageid=147#projects

 

 

RESNET – Residential Energy Services Network

http://www.natresnet.org/

 

 

Healthy Building Supplies

 

Ultra touch is an all cotton insulation that is safer alternative to traditional fiberglass. The denim is not exactly the hand me down denim jeans, but the waste and scrap from the process of manufacturing blue jeans and other cotton textiles. The materials are cut into strips and treated with a boron solution to retard fire and mold. It is also treated with a pest repellant which his reported by the manufacturer to be non toxic.

 

The Ultra Touch Brand is manufactured by Bonded Logic and has an R value (thermal resistance value) of about 3.4 per inch which is the same as fiberglass and comes in thicknesses from 3.5 in(R-13) to 6 in (R-30) in dimensions suitable for use with 2 x 4 and 2 x 6 framing. The batts are backed with 100% foil and can be used in automatic, aviation and marine settings as well as residential and commercial construction.

Recycled denim spares the landfill additional materials and produces much less energy than other forms of insulation.

 

The denim is also free from substances like formaldehyde and resins that can cause skin and lung irritations.

 

Ultra Touch is a Class- A fire rated and meets LEEDs eligibility requirements.

 

Home Green Home lists their prices of this product for comparison or Branded logic offers a search option on their page to find distributors in your area.

 

 

 

 

 

 

 

 

Energy Efficient Mortgages

In order to promote energy efficiency, HUD is proposing an Energy Efficient Mortgage product for homeowners which could provide incentives to those that invest in clean energy improvements.

HUD is also encouraging all federally-assisted housing agencies to go green. Through $250 million from the Recovery Act and $600 million in Capital Fund competitive grants, agencies are able to increase energy efficiency in their properties which will save money, protect the environment, and create jobs.

The  President’s announcement  to award 100 grants totaling $3.4 billion to private companies, utilities, cities, and other partners to help build a nationwide smart energy grid. As part of the American Recovery and Reinvestment Act, Baltimore Gas and Electric (BGE) in Baltimore, MD will receive $200 million to install two-million residential and commercial smart meters. These meters will reduce peak electricity usage by as much as one-third and save customers approximately $2.6 billion.

The Smart Grid will allow consumers to have real-time information on the costs of their energy use, and the ability to manage their energy consumption and save money