Is there a major purchase in your future? Tell us what you're most likely to spend the big bucks on.
Pretty much every time you learn something new, you also learn a whole new vocabulary to go along with it. Real estate investing is no different. Real estate investors must understand the terms and investment vocabulary. Here are some definitions of common acronyms to get you started:
Principal (P), Interest (I), property Taxes (T) and Insurance (I). This is basically the “bottom line” or the minimum you need to calculate when thinking about purchasing an investment property with a loan. Usually it is calculated overall and on a month-to-month basis.
The overall number is what you would potentially spend on the property over the life of the loan. Month-to-month is the portion of PITI you have to pay each month to stay in good standing. This information will help determine how much rent you should charge.
Loan-to-Value, also important if you’re taking out a loan on your investment property, is calculated by dividing the loan by the property’s value, then expressing that as a percentage. For example, if the loan is $200,000 and the value of the property is $250,000, the LTV is 80%.
The lower the LTV, the more equity you have in the property, which means you have more room to negotiate should you decide to sell.
Gross Operating Income is the actual annual income collected from the property, which includes all sources of income (laundry, parking, storage, etc.) and takes into account any vacancies.
Net Operating Income is the income left over from your rents after paying all your monthly operating expenses. So, subtract your expenses from your GOI to get you the property’s NOI. For example, if you take in $10,000 in rents on all the units and spent $8,000 on maintenance, janitorial duties, supplies, accounting, insurance, taxes, and utilities, your NOI for the month was $2,000.
Debt Coverage Ratio is a term commonly used by lenders in underwriting loans for income-generating properties. It’s calculated by dividing the NOI by the total debt. Ratios of 1.20 and higher are considered average.
Conditions, Covenants, and Restrictions are promises written into contracts where the parties agree to perform, or not perform, certain actions.
CCRs can occur in several contexts. There can be CCRs written into a deed when you purchase a property. Also, your tenants could sign a rental agreement in which they agree to certain conditions (such as “no pets allowed” and “you can live here as long as you pay rent, otherwise we can evict you”).
I’m sorry to disappoint you on that last one. CCR on the radio is much more exciting than the real estate investing version of CCR. But it’s an important term, so I hope I’m forgiven. Either way, I hope the acronyms listed above will help you in your quest to invest in real estate.
Young adults, so-called “millennials,” have been pushed by the recession to live with their parents into adulthood–but they really want to move out, according to a study by Harvard’s Joint Center for Housing Studies. That study found that millennials could form 24 million new households by 2025.
Three main factors have been holding millennials back from moving out, said the Harvard study: A weak job market for recent graduates, high debt from student loans and tightened lending standards.
The report also found that the number of young people who buy homes increases as their incomes grow. As and the economy improves, millennials–which the study defined as those born between the years of 1985 and 2004–will make decisions about their living arrangements that will, by extension, affect the economy.
But don’t foresee a mass exodus from parents’ homes, the authors said. Millennials will probably just trickle out of their parents’ nest in what would look like a steady, slow recovery.
Average rates notched down slightly to 4.14% with an average of 0.5 points, down from last week’s 4.17%, according to Freddie Mac. A year ago, rates on 30-year mortgages were 4.46%.
The rate on an average 15-year mortgage was 3.22% with 0.5 points, down from 3.50% a year ago. For adjustable rate mortgages, a five-year ARM this week averaged 2.98% with 0.3 points and a one-year ARM averaged 2.40% with 0.4 points.
When it comes to buying a house, the highest priced offer gets the house…right? Not always! Sure, a hefty sum on an offer is the first thing that every seller wants to see, but any good real estate agent will advise their seller that each offer is a sum of its parts.
Here are five reasons why you may just beat that higher offer:
If you can buy with all cash, you will likely win out over a higher-priced offer. According to RealtyTrac’s latest data, 43% of all home sales in 2014 have been all-cash deals. Savvy sellers know the benefits of an all-cash buyer: there is no issue involving mortgages and lenders, the escrow closes faster, and there is no appraisal to worry about.
A pre-approval letter is the confirmation from your mortgage broker or bank that you’re ready to buy in a set price range and have been pre-approved for the loan. In essence, the pre-approval letter turns you into a virtual cash buyer, as mortgages are harder to come by these days. Someone may be offering to pay more, but if they are not pre-approved, you will have the leg up, even at a slightly lower price.
Closing is generally 30, 45, 60, or 90 days. Customizing the length to suit the seller’s needs can often seal the deal over a higher priced offer. A seller generally wants a fast closing. If you have all your ducks in a row, you may be able to pull off 30 days. But what if the house they are moving to won’t be ready for 60 days? They’ll need more time. Find out what they need, and then give it to them. I’ve seen many lower offers win using this tactic.
I know, I know, you are thinking this is soooo cheesy. However, a friend of mine had three similar offers on the table when he was selling his house. Two of the offers came with very heartfelt letters.
He was actually put off by the buyer who didn’t send a letter because the others did and it made a huge impact—and he sold to one of the letter-writers, even though it was a slightly lower-priced offer than the non-letter writer. Writing a letter may not get you the deal, but if you are the one offer that doesn’t put pen to paper, it could lose it.
Contingencies are negotiating tools that give you an opportunity to walk away without consequence. The most common: the inspection, the financing, and the appraisal. However, every contingency you add makes your offer weaker, because it makes it that much harder to close the deal. Make sure you really need them before building them into your offer.
Here are’s some more details on specific contingencies and how to handle each:
How We Track This Uneven Recovery
Since February 2012, Trulia’s Housing Barometer has charted how quickly the housing market is moving back to “normal” based on multiple indicators. Because the recovery is uneven, with some housing activities improving faster than others, our Barometer highlights five measures:
The first measure, home prices from our Bubble Watch, is a quarterly report. The other four measures are reported monthly; to reduce volatility, however, we use three-month moving averages for these measures. For each indicator, we compare the latest available data to (1) its worst reading for that indicator during the housing bust and (2) its pre-bubble “normal” level.
4 Out of 5 Measures Improve and Are At Least Halfway Home
All but one of the Housing Barometer’s five indicators have improved since last quarter, and all five have improved or remained steady since last year. Prices and the delinquency + foreclosure rate made the biggest strides:
|Housing Indicators: How Far Back to Normal?|
|Now||One quarter ago||One year ago|
|Home price level||79%||68%||44%|
|Delinquency + foreclosure rate||74%||63%||53%|
|Existing home sales, excl. distressed||64%||61%||64%|
|New construction starts||50%||45%||41%|
|Employment rate, 25-34 year-olds||35%||39%||30%|
|For each indicator, we compare the latest available data to (1) its worst reading for that indicator during the housing bust and (2) its pre-bubble “normal” level.|
What’s Missing from the Housing Recovery
First-time homebuyers are still missing from the housing recovery, making up just 27% of existing-home buyers according to NAR’s May report. That’s down a bit both from last month and from last year.
How has the recovery gotten this far without first-time buyers? Investors and other bargain-hunters bought homes near the bottom of the market, in late 2011, which boosted sales and home prices. Now that prices are near long-term norms – just 3% undervalued – the bargain-hunting engine is sputtering. Repeat buyers, who are trading in one home for another, are taking more of the market.
Would-be first-time homebuyers are stuck: rising prices and mortgage rates have reduced affordability before young adults have been able to recover from the jobs recession. A full recovery that includes first-time homebuyers is still years away; many young adults still need to find jobs and keep them long enough to save for a down payment and qualify for a mortgage. Until that happens, the clearest signs of recovery will be apartment construction and renter household formation, not first-time home buying, as young adults move from their parents’ homes into their own rental units.
NOTE: Trulia’s Housing Barometer tracks five measures: existing home sales excluding distressed (NAR), home prices (Trulia Bubble Watch), delinquency + foreclosure rate (Black Knight), new home starts (Census), and the employment rate for 25-34 year-olds (BLS). Also, our estimate of the “normal” share of sales that are distressed is 5%; Black Knight reports that the share was in the 3-5% range during the bubble. For each measure, we compare the latest available data to (1) the worst reading for that indicator during the housing bust and (2) its pre-bubble “normal” level. We use a three-month average to smooth volatility for the four indicators that are reported monthly (all but home prices). The latest published data are May data for the employment rate, existing home sales, new construction starts, and the delinquency + foreclosure rate; and Q2 for home prices.
See the original article, with more charts, here.
They’re the housing market menace that won’t seem to go away – homes abandoned by their owners, not yet taken over by the banks. Even now, well into a two-year recovery in home prices, there remain 141,406 “zombie foreclosures,” according to data firm RealtyTrac.
That’s down 16% from a year ago nationwide, which sounds pretty good. Still, zombie foreclosures increased this quarter in 10 states plus D.C. The problem is particularly persistent in some regions—Florida accounts for more than one-third of all zombies—where upwards of 30% and even 40% of foreclosures are vacant.
Metropolitan areas (keep in mind, these are generally much larger regions than cities themselves) with the highest percentage of vacant foreclosures, reports RealtyTrac:
|Homosassa Springs, Fla.||43%|
|Port St. Lucie, Fla.||33%|
|Punta Gorda, Fla.||33%|
|Daytona Beach, Fla.||32%|
|Fort Wayne, Ind.||31%|
Vacant foreclosures were a downright plague during the worst of the housing crisis—homes overgrown with weeds, windows boarded up dragged down property values and in some cases deteriorated into hotbeds of crimes. From a 2008 U.S. Conference of Mayors report: “These properties are a drain on city budgets. They detract from the quality of life, as well as the economic opportunities, of those living around them. They are an impediment to individual neighborhood redevelopment and, ultimately, to achievement of city-wide economic development goals.”
Five years later, a swarm of local and national initiatives and streamlined foreclosure procedures have helped; so has a flood of investor buying. Rising home prices and an improving economy have kept fewer homes out of foreclosure in the first place.
Still, real estate analysts and community advocates fear that the last batch of zombies are going to be the hardest to kill—they may be in the worst shape and in the least desirable neighborhoods. Investors don’t want them, and the properties require way too much work for traditional buyers.
And, community redevelopment types fear, banks are taking their sweet time foreclosing on them at all, putting off the moment when they have to pay all the back taxes, code enforcement fees and other liens that have amassed over the years.
“The banks are hoping the market will keep turning around, or they’re looking for alternatives that lessen the red ink on their portfolio,” says John Taylor, CEO of the National Community Reinvestment Coalition. “There was a time the banks were just giving away these properties trying to get them off the books. Now, they don’t want to add to that.”
Not surprisingly, the longer the foreclosure process lasts, the more likely the owners are to abandon the homes. And where are foreclosures taking the longest? New York and Florida, a 418 and 411 days on average, respectively, followed by New Jersey (378 days), Illinois (272) and Hawaii (249).
Zombie Foreclosures in the Largest 20 Cities
|New York City||13%|
A new study finds wealth inequality among U.S. households has nearly doubled over the past decade.
The analysis, performed by researchers at the University of Michigan, shows households in the 95th percentile of net worth had 13 times the wealth of the median household in 2003. By 2013, this disparity had increased almost twofold, with the wealthiest 5% of Americans holding 24 times that of the median.
In dollars terms, the median wealth of a US household was $87,992 in 2003, and by 2013 had decreased 36% to $56,335. In contrast, the richest 10% actually saw their net worth increase from 2003 to 2013, with the highest gains going to the top 5%. The median wealth of the households in the top five percent grew over 12% during the same time period, from $1,192,639 to $1,364,834.
The study also shows similar wealth inequality growth between median and poor households. In 2013, the 50th percentile held 17.6 times the wealth of the least wealthy 25%—over twice the disparity found in 2003.
A principal reason for the rapid increase in wealth disparity over the last 10 years is the different ways various economic groups invest their money. According to the study’s lead author, Fabian T. Pfeffer, more than half of the median household’s wealth in 2007 was in home equity. By comparison, the median household in the richest 5th percentile held only 16% of their wealth in home equity, with the lion’s share being kept in real assets, including business assets (49%) and financial instruments like stocks and bonds (25%).
Pfeffer explains that because stocks have recovered more quickly than the real estate market—the S&P reached its pre-recession high in March of 2013, while home prices are still far from their 2006 peak—average households were hurt far more than richer Americans when the housing bubble popped. When home equity is excluded from household wealth, the impact of the housing crash on average Americans is especially clear. A median household’s total net worth declined by $42,000 between 2007 and 2013, but their wealth held in non-real estate assets declined by only $6,900. The Great Recession’s disproportionate impact on real estate allowed the richest households, who could afford to diversify their investments, to grow wealth even during a deflating housing market.
Another concern for middle class households is that many sold off investments during the recession in order meet expenses, and are now less able to enjoy the benefits of a recovering economy. “Part of the lack of recovery is that they [median American households] had to divest,” says Pfeffer. “The troubles will stay with them for the next couple of decades as they try to reclaim these assets.”
Will wealth inequality continue to increase at its current pace? Pfeffer believes it would take another deep recession for inequality to double again in the next 10 years, but says his research confirms what economists like best-selling author Thomas Piketty have been saying for years: that returns to capital have been increasing at a rapid pace over the last century, creating a persistently swelling gap between the wealth of the haves and the have-nots. “I don’t see many hopefully signs that we’re going to get back to where we were 10 years ago,” Pfeffer says.
Some have claimed inequality is less important as long as all Americans see wealth gains over time. The rich may get richer faster, but that might not matter if the poor and middle class are also seeing their wealth increase. Pfeffer disagrees. A rising tide may lift all boats, but the Michigan professor points out that wealth not only tends to determine political influence, but also that wealth inequality greatly affects the opportunities available to the children of the middle class, especially in terms of education. “The further families pull apart [in net worth], the more disparate the opportunities become for their offspring,” he says.
We talk a lot at Porch about how much money is spent on home improvements, but the National Association of Home Builders’ estimates of 2014 spending on improvements by zip code is a good breakdown of just how much money is being spent, even all the way down to your local neighborhood.
According to the NAHB, the average zip code in America will see over $5 million spent on home improvement this year. That’s a lot of new roofs, landscaping, and remodels.
On average, total spending on improvements in a zip code is projected to be about $5.1 million in 2014. The top 5 total-spending zip codes are all in Maryland, Texas, or Illinois. Each of these top 5 zips contains at least 15,000 owner-occupied homes and home owners who average at least $145,000 in income and are 60 percent or more college educated. Most of these top 5 zips don’t have an unusually large share of homes in the key vintage for remodeling (homes built from 1960 to 1979), except for the zip at the very top of the list—#20854 in Maryland, a close-in suburb of Washington DC. 20854 is the only zip where over $60 million in spending on improvements is projected for 2014, and over half the owner-occupied homes in that zip were built 1960-1979.
See NAHB’s heat map of average remodeling spend per home by zip code. Lots of heavy activity in the northeast, Colorado, SoCal, and San Francisco Bay Area.
Here’s the NAHB’s list for all 50 states plus the District of Columbia. Read on to see how I adjusted these figures for cost-of-living.
NAHB 2014 Spending Projections by State
|RANK||STATE||HOMES||SPENDING (M)||PER HOME|
|1||District of Columbia||110,668||$299.6||$2,707|
In general, the states at the top of the list are mostly high-cost areas, and those at the bottom are lower-cost areas. So I adjusted the list based on first quarter 2014 cost of living data to get a better sense of which states are going to be doing more home improvement in 2014.
NAHB 2014 Spending Projections Adjusted for Cost of Living
|RANK||STATE||COST OF LIVING||ADJ. PER HOME|
|4||District of Columbia||139.6||$1,939|
After adjusting for by how expensive each state is, the top five for home improvement activity in 2014 are Virginia, Colorado, Utah, the District of Columbia, and Illinois. The bottom five are Alaska, West Virginia, New York, Maine, and Hawaii.
Bottom line: If you live in a state near the top of the list, don’t expect that you’ll have a lot of flexibility on schedule or price when working with a pro for your home improvement project since lots of your neighbors are probably planning similar projects, too. If you’re in a state near the bottom of the list, you might have a little more leeway.