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Mike Hunter / Helpful Buyer Info, Useful Stuff / buyer agent, buyer agents, buyer representative, buyers, buyers agent, cost, first home, first time buyers, home, home buying, house purchase, money lender credit, payment, year /
Several factors should be considered when purchasing a home
Your Financial Health … your credit & home affordability
Is now the right time financially for you to buy a home? Would you rate your financial picture as healthy? Is your credit good? While you can always find a lender to lend you money, solid lenders are more skeptical if your credit history is not good.
Generally, a couple of blemishes on a credit report will make you a good credit risk and could qualify you for the lowest interest rates. If you have more than a couple of blemishes on your report, lenders like e-Loans may still provide you with a loan, but you may just have to pay a higher interest rate and fees. Some say that you should refrain from borrowing as much as you qualify for because it is wiser not to stretch your financial boundaries. The other school of thought says you should stretch to buy as much home as you can afford, because with regular pay raises and increased earning potential, the big payment today will seem like less of a payment tomorrow.
This is a decision only you can make. Are you in a position where you expect to make more money soon? Would you rather be conservative and fairly certain that you can make your payment without stretching financially? Make sure that whatever you do, it’s within your comfort zone. To determine how much home you can afford, talk to a lender or go online and use a “home affordability” calculator. Good calculators will give you a range of what you may qualify for. Then call a lender. While some may say that the “28/36” rule applies, in today’s home mortgage market, lenders are making loans customized to a particular person’s situation. The “28/36” rule means that your monthly housing costs can’t exceed 28 percent of your income and your total debt load can’t exceed 36 percent of your total monthly income. Depending on your assets, credit history, job potential and other factors, lenders can push the ratios up to 40-60% or higher. While I’m not advocating you purchase a home utilizing the higher ratios, its important for you to know your options.
How long you plan to live in the home
If you purchase a home and get a job transfer or decide to move after only a short time, you may end up paying money in order to sell it. The value of your home may not have appreciated enough to cover the costs that you paid to buy the home and the costs that it would take you to sell your home. The length of time that it will take to cover those costs depends on various economic factors in the area of the home. Most parts of the country have an average of 5% appreciation per year. In this case, you should plan to stay in your home at least 3-4 years to cover buying and selling costs. If the area you buy your home in experiences an economic up turn, the length of the time to cover these costs could be shortened, and the opposite is also true.
How long the home will meet your needs
What features do you require in a home to satisfy your lifestyle now? Five years from now? Depending on how long you plan to stay in your home, you’ll need to ensure that the home has the amenities that you’ll need. For example, a two-bedroom dwelling may be perfect for a young couple with no children. However, if they start a family, they could quickly outgrow the space. Therefore, they should consider a home with room to grow. Could the basement be turned into a den and extra bedrooms? Could the attic be turned into a master suite? Having an idea of what you’ll need will help you find a home that will satisfy you for years to come.
Where the money for the transaction will come from
Typically homebuyers will need some money for a down payment and closing costs. However, with today’s broad range of loan options, having a lot of money saved for a down payment is not always necessary – if you can prove that you are a good financial risk to a lender. If your credit isn’t stellar but you have managed to save 10-20% for a down payment, you will still appear to be a very good financial risk to a lender.
The ongoing costs of home ownership
Maintenance, improvements, taxes and insurance are all costs that are added to a monthly house payment. If you buy a condominium, townhouse or in certain communities, a monthly homeowner’s association fee might be required. If these additional costs are a concern, you can make choices to lower or avoid these fees. Be sure to make your realtor and your lender aware of your desire to limit these costs. If you are still unsure if you should buy a home after making these considerations, you may want to consult with an accountant or financial planner to help you assess how a home purchase fits into your overall financial goals.
Mike Hunter / General Information, Helpful Buyer Info, Helpful Seller Info / 1031 exchange, business, exchange, home investors, investment, IRS Section 1031, property investment, real estate investment, replacement, tax sale /
What is a 1031 exchange?
Under section 1031 of the Internal Revenue Code, a real property owner can sell his property and then reinvest the proceeds in ownership of like-kind property and defer the capital gains taxes. To qualify as a like-kind exchange, property exchanges must be done in accordance with the rules set forth in the tax code and in the treasury regulations. The 1031 exchange can offer significant tax advantages to real estate buyers. Often overlooked, a 1031 exchange is considered one of the best-kept secrets in the Internal Revenue Code.
Who should consider a 1031 exchange?
If you have real property that will net you a gain upon sale (generally property that has been substantially depreciated for tax purposes and/or has appreciated in fair market value), then you are exactly the person who should consider a 1031 exchange.
There are 5 tax classes of property:
1) Property used in taxpayers trade or business.
2) Property held primarily for sale to customers.
3) Property which is used as your principal residence.
4) Property held for investment.
5) Property used as a vacation home.
Section 1031 applies to the first and fourth categories, and potentially the fifth category. Business use is defined as, “To hold property for productive use in trade or business.” Property retired from previous productive use in business can be qualifying property. Investment purpose defined as real estate, even if unproductive, held by a non-dealer for future use or increment in value is held for investment and not primarily for sale. Investment is the passive holding of property, for more than a temporary period, with the expectation that it will appreciate. Property held for sale in the immediate future is not held for investment.
What are the 1031 exchange rules?
The real property you sell and the real property you buy must both be held for productive use in a trade or business or for investment purposes and must be like-kind.
The proceeds from the sale must go through the hands of a qualified intermediary and not through your hands or the hands of one of your agents or else all the proceeds will become taxable.
All the cash proceeds from the original sale must be reinvested in the replacement property – any cash proceeds that you retain will be taxable.
The replacement property must be subject to an equal level or greater level of debt than the relinquished property or the buyer will either have to pay taxes on the amount of the decrease or have to put in additional cash funds to offset the lower level of debt in the replacement property.
Is There a 1031 Timeline I Have to Follow?
Yes, there are two “Periods” you have to follow exactly.
The Identification Period … Within 45 days of selling the relinquished property you must identify suitable replacement properties. This 45 day rule is very strict and is not extended should the 45th day fall on a Saturday, Sunday, or legal holiday.
The Exchange Period … The replacement property must be received by the taxpayer within the “exchange period,” which ends within the earlier of . . . 180 days after the date on which the taxpayer transfers the property relinquished, or . . . the due date for the taxpayer tax return for the taxable year in which the transfer of the relinquished property occurs. This 180-day rule is very strict and is not extended if the 180th day should happen to fall on a Saturday, Sunday or legal holiday.
Just the other day I was at a home inspection (representing the sellers) and the buyer’s home inspector was commenting on the Brazilian Cherry floors in the Study, telling the buyers that “this wood is very soft, so you’ll want to be very careful when you walk on it.”
Having grown up in the household of a high school shop teacher, I’ve had a great education in woodworking and made lots of projects with my Dad. Over the years I’ve worked with Brazilian Cherry and for a fact I know it is a very, very hard material. It takes forever to sand and holes for fasteners have to be pre-drilled very accurately and sized correctly. But I kept that knowledge to myself and decided to share it with you instead.
Many woods are used for flooring and although today’s design trends and color schemes often drive the choice of materials, over time the most popular woods for this area of the country, are: Brazilian Cherry, Mahogany, Pecan, Maple, White Oak, Red Oak, Walnut, Teak, Pine, and Fir. Of these, Red Oak is the most commonly used (it’s considered the most color-neutral and affordable of the woods) and thus it is considered the standard or benchmark in wood hardness.
If you Google hardwood hardness you will inevitably encounter the Janka Hardness Scale. It is the industry standard for judging the ability of woods to withstand the beating that wood takes from normal wear and tear: denting, gouging, pet scratches, heavy furniture, etc. Janka measures the amount of force in lbs-force that it takes to push a half-inch diameter (okay it’s really .444 inch) steel ball half of its diameter down into the wood. While this gives a general sense of the wood’s hardness, there are many factors that also contribute to a wood floor’s hardness and durability, including how it is cut from the log and how it is finished.
How the tree is cut has an effect on its hardness and suitability as a floor covering. Hardwood flooring is produced by milling wood from trees. There are three basic ways to cut a tree into lumber, called “plainsawn”, “quartersawn” and “riftsawn”.
“Plainsawn” wood is just that, the log is sliced lengthwise from one side to the other in a series of parallel cuts, sort of as you’d cut a block of cheese. This gives the best yield from the tree but for flooring it tends to result in a very inconsistent grain pattern and tends to expand and contract in unpredictable ways. Wide-pine floors (found in many Antiques and Antique Reproduction homes) are the typical example of “plainsawn” wood that most of us will encounter.
“Quartersawn” wood is the most common way that flooring material is made. In this method, imagine that the log is cut down the middle, then both halves are cut down the middle, and the boards are then cut from the “quarters” with the point facing straight down (a series of parallel cuts starting perpendicular to the centerpoint of the tree). This gives consistency to the grain of the boards (as consistent as any natural material can be) and a predictable stability that makes it perfect for flooring. For the purposes of this blog, I am using hardness factors derived from “quartersawn” wood.
“Riftsawn” wood is the absolutely ideal material for consistency of grain and stability but is very hard to find because it is so expensive to manufacture. In this method, the log is cut into a series of wedges that are perpendicular to the rings of the tree. The wedges are then sawn into boards and the excess material becomes waste. Because of the low yield per tree the cost per board foot is very high and you will probably never see “riftsawn” flooring unless touring a mansion or a castle. By the way, there are a couple of specialty sawmills in the Sudbury area that will produce “riftsawn” boards for you, but hold onto your wallet.
As mentioned earlier, the finish also has an effect on the hardness. I am not qualified to comment on what finish is harder or better (best to ask a flooring expert) but I can tell you that the typical finish penetrates into the top ¼” of the wood, at most, so logic would have it that finished versus unfinished wood would be harder but much beyond that I can’t really say.
So how hard is my hardwood floor?
Below is a list from softest to hardest:
- Latin: Abies sp
- Other Common Names: White Fir, Balsam Fir, Fraser Fir
- Janka Hardness: 400
- Latin: Pinus alba
- Other Common Names: White Pine, Eastern White Pine
- Janka Hardness: 420
- Hardness Compared to Fir: 1.05 times harder
- Latin: Pinus echinata
- Other Common Names: Southern Yellow Pine, Shortstraw Pine
- Janka Hardness: 690
- Hardness Compared to Fir: 1.725 times harder
- Latin: Prunus serotina
- Other Common Names: Black Cherry, Cherry, American Cherry
- Janka Hardness: 950
- Hardness Compared to Fir: 2.375 times harder
- Latin: Tectona grandis
- Other Common Names: Plantation Teak, Burmese Teak
- Janka Hardness: 1000
- Hardness Compared to Fir: 2.5 times harder
- Latin: Juglans nigra
- Other Common Names: Black Walnut, Eastern Black Walnut
- Janka Hardness: 1010
- Hardness Compared to Fir: 2.525 times harder
- Latin: Pinus palustris
- Other Common Names: Long Leaf Pine,
- Also Commonly from: the Center or ‘Heart” of Yellow pine
- Other Notes: mostly from recycled or underwater harvested, swamp trees
- Janka Hardness: 1225
- Hardness Compared to Fir: 3.0625 times harder
- Latin: Quercus rubra
- Other Common Names: Northern Red Oak
- Janka Hardness: 1290
- Hardness Compared to Fir: 3.225 times harder
- Latin: Quercus alba
- Other Common Names: Old Oak
- Janka Hardness: 1360
- Hardness Compared to Fir: 3.4 times harder
- Latin: Acer saccharum
- Other Common Names: Rock Maple, Hard Maple, Hard Rock Maple, Sugar Maple
- Janka Hardness: 1450
- Hardness Compared to Fir: 3.625 times harder
- Latin: Carya illinoinensis
- Other Common Names: Hickory, Satinwood
- Janka Hardness: 1820
- Hardness Compared to Fir: 4.55 times harder
- Latin: Swietenia mahagoni or Swietenia macrophylla
- Other Common Names: West Indies Mahogany, Honduras Mahogany, Genuine Mahogany
- Janka Hardness: 2200
- Hardness Compared to Fir: 5.5 times harder
- Latin: Hymenaea courbaril
- Other Common Names: Brazilian Copal, South American Locust, South American Cherry, Jatobá or Guapinol
- Janka Hardness: 2350
- Hardness Compared to Fir: 5.875 times har
The complete process is simple once you understand the steps
Preapproval or Pre-commitment Letter
Provided by a lending institution to indicate the mortgage amount you qualify for. This process is best accomplished prior to beginning the search for a home, and a copy of the letter should be in your possession for use during the offer to purchase phase.
A preliminary but legally binding contract that covers the basic terms of your agreement with the Seller: price, occupancy, financing, and inspection contingencies, and the date for signing the Purchase and Sale Agreement. Each contingency has a cut-off date that must be met. The customary deposit with the agreement is $1000.00 in Middlesex County, other counties may vary.
Include a structural, pest, radon, well water, lead paint, and radon gas. These must be done within seven days of signing of the Offer and are conducted at the Buyer’s expense. The Buyer should be present for these inspections.
Purchase and Sale Agreement
Should be entered into ten working days after an accepted Offer, since it is more specific, and therefore protects both parties more fully. The customary deposit with this agreement is 5% of the purchase price although a lesser amount may be acceptable under certain circumstances.
Maintained in a separate Escrow account usually by the listing Broker or one of the Attorneys. Any interest accrued (if any) is split 50/50 between the Buyer and the Seller unless agreed otherwise. Both parties must sign a release for any funds to leave the Escrow account.
It is usually the only contingency to survive the Offer form (remain on the Purchase and Sale Agreement). Your application must be filed within 3-5 business days of the accepted offer and the loan commitment must be received within a stated time period … currently can be gotten easily within 21 business days of filing the application.
The lending institution hires a licensed appraiser to determine the value of the property and to give a professional opinion of the collateral for their investment. This must be conducted prior to the loan commitment being made, and is coordinated with the listing agent.
Ownership of the property in Massachusetts is customarily transferred by a quitclaim deed – the Seller transfers all his/her rights in the property to the Buyer. It is the responsibility of the Buyer and his/her lending institution to determine the validity of the seller’s title to the property, and is reviewed by the Attorney for the lender and paid for by the Buyer. The responsibility for clearing any clouds on the title rest with the Seller. Title insurance is required for the lender but you can purchase your own title insurance, and I generally recommend that you get it as the cost to clear any title items can get expensive in he future.
Also referred to as paper passing or simply “passing”. It is conducted by the Attorney for the lending institution, who searches the title to the property and guarantees to the bank and to you that it is clear. The location of the closing is usually at the office of the lending institution’s Attorney, but can also be at the lending institution or the appropriate Registry of Deeds. The closing should take place 45-60 days after signing the Offer.
Customarily immediately after the closing. Technically it can’t take place until the change of ownership is filed at the County Registry of Deeds.
It is strongly advised that you retain the services of an Attorney to represent your interest prior to signing the Purchase and Sale Agreement and throughout the entire process.