Think you Can’t Buy?  Think Again.

Watching the news can be depressing.  Many of the headlines are just plain bad news.  The mortgage “crisis”, the bursting of the “bubble” and the “collapse” of the real estate market have all been exposed, examined and rehashed a few too many times.  This bad press has kept some potential buyers from contacting their Glen Ridge NJ realtor.

Contrary to what you may be thinking, this isn’t such a bad time to buy.  There are a number of good reasons to consider buying sooner rather than later.

• Tax credits for buyers, first time and repeats.
• Low interest rates.
• First time buyer programs.
• Excellent inventory on the market.
• Most reasonable prices in years.

These are just a few reasons to think about calling your Montclair NJ realtor.  Tax credits will be ending in June so timing is crucial if you want to take advantage of buying while it is most beneficial. 

While the real estate market isn’t all gloom and doom, there are a few things you will need to have in order before you start house hunting. 

• A fairly healthy credit score.
• Preapproval for a mortgage.
• A down payment and/or closing costs.

It is true that lenders are a little more carful these days.  If you credit score is poor, you’ll need to do some work if you want to qualify for a lower rate.  You may still be able to get loan with a lower score but your interest rate won’t be as low.

Research lenders and choose one you trust.  Get a preapproval for your loan.  This is different from prequalification, although many people use the words interchangeably.  Preapproval is a firmer commitment from your lender to loan you a certain amount at a certain rate.  Your lender will do everything for a full approval except the title search and appraisal.  Prequalification is more of a rough estimate.  It’s based on information you provide and subject to change depending on a credit check and other verifying factors.  Preapproval gives you an edge when negotiating; it shows you are serious about buying and capable of doing so.

You may also want to save up a down payment and closing costs.  Again, this shows sellers that you are a serious buyer.  Sellers want to work with buyers who have everything in place and won’t cause delays. 

Think again if you thought you weren’t able to become a homeowner.  This might just be the right time for you to buy.

Info for the New Real Estate Investor

Investing in real estate looks a lot different today than it did just a few years ago.  Real estate is still a solid investment, even since the bubble burst, but most investors go about it in ways they didn’t consider even just five years ago.  “Investing” used to be synonymous with “flipping.”  These days when someone asks his Glen Ridge NJ realtor about buying an investment property, he’s usually thinking about renting it.

Renting is a long-term way to make money from real estate.  It’s not as fast a profit as flipping a home could be, but there is more security in renting.  The market is strengthening but it’s no longer at such a peak that a flipped is a guaranteed sale.  Plus, there are benefits to renting that newly minted landlords may not even be aware of yet.

Tax Deductions
There are a lot of ways to maximize the money you make from renting a home and one of them is to investigate every tax deduction available.  Some are obvious and some may not have occurred to you.  Check with your tax professional to make sure you are getting the full benefits from your rental property.  Here is a sampling of deductions to get the discussion started.

Interest
This one is pretty well-known.  Every homeowner can deduct the interest from their mortgage, whether it’s on a rental property or primary residence.  This is quite often a large deduction.  You can also deduct the interest on loans used to improve the property

Travel
Every time you have drive to fix that faucet, you can deduct your travel expenses.  You can use the standard mileage rate deduction (around 55 cents per mile in 2009) or the actual cost of gas, repairs and so forth.  If your property requires you to travel long distances, you may be able to deduct the cost of hotels, airfare, meals and other related expenses. 

Contractors
The wages you pay to contractors and laborers to make repairs on your properties may also be deductable as a business expense.  You can do this whether the worker is your own employee or an independent contractor.

Depreciation
This is definitely an area to discuss with your accountant, but the depreciation of your rental property is deductable.  It’s a complicated formula that allows you to deduct a certain percentage each year for the first 27 years you own the rental.  This deduction can really improve your bottom line.

If you are thinking about investing in a rental property, look into the different types of deduction you may be able to claim before you call your Montclair NJ realtor.  What you learn may just give you the push you need to get back into the real estate market.

A lot of buyers worry that the right house will never come.  But the right house always appears eventually.  And, buyers should be able to take as much time as they need find it.  But, one of the obstacles to finding it without spending two years looking and fretting is to begin eliminating as many communities as possible – as early on as possible – so that they can target the town that is perfect.  In a region like Essex County, New Jersey where there are so many towns to choose from in very close proximity, it’s easy to conduct a search in 5 or 6 of them at once.  However, one of the interesting characteristics about our area is that the towns are each very unique and different from one another.  They vary in their transit systems, their housing inventory, tax ratios, politics, goods and services, lot sizes, school systems, household income levels, parks and recreation programs, and so much more.

Steps 1 and 2
After getting pre-approved for a mortgage – which is the first thing a buyer should do – eliminating towns is the next step.  You might need a few weeks to target the top choice but the best way to get there is by ‘process of elimination’.  Finding the house is not that hard.  In fact, it’s actually the easy part, believe it or not.  Even if the community you choose is a little pricey for your wallet, you can always buy a smaller home and expand, or a fixer-upper and improve down the road. But you’ll never be able to change the address – or create services, beauty or amenities that just don’t exist in the municipality.  It’s better to buy a home that may need a little work in a town that you’re over the moon about then to buy a better house in a town that is just okay in your mind.  Once you’re in, you’re in. Like a marriage, you want to be 100% sure that you know what you’re getting into. 

How to Choose the Right Town
How do you judge a town?  Certainly, don’t judge it by looking at a bunch of attractive affordable listings on the internet.  I don’t care how great they are; those are just buildings.  They tell you nothing about the fabric of the community.  You can easily be compelled to go see one of those homes, get seduced by its charm and temporarily forget that the location makes your commute more difficult.  You’ll realize this, of course, the next day when you think it about it but, by then you’ve already wasted a Saturday or Sunday afternoon with your family by having gone to see this home.  I know that it didn’t cost you anything but your time.  But these hours of searching in the wrong towns can add up and wear you down – making your search a chore rather than the fun and exciting experience it should be.

Things to Consider
Just the way you have priorities for the house itself (location, size or condition), prioritize the towns by deciding what your top three criteria are.  Is the school system your highest priority?  Are lower taxes next?  Do you absolutely require proximity to major highways or business centers?  Once you establish these priorities, the decisions almost make themselves.  Some of the criteria to consider are:

• School rankings and/or teaching philosophy (Rankings don’t always tell the whole story.  Some highly ranked school systems have difficulty managing children with slight learning disabilities and you will pay extra for services.)
• Property taxes  (In many cases, you get what you pay for so when you see a town with ultra-low taxes, find out why they are so low.  There is always a reason.)
• Sports and Recreation  (How many parks are there?  What sports programs do they offer?  Is there a Community Center?  A YMCA?)
• Do they have their own Police and Fire Dept?  (Some small communities share with neighboring towns and they may be volunteer departments – as opposed to being paid by the municipality.)
• Where is the top of the market?  (How much do the most expensive homes in the town sell for?  Are you buying one of the best homes in town?  Or are most of the homes around you more expensive?)
• Who lives there?  (What’s the profile of the residents?  Are they mostly professionals?  Tradesmen?  Artists?  How does the town skew politically?  What’s the vibe?)
• Medical Services (Where is the nearest hospital, medical center or walk-in clinic?  How highly is it ranked?)
• Town Center  (Walk through it; talk to the shopkeepers to help get a vibe on the community)

I get this question ALL the time.  I have clients who call me over to their home and ask what I think.  I also have buyers who ask if they should buy a smaller house and build an addition later.  I’ll discuss both scenarios – and tell you what I plan to do with my own living situation this year.

If You Already Own and You Need More Room

There are many questions to ask but the first and simplest is, ‘Do you love your location?’  If you don’t, forget the addition and just buy a bigger house.  It’s a huge investment to add on – not to mention the inconvenience.  Why bother investing in a spot that you may want to leave before the equity has increased enough to justify the expense?

But, if you do love it, that’s a good motivator for improving.  You can change just about everything about a house except the address. It’s possible that you might not find another location as good as the one you already have.  And if you have great neighbors and your kids have loads of friends on the street, it’s even harder to leave.

Structurally Speaking

Is a doing an addition structurally prudent?  If all the homes around yours are about the same general size, it could be a huge mistake to build a big addition – making your home the largest on the street.  Most buyers are hesitant to purchase the largest house in the neighborhood.  In fact, buyers often lean the opposite way and purchase the smallest home on the best street they can find.  It’s important for resale value that your home be ‘amongst its peers’ and not stick out like a sore thumb.
How Much Does an Addition Cost?

A local contractor recently told me that the cost of building an addition in the Montclair, New Jersey area is $120 – $140 per square foot.  For a 1,500 sq foot addition, that’s $180,000 – $210,000.  And that’s before you pay for appliances, light fixtures, sinks, tubs, toilets, flooring and carpeting.  Financially, the cost of borrowing money right now – to buy or to build – is extremely low.  However, if you will owe more than 50-60% of the new value or worth of the home after you put an addition on, be very careful about moving forward.  You may need to stay in the house a very, very long time for the renovated house to appreciate enough to sell and not cause you to lose money.  This scenario was one of the major cautionary tales of the subprime crash.  Over-improving caused millions of Americans to go into foreclosure or to declare personal bankruptcy.

The best advice you can get is to call in a realtor before you make this momentous decision.  Let him or her tell you whether or not it’s advisable and what it might be worth when the addition is complete.  Best of all, the realtor’s advice is free so you have nothing to lose by doing your homework.

If You’re Looking to Buy a House and Add on Later

First, congratulations on buying a home right now.  We will probably never have a better climate  in which to buy real estate than today.  It’s a virtual candy store out there with loads of inventory to choose from.  That said, the market is improving in Montclair, Glen Ridge, the Caldwell’s, Verona and other towns in Essex County, New Jersey.  The window of opportunity will close.  Interest rates are already bouncing back up over 5% and expected to climb steadily throughout 2010.  A fraction of point climb can make a big difference in your monthly mortgage payment.

What I’m Going To Do in 2010

So, what size home should you buy?  Should you purchase small and add on later or – buy as big a house as you can find?  I’m actually a potential buyer myself right now so let me share my plans with you as a way of answering the question. I currently own a home and am looking to trade up this year and am planning on making location my #1 consideration and size the #2 factor.  I am much less concerned with the interior condition because I know that I can always improve it over time.  Personally, I’m not really interested in dealing with the hassle of an addition.  I don’t want to spend the money to move walls around and spend months living amid debris and dust – or worse, spending thousands of dollars on a short term rental to move into while the work is being done.

I want a bigger house in a fabulous location and I’ll save loads of money for two reasons. First, I’ll buy my ‘forever’ house at a record low interest rate and second, I’m not going to pay a premium for someone else’s ‘move-in condition’ home.  I’ll make the interior upgrades myself, even if they are somewhat inconvenient. But, they won’t be nearly as inconvenient as building an addition.  So, bring on the old kitchen and bathrooms!  Just give me size and location – and let the contractors go build an addition for someone else!

You might think that real estate grinds to a halt as the holidays are approaching.  It’s not true.  In the last month alone, Montclair had 25 homes go under contract.  Verona had 10.  South Orange and Bloomfield each put 13 properties under contract.  And, West Orange homeowners accepted offers on 28 homes.

What Kind of Buyers Are Actually Shopping For a Home Now?

Motivated buyers; that’s what kind!  The buyer pool does indeed get a little smaller at the holidays but it does not disappear.  But what’s most noteworthy is that those who are still out there shopping are very serious buyers.  Many of them want to (or must) close by the end of the year.  Beginning in November, it’s very common for sellers to receive offers with a designated closing date of December 28th or 29th.  And January is statistically the most popular month for relocations.

Many sellers think that their home will not sell over the holidays.  It’s true that sales slow down in the second half of December but that is mostly because the real estate industry has – over the years - come to think of Christmas and Hanukah as ‘down time’.  In other words, it’s really the realtors who – historically – have advised sellers to just wait until January to introduce a new listing.  So, ‘new’ inventory coming on the market at holiday time can be scarce.  With January only  a couple of weeks into the future, most sellers don’t mind waiting to list then when buyers begin to return to the market in greater numbers.  But then again, new listings flood the market in greater numbers, too.

Another upside of being on the market over the holidays is that, because inventory shrinks, there are fewer homes for these very serious buyers to look at.  Those homes on the market really get noticed and considered.

Note to Sellers

There is one scenario where – as a seller – it is wise to withdraw a property at the holidays and re-list in January or February.  That is when it has been on the market for a few months without selling.  The holiday season is a natural break period to remove it and re-introduce it as a ‘new listing’ (hopefully at a new lower price and with an improvement or two) after the New Year. Even though the real estate community will remember the property, it will begin the New Year with zero Days on Market (DOM) on the listing sheet.  A high DOM signals buyers that, either the property is way overpriced and they can make a lowball offer or worse, that the sellers are unrealistic and inflexible.

Note to Buyers

The next 4 months will be very active in real estate because so many buyers are trying to take advantage of both the U.S. home buyer tax credit which requires that the buyer be under contract by April 30, 2010 and close by June 30, 2010.  They will also be motivated by the last few months of the fed buying down interest rates.  We don’t know exactly when this will end, but it will end.  Afterward, it is possible for rates to climb at an accelerated pace.  Most experts agree that inflation is coming at some point in the not too distant future.

How is the market?  This is a certainly a loaded question these days.  But, I do get asked this constantly so look for this topic to be a regular blog entry.  Let’s look at the national picture first and then, in my next blog, we’ll drill down to New Jersey and Essex County. 

The National Picture

Perhaps the most popular or commonly quoted national real estate measurement is Standard & Poor’s/Case Shiller Index which measures home prices and the pace of home sales.  It’s a three month moving average and they reported earlier this week that existing home sales are up 10.1% – most likely due to the first time homebuyer credit (now expanded to existing homeowners, too).

The home price index measures 20 metropolitan areas and that index rose only .03%.  At least it rose.  However, nine cities including Boston, New York, Charlotte and Seattle fell.  I want to take a moment to note something.  The Case-Shiller Index measures only about 45% of the market and does not even measure condos, co-ops and townhomes, at all.  This is significant as these are largely entry level homes. Statistically, for every entry level (or “starter” home) that sells, four more sell as a result.  So, an argument can be made that the Case Shiller Index is overly pessimistic. I’m not saying that the index is not reflective; only that it should be noted.

The National Forecast

The New York Times reported on 11/25/09 that there is some pessimism about a second potential dip, leading to what’s known as a “W” shaped recession which has two lows.  A traditional recession is “V” shaped.  The pessimistic forecast pointed to an abundance of inventory, continued unemployment and a traditional slow-down of real estate sales in winter. 

Jeffrey Otteau, New Jersey’s foremost valuation expert, disagrees. For one thing, a “V” or “W” shaped recession implies a steep or rapid decline followed by a steep or rapid recovery.  Everyone agrees that we did not have a rapid decline in real estate (it took four years, beginning in June 2005) and certainly no one expects to see a rapid recovery. Rather, he forecasts a boat shaped recession which began with a long, slow steady decline after which the market will skip along the bottom for some time and then conclude with a long, slow steady recovery.  While the market will recover in fits and starts, Mr. Otteau does not forecast another major dip due to the extension of the home buyer credit, the fed continuing to buy down interest rates and job losses continuing but leveling off.

Additionally, he says that the point of view about loads of pent up inventory should largely be offset by loads of pent up demand among untold numbers of buyers who have put off a purchase – some for years - while waiting for the market to hit bottom.

New Jersey

Compared to the rest of the nation – and certainly the most deeply affected states of CA, NV, MI and FL – New Jersey is well ahead of the curve in terms of recovery and is showing significant signs of stabilization.  With the exception of Cape May County and a few southern areas, the numbers show that the worst seems to be behind us.  In other words, in most of the state, prices are no longer falling.  Most of the recovery is in the lower price ranges, where it always begins and where the homebuyer credit is having the greatest impact.

While lower priced homes are beginning to stabilize, the luxury market is still in trouble, in New Jersey and elsewhere.  Older existing luxury homes in blue chip communities are faring better than new construction (‘McMansions’) with over 3,000 square feet on 2+ acres.  Their perception as a commodity is greatly diminished due to the sheer number of them available and the use of less expensive building materials compared to those used in older existing luxury homes.  With the last of the 80 million baby boomers trading down at an accelerated rate and only 50 million Gen X’ers to buy them (who earn 17% less than their parents did at the same age), they may be in permanent decline.

Despite the aging population, adult 55+ communities may be in the most trouble of all due to their very high maintenance fees and exclusivity which seriously reduces the potential buyer pool. Look for some possible federal legislation down the road to rescue and reclassify them as garden variety condo communities.

I will cover Essex County in particular in my next blog.  The good news, if you’re thinking of buying or selling in Essex County, is that it’s always going to be an area with tremendous resale value due to it’s great housing stock, beauty, culture, proximity to Manhattan and mid-town direct train access.