Don’t Renovate and Sell!

home renovationsHomeowners often consider making renovations before selling. They believe the increased value of their home will exceed the cost of renovation. Unfortunately, this is often not the case. For every dollar you spend on renovations, you generally recoup less than a dollar back.  See the annual report in Remodeling magazine, which compiles statistics on the cost recouped of most remodeling projects.

Based on surveys of thousands of real estate professionals, Remodeling magazine concludes that the highest return projects are around 70%, while the lowest are in the neighborhood of 40%. The magazine sends out surveys to thousands of real estate professionals across the country essentially asking for their experience and opinions. The conclusions can’t be scientifically proven, but as the costs of construction are fairly easy to determine there is no reason to doubt the survey’s construction figures. However, I wouldn’t rely too heavily on the specifics of cost recoupment figures. I have seen the surveys they send out and there is simply no way to compile figures in any truly scientific way. Who really knows how much a particular home would have sold for if the kitchen hadn’t been renovated?? Rather, the opinions of thousands of real estate agents, appraisers and other real estate professionals are probably fairly accurate in a general sense. They should be used as a general guide as to which projects result in higher or lower cost recoupment, and very approximately what to expect.

Interestingly, according to the study, renovated kitchens and baths recoup somewhere around 55-65% versus other projects that return more. Common real estate wisdom says that kitchens and bathrooms sell homes. So what’s going on? The answer to this conundrum is that nice kitchens and baths make homes appeal to more people and easier to sell, but are just not valuable enough to recoup the initial investment.

The value proposition of renovating your kitchen and baths looks much better when you do the renovations a few years before you sell your home. You also get the chance to actually enjoy the renovations. Most real estate agents consider kitchens and baths fairly new up to around 3 years after renovation. For example, you spend $50,000 on a new kitchen and enjoy it for 3 years. You then recoup 65% of the cost at sale, so the renovations cost you about $17,500 and help sell your home.

In real life, it may be difficult to plan ahead. However, if you are considering making improvements to your home, considering recoupment values may help you determine what renovations make the most sense in the long term. After making improvements, I often hear sellers say, “Wow, I should have done this earlier.”

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What Condo Association Budget?

condo-budgetCondominium association budgets come in all shapes and sizes. If, like me, you live in a very small association with 2 or 3 units, it may be questionable whether an actual written budget even exists. Large associations, made up of hundreds of units, often have detailed budgets prepared by professionals. In either case, when you went to sell your condo in the past, only the prospective buyer cared about and reviewed the budget. In today’s lending climate, it is standard practice for the buyer’s lender to review the budget. Fannie Mae, the quasi-public company through which most mortgages pass, does not require a written budget for 2–4 unit associations, but does require it on associations of 5 or more units. Many lenders also have an “overlay,” which is essentially an additional requirement that 2–4 unit associations have a written budget. The bottom line is that it is a good idea to have an actual written budget, because it is likely that the lender will ask for it when someone goes to sell a unit in the association.

The lender reviewing the budget will want to see a line item for a 10% reserve. 90% of the annually collected fees must account for all of the regular recurring expenses, and 10% must be saved as reserves. According to the lenders I work with, it is unnecessary to have a separate reserve account. Be careful, however, as buyers looking to get mortgages guaranteed by the Federal Housing Administration (known as FHA mortgages) require condominiums associations to meet stricter requirements.

Most condominium budgets can be set up to show a 10% reserve. All obviously recurring expenses, like insurance, water and sewer, the common electric bill, and all clearly recurring maintenance (snow removal, for example) must be budgeted for in a line item. I also recommend some money be put in a line item labeled “maintenance,” because not having any money for general maintenance is not realistic or credible. Expenses that do not come up every year do not have to be budgeted for in advance and can come out of reserves. For example, if your association plans to spend $10,000 in the upcoming year on a new walkway, the budget can still show a 10% reserve for the year that you build the new walkway. The following year, when you produce a “budget vs. actual” report, you would show that you spent the money out of reserves.  As a matter of fiscal prudence, your association may still want to raise fees or collect money via a special assessment, but that is a different conversation.

I always enjoy a good conversation about condominium association budgets, so please don’t hesitate to contact me or write a comment and tell us about your condo association budget.

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5 Stats that Determine the Real Estate Market

housingPeople often ask me, “How’s the market?” The answer is clearly subjective, but careful analysis of the following statistics leads to at least an educated subjective judgment:

1.Value

Values or prices are usually expressed in terms of how the median price of closed sales compare year-to-year or month-to-month. Because the seasons strongly affect home sales, I recommend considering the median prices for any given month compared to the same month a year ago:

  • In April 2012, the median selling price of single family homes in the greater Boston area fell 2.5%, and condominium prices were up 6%, compared to April  2011.

 2. Volume

The most relevant statistic for sales volume (the number of homes sold) is the number of homes sold compared to the same month a year ago.

  •  The number of single family homes sold in the greater Boston area was up 11%, while condos were up 18.5%.

 3. Inventory

Take a look at how many homes are on the market compared to a year ago.

  •  The inventory of single family homes was down 10% in April, and for condos the inventory was down a whopping 30%.

 4. Days on Market

Still relevant but not quite as important, are the figures for “days on market and “supply.” This is the average time it takes a home to go under contract.

  •  The average days on market for real estate in the greater Boston area stayed relatively stable, declining two days from 122 to 120 days for April 2012 compared to April 2011. For condos, the time fell 19 days from 117 days to 98 days.

 5. Supply

The “supply” is the number of homes on the market divided by the monthly rate that they are selling. For example, if there are 50 homes on the market and 120 homes sold over the past 12 months (an average of 10 per month), there is a 5 month supply. Most experts consider somewhere between 7.5 and 8.5 months supply of homes a fairly balanced market.

  •  The supply of single family homes was down about 10% from 7.9 months in April 2011 to just 6.4 months of supply in April 2012. There was a 4.8 month supply of condominiums available in April, down sharply from April of one year ago when there was an 8.2 month supply.

 If you can get the answer to these statistical questions for the geographic area (neighborhood, town, city, state, or country) that you are interested in, you should have a pretty clear picture of what the real estate market is doing. So how’s the greater Boston area market doing? My analysis is that the greater Boston area is experiencing a transition to more of a seller’s market. The supply is shrinking and demand appears to be growing, pushing prices up and making it easier for sellers to sell. What’s your analysis?

The figures for this post can be found here on the Great Boston Association of Realtors site.

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What is ENERGY STAR?

Energy-StarENERGY STAR is a joint program of the U.S. Environmental Protection Agency (EPA) and the U.S. Department of Energy designed to help consumers save money, and protect the environment through energy-efficient products and practices.

In 1992, the (EPA) introduced ENERGY STAR as a voluntary labeling program designed to identify and promote energy-efficient products to reduce greenhouse gas emissions. Computers and monitors were the first labeled products. By 1995, the EPA had expanded the label to residential heating and cooling equipment. The ENERGY STAR label is now on major appliances, lighting, home electronics, and has been expanded to cover new homes and commercial and industrial buildings.

Whole Home ENERGY STAR Rating

For an entire home to be labeled ENERGY STAR, it must be built by an ENERGY STAR builder-partner to meet strict guidelines for energy efficiency set by the U.S. Environmental Protection Agency. These homes are at least 15% more energy efficient than homes built to the 2004 International Residential Code (IRC), and include additional energy-saving features that typically make them 20–30% more efficient than standard homes.

The ENERGY STAR label is rapidly becoming more of a selling feature. Home buyers are now very conscious of a potential home’s energy efficiency. The Multiple Listing Service has specific sections where ENERGY STAR rated systems and appliances can be highlighted so that buyers can easily determine if there is ENERGY STAR rated equipment in the home they are considering. However, as the whole-house Energy Star rating is fairly new, it doesn’t yet appear often.  As more and more homes get the designation, you will see it more often and consumers will look for the whole home rating.

The ‘No Cost Energy Assessment’ & Benefits

Locally, the ENERGY STAR program is partnered with a program called Mass Save. This initiative is sponsored by several local energy companies and administered by a company called Conservation Services Group. Through Mass Save you can schedule a no-cost “Energy Assessment” on your home or even your rental property. Depending on the results, homeowners are then eligible for an instant rebate of up to $2,000 for 75% of the cost of installing insulation, and a zero percent interest loan on new heating equipment. The website also contains a wealth of information on saving energy as well as information like current tax credits available for energy efficient home improvements.

As energy costs continue to rise, taking advantage of the Mass Save program, and looking for ENERGY STAR rated appliances will not only benefit you in the short term, but add value to your home when it comes time to sell.

Resources:  www.masssave.com, www.energystar.gov

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Has your home’s value decreased? Buy a more expensive one!

trading-upIf your home has decreased in value and you are thinking about selling it, it’s hard to see any silver lining. However, if you have other resources and have been thinking about buying a larger home, this is, surprisingly, the best time to “trade up.”

Here’s why…

I recommend that homeowners consider home ownership a long term investment in the residential real estate market. Most people plan to “stay invested,” buying and selling several homes in their lifetimes, or stay in the same home for decades. Most people enter the residential market when they first buy a home. They leave the market when they sell their last home or leave their last residence to heirs. People might trade up into a more expensive home or make a lateral move or two to something of similar value before downsizing in retirement as “empty nesters.” If you don’t sell your home and completely step out of the housing market by renting for a long time or traveling the world for few years, you stay invested. Similarly, you are no longer invested if sell your home and move to a completely different market, like moving from Boston to Florida. In these cases, you might want to carefully consider your relative position in each market.

Here is an example of how trading up could look when the value of your home is down:

2006: The value of your home (either just purchased or not) – Home A: $500,000

2012: Your home has decreased in value 15%. Current value Home A: $425,000

2012: You purchase your dream home – Home B: $750,000

2027: 15 years later the market has recovered and gone up a total of 30% since 2012

The value of your home – Home B: $975,000

The value of your old home – Home A: $552,500

You benefit in the long run, because you purchased the more expensive home in a lower market. Your home is down today, but the more expensive home is down more!

The point is that it doesn’t make sense to put off selling your home, because you can’t get what you want for it. Sell when it makes sense in your life to be in a different home. Your investment in the residential real estate market will take care of itself in the long term.

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Is Your Painter Lead-Paint Certified?

Lead Paint RegulationsOn April 22, 2010 Massachusetts adopted a lead paint law that  likely affects you if you own a house built before 1978. Previously, you could hire anyone,  to paint anything  in your house. Not anymore.  The “Renovating, Repair and Painting Rule” (RRP) requires that for home improvement projects that will “disturb” more than 6 interior square feet of paint or 20 exterior square feet of paint, your painter must be certified by the EPA.  The only exceptions* to this rule are if:

  1. Your house was built after 1978
  2. The house or “components” of the house have been tested as lead free by a Certified Risk Assessor, Lead Inspector, or Certified Renovator
  3. You do the renovations yourself.

Fortunately, professional painters can become certified relatively easily by taking a one day course and paying a fee of $375. Painters who are not certified face fines of up to $5,000, license suspension and can be subject to a “cease work” order by any number of public health agencies, including  possibly, the local building inspector. The “cease work” order/penalty is the major risk to a homeowner. There is no provision in the law for any other type of penalty against a homeowner.

Initially, a Boston Globe article reported that there were concerns that the certification requirement would make hiring a painter more expensive.  However, almost 2 years after the law went into effect, I couldn’t find any evidence of increases in the cost of hiring a painter. Although the time and expense of obtaining certification are relatively minor, there are real expenses associated with properly managing work sites that contain lead dust. Costs will likely rise, but worksites should be safer and ultimately homes will be safer as well.

If you decide to undertake a do-it-yourself renovation or painting project where there is any possibility of creating dust and you might have lead paint, I highly recommend you  learn how to properly handle and contain the dust from your project. Most of it is common sense and merely requires a high level of preparation and care. A good resource is the Renovate Right pamphlet that lead-certified contractors are required to provide to consumers.

The laws around lead paint are extensive here in Massachusetts. If you have information or expertise you would like to share, please comment, or contact me.

Other helpful resources are:

*The question arises that if you hire a general contractor who is lead-paint certified, and he sub-contracts out the painting work, do those painters have to be certified? The answer is complicated. There are rules about who has to be certified on a job site, and when a “non-certified” painter can be on the job under the supervision of someone who is certified. As a general rule, if you are hiring a general contractor make sure he really understands the lead laws and fully intends to follow them.

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Converting to Investment Property

Sell or Rent HouseRenting Your Home vs. Selling Your Home

Many of the sales I handle are in urban neighborhoods where people consider keeping their condominium as an investment property instead of selling it. This is more common lately as many homeowners become painfully aware that they cannot sell their home for the price they want. They naturally consider holding and renting the property until the value of their home recovers. However, if a home’s value is much higher than what was paid for it, this strategy has serious tax implications.

Capital Gains Tax Rules  – The Basics

According to Federal and State (Massachusetts) tax rules, gains in value are tax free up to certain limits for people who lived in the home as a primary residence for two out of the last five years. A gain of up to $500,000 for a couple or $250,000 for an individual is tax free when you sell the home. Basically, if you rent your home instead of selling it right away, you have a three year window to sell and avoid paying capital gains tax. Gains on homes not sold in the three year window are taxed at 15% Federal and 5% State. Another option is to keep the property for life and pass it on to your heirs. A discussion of this option is complicated and beyond the scope of this post.

The Three Year Plan

If you hold onto a property and rent it, you will have to deal with one unpredictable variable – tenants. In my experience, the presence of tenants usually compromises your ability to get the highest possible price for the property. Tenants are not usually the best decorators and may not have the highest standards of cleanliness. Plus, it is extremely difficult to make improvements with tenants in the unit. To get the highest possible price, you may have to wait for the tenants to leave, make improvements, and then thoroughly stage the unit starting from scratch. With tenants in your unit, you could get anywhere from 3 to 5% off the highest possible price. The discount may be even greater if the home shows badly, or the tenants make showings difficult or are problematic. Being a landlord carries significant risk.

These costs and headaches must be considered against any expected future increase in the value of your condominium. If you decide to sell immediately, many of these costs can be avoided. There is no danger of a tenant causing wear and tear or making showings difficult. If your home is in good condition and well-decorated, you can probably prepare it for sale without making costly cosmetic improvements and can stage it using many of your own furnishings. Ultimately, you may decide to rent your condominium, but it’s important to be aware of what you’re getting into.

Ask The Tough Questions!

Real Estate ConceptThis week’s post is courtesy of negotiation consultant and blogger, Chad Ellis.

During a recent family visit my father reminded me of an unusual house near where I grew up.  It was a lovely house with a good-sized yard next to a pond.  Perfect for a family, and many families happily bought it.  In fact, the house was bought by a new family almost once a year, for what always seemed a bargain price.  Most families sold the house within a year of moving in.

Nothing was wrong with the house, per se.  The problem was that the yard and pond were the summer home for a large flock of geese.  During the warm season they would arrive and spend the next few months defecating all over the yard, turning what looked like a dream into something quite less pleasant.  When the geese had gone, the new owners would look at their mess of a yard, clean things up as best they could, and put their lovely house on the market.

In my last post we discussed the importance of information.  Clearly the buyers of this home lacked a key piece of information.  But why?  Buying a home is a big deal — for most of us it’s the biggest purchase we’ll ever make.  Paying 10% more than you have to is a huge loss as is buying a house you decide you can’t keep.  Even without the Internet making research fairly easy, it would have been relatively easy for home buyers to learn about the history of the Goose House.  So why didn’t they?

In my experience, there are two reasons people enter negotiations without key information.  First, we don’t make a list of what information we’d like to have.  Second, we become extremely reluctant to ask questions.

If anything, this problem escalates with major purchases.  The same person who will check movie reviews before putting $10 and an evening at risk will do little or no preparation when buying a house or negotiating salary at a new position.  Having more at stake sometimes makes us less willing to prepare, perhaps because it’s more frightening to admit a lack of knowledge when it comes to something important.  If this sounds like you, make extra certain that you commit to asking the sorts of questions we discussed last time.  Then, when you consider about how you might go about acquiring that information, be aware of the options that make you uncomfortable — and spell out the costs and potential gains of that option.  An experienced buyer’s agent you trust can help you to identify the tough questions you need to ask and will know how to ask and where to look to get the answers.

If the buyers of the Goose House had done that, they might have learned about the house’s history…and avoided a costly mistake.

Chad Ellis
Check out my Negotiations Blog:
www.negotiatewithchad.blogspot.com

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Inspecting Your Home Inspector

inspection2In my last post, I recommended a useful context to make home inspection issues easier to negotiate for both parties. Buyers, however, still need to make sure that they get a thorough and fair home inspection. Home inspectors are subject to a license requirement, a code of ethics, and standards of practice from the Board of Registration of Home Inspectors, but their results still vary widely. In my experience, multiple home inspectors inspecting the same property are likely to find very different issues. How can you assess your home inspector?

Home inspectors often fall into three different categories. First, there is the highly critical inspector. Real estate agents often refer to these inspectors as “alarmist,” while many consumers merely consider them “tough.” A highly critical inspector can be a good choice if the buyer can maintain perspective. If you are somewhat savvy about home construction issues and not easily alarmed, this type of inspector may be fine for you. However, be wary of the home inspector who thinks it is his or her job to be negative. A home inspector who tells you the roof is “fully depreciated,” but fails to give you an opinion on its condition given its age, is doing you a disservice. A roof that is past its normal life span, might still be in reasonably good condition and last a few more years.

The second category of home inspectors falls on the opposite end of the spectrum.  These inspectors tend to minimize issues and accentuate the positive. Real estate agents often regard these inspectors as “easy.” Beware the inspector who just gushes nice things about the home. He is mostly trying to stay in good graces with the real estate agent and doesn’t want to offend anyone.  If you find yourself in the middle of a home inspection with this type of inspector ask him to be more critical and to provide you details and specifics about the systems he is inspecting.

The vast majority of home inspectors fall into the last category. These are the home inspectors that real estate agents regard as “fair.” They will give you a reasonably balanced assessment of the home as whole, yet still uncover critical issues. The key to getting the most value from this type of inspector is twofold. First, ask a lot of questions and figure out what the inspector knows and doesn’t know about the systems he is inspecting, and his experience with those systems. Second, if he finds any issues of more than minor concern, hire a true expert to take another look at those issues. For example, if the inspector raises concerns about the roof, hire a roofer to look it over.  This last tip is important no matter which category your inspector falls into.

Never stop being a good consumer. Hire a home inspector who comes referred by someone you trust, ask lots of questions, and don’t forget to actually read the report.  If you don’t understand something about the report, ask more questions. For more information about home inspectors, click here.

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Home Inspections – A Context Shift

inspectionIn my experience, the home inspection is at the fulcrum of the residential real estate transaction. If a deal is going to sour, it is likely due to the home inspection. Although not required by laws or regulations, home buyers in Massachusetts almost always have a home inspection and the right to cancel the transaction if they are dissatisfied with the results.

Most buyers start the buying process thinking that the home inspector will find all the issues including what is not functioning properly and what may need attention in the near future. Buyers assume they’ll have the agent negotiate with the sellers to fix the problems or compensate the buyer in some way.

Sellers usually have a different perspective. They often feel that the issues are to be  reasonably expected given the age and general condition of the home or should have been obvious to the buyer from the start. In the sellers’ minds, the house comes “as-is” and the price has already been negotiated. After all, the sellers have lived with the issues for some time.

These very different approaches can make for difficult negotiations over issues that actually don’t involve a great deal of money. The solution is a different context for the home inspection.

Buyers will benefit most by using the home inspection to determine whether the home generally meets their expectations and if they want to proceed with the purchase. It is best if buyers focus on specific problems that were unknown prior to negotiating the sale price.  What doesn’t function properly given the age of the renovation, or the home, and the general condition of the house? Reasonable wear and tear is to be expected.  If an item is past its life expectancy and still works, then it is actually functioning better than expected.

The buyers and their agent should present the seller with a reasonable dollar amount for fixing the problems (I generally recommend against asking the sellers to make repairs because the buyers will have to inspect the work and this opens up a new set of problems). The sellers ought to approach the buyers’ requests essentially the same way. If the buyers could reasonably have expected the item to function properly, and it doesn’t, then the buyers request for compensation is reasonable.

There will still be complicated issues to resolve around what is reasonableness. However, if buyers and sellers approach the home inspection from the same context, those issues should be easier to resolve.

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