Seemingly forever, the average time between reaching a sales agreement and closing on that property has hovered around 45 days — a month and a half.
It’s not something consumers think about much when they set out to buy a first home or plan to upsize to accommodate life changes. In fact, if you were to describe the home buying experience solely upon the things we see in advertisements, the process would end with the sales contract and all parties would merrily proceed directly to the handing over of the keys.
Unfortunately, those ads don’t talk much about the next month or six weeks, the period real estate professionals call the “settlement process.” More than a few real estate agents will roll their eyes and sigh when asked by a client, upon the signing of a sales contract, “What’s next?”
There’s an entire industry built upon the “What’s next?” in question. When asked why it takes an average of six to seven weeks to get to closing, there are a lot of complex (and honest) answers. But there’s also room for improvement.
The process of orchestrating the collaboration of lenders, appraisers, home inspectors, one or two real estate agents, a title insurance company and possibly others is complex. It doesn’t lend itself to a 24-hour cycle. And the complex legal and regulatory web that can vary from state to state and even city to city doesn’t invite a quick and smooth passage to the closing.
Yet more can be done to ease that 45-day average. There are many processes and chokepoints that could be better addressed. The industry is finally recognizing those stubborn, delay-causing entities and processes and starting to address them head-on, giving us all hope that the 45-day close will one day be a relic of the past.
The chokepoints that the digital transformation hasn’t eliminated …yet
While much is made of the digital transformation that’s swept the title and settlement services industry in recent years, a large portion of that has addressed the core processes of issuing a title insurance policy. Title production platforms are usually the backbone of a digital or partially digital title operation. One would be hard-pressed to find many title agencies that aren’t using some level of technology in that regard.
Other complex and time-consuming tasks addressed by improved technology include title searches, document preparation, lien releases and even the closing itself, as RON and digital closings gain adoption rapidly. The good news is that this trend towards a general adoption of technology seems to be accelerating.
However, the settlement process varies from client to client, location to location. A form may be required in one county that isn’t in most others. A document might be needed closer to the closing date or as soon as a few days after the start of the process.
With all these nuances, it’s unlikely that a centralized production system developed for nationwide usage can eliminate the need to manually enter, for example, borrower information into a proprietary municipal website. There are dozens, if not hundreds, of similar tasks that, to date, have defied complete automation.
Take the wide-ranging requirement for addressing clouds on the title. For numerous reasons, the curative department of a title firm likely doesn’t have the technology to procure things like a satisfaction of mortgage or release. Instead, it’s often some combination of specialized technology, an internet search, a few emails or voicemails, a document with manually entered data and the like.
One significant hurdle to a faster closing process is the complex communication between the various professionals involved. In a typical transaction, a title agency must coordinate with several other parties, often using a mix of emails, phone calls, texts, specialized apps and online portals. This patchwork of communication methods not only makes the process cumbersome but also increases the chances of mistakes and delays.
And then, there’s the process of dealing with the property’s Homeowners Association (HOA) or even simply determining whether one is involved at all.
Dealing with the HOA — a nightmare for all parties involved
The sheer number of HOAs in the United States and the lack of uniformity involved in almost any element of their role in a real estate transaction is another glaring reason for the 45-day closing.
Nearly half (53%) of the owner-occupied homes in America are represented by some form of HOA, yet there’s no single database or central repository that comprehensively indicates which homes are part of an HOA.
There’s no uniform method of determining if a property management firm represents an HOA and, if so, which firm. There’s no easy-to-access resource advising how to communicate with every HOA or property management firm. There’s no universal means of determining what HOA documents are required in different states or what fees you need to pay the HOA to release the documents.
In addition, it almost seems that each HOA takes pride in sorting and storing that data in a unique way. Of course, HOAs and property managers are busy and have other priorities as well. Requirement by requirement, form by form, it has long fallen to the title agency or escrow company to slog through a number of blind alleys to sort the HOA process.
Those realities don’t even contemplate the numerous headaches and delays that come with identifying and dealing with multiple HOAs or the project management skills required to coordinate the Realtor, buyer and seller alike.
This is when an otherwise on-track closing is suddenly and indefinitely delayed by the realization that there is an HOA and that it’s not necessarily playing by the timelines of the closing. Even something as simple as obtaining a PDF might take weeks.
Additionally, almost each HOA in the United States has (and occasionally uses) the ability to change its requirements and documentation with almost no obligation to report these changes to any centralized authority. It quickly becomes apparent that just the process of collecting and exchanging proper HOA documentation is a massive impediment to achieving a faster closing time.
There is growing hope, however. As more title businesses clamor for new technology or improved service offerings for addressing chokepoints like these, more solutions are coming online. More professionals and firms are offering outsourced services and technology that lead to a more streamlined approach. AI and LLMs (large language models) are increasingly being brought into the fray as well.
Now that the title industry has addressed and begun to adopt the automation of core processes (title production platforms, automated search products), it is collectively putting more resources into addressing some of the more granular but every bit as stubborn obstacles to a cleaner, faster closing.
New applications are coming to market faster than ever to help process handwritten documents or non-standard forms and input them into searchable PDFs or even directly into a title agent’s production system.
“Stare and compare” is increasingly replaced by more sophisticated OCR and AI applications. Status updates and other routine forms of basic but time-consuming communication or data collection are moving away from voicemail or email toward RPA and AI applications. The list of improvements is growing at an accelerating pace.
The title industry has finally put the foundation in place for a modernized workflow. Now, it is focusing on some of the ancillary processes that have historically clogged the production pipeline. Real estate will look different in 2030, perhaps even in 2024. I am convinced that our industry will finally put the 45 days to close to bed once and for all.
Anton Tonev is the cofounder of InspectHOA.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story: [email protected]
To contact the editor responsible for this story: Deborah Kearns at [email protected]
Embarking on the path to homeownership in Utah? Look no further – this Redfin guide is your key to understanding the nuances of purchasing a home in the Beehive State. Whether you’re a nature enthusiast seeking the perfect mountain retreat, an adventure seeker drawn to the state’s outdoor playground, or someone eager to become a part of its warm and tight-knit communities, Utah is a wonderful place to call home.
You might be interested in the buzz of Salt Lake City or the quiet charm of smaller towns – either way, Utah’s housing market covers all bases. Whether you’re a first-time homebuyer or a seasoned homeowner, this Redfin guide will help you navigate the homebuying process in Utah. Let’s dive in.
What’s it like to live in Utah?
Living in Utah seamlessly combines natural wonders and inviting communities. With mountains hovering over cities like the snow-clad Wasatch Range, you’ll be able to hit the slopes in renowned ski destinations like Deer Valley. Alternatively, you could visit the beauty of Zion National Park, a testament to Utah’s diverse geography. Utah is also known for hosting lively events throughout the state, such as the prestigious Sundance Film Festival in Park City, one of the largest independent film festivals in the world. Check out this article to learn more about the pros and cons of living in Utah.
Utah housing market insights
The Utah housing market is currently undergoing a series of interesting trends. The median sale price is $543,700, marking a 3.3% decline from the previous year. This shift is accompanied by a decrease in housing demand and a corresponding reduction in supply. Despite the lack of demand, notably competitive cities include Taylorsville, West Valley City, and Cottonwood Heights, where the housing market activity is particularly pronounced. On the flip side, cities like Vernal, Pleasant Grove, and Riverton are making their mark with rapid growth in sale prices, positioning them among the top 10 metros in Utah experiencing this upward trajectory. These dynamics create a diverse landscape within Utah’s housing market, offering challenges and opportunities for those looking to buy.
Finding your perfect location in Utah
Discovering your ideal location in Utah is pivotal to crafting a fulfilling lifestyle. Utah offers diverse settings that cater to individual preferences. Choosing the right spot by using tools like a cost of living calculator ensures access to activities and communities that align with your values, setting the stage for your journey in the Beehive State. To kick-start your exploration, here are five popular Utah cities.
#1: Logan, UT
Median home price: $360,000 Logan, UT homes for sale
Living in Logan includes a blend of a college town and stunning natural surroundings. Home to Utah State University, the city boasts youthful energy with cultural events and educational opportunities. Residents can stroll along the charming Main Street, explore the nearby Cache National Forest for outdoor adventures, and savor local produce at the Cache Valley Farmers Market.
#2: Ogden, UT
Median home price: $365,500 Ogden, UT homes for sale
The city’s revitalized downtown hosts lively art galleries, restaurants, and seasonal events, creating an exciting cultural scene. Outdoor enthusiasts can easily access nearby attractions like Snowbasin Resort for skiing or hiking in the stunning Ogden Canyon. At the same time, the scenic Ogden River Parkway provides a serene backdrop for leisurely walks and biking.
#3: Provo, UT
Median home price: $440,000 Provo, UT homes for sale
Home to Brigham Young University, the city exudes a youthful atmosphere with cultural events. Some events include the First Friday Art Gallery Stroll and the Freedom Festival. Residents can hike up Y Mountain for panoramic views, explore the historic downtown with its local shops and eateries, and take advantage of the Provo River for recreational activities like fishing and tubing. The cost of living in Provo is 4% higher than in Ogden, mainly attributed to housing, groceries, and lifestyle experiences.
#4: St. George, UT
Median home price: $523,000 St. George, UT homes for sale
The city’s warm climate makes it an ideal destination for golfing, hiking in Snow Canyon State Park, and exploring Zion National Park’s stunning red rock landscapes. Residents can also enjoy cultural events like the St. George Art Festival, showcasing local artists, and immerse themselves in the city’s historical sites, such as the Brigham Young Winter Home. However, the cost of living in St. George is 7% higher than the national median, so if you’re on a budget, you’ll want to check out affordable suburbs outside downtown.
#5: Salt Lake City, UT
Median home price: $595,000 Salt Lake City, UT homes for sale
With a backdrop of the majestic Wasatch Mountains, moving to Salt Lake City, you can enjoy skiing in nearby resorts like Alta and Snowbird or hiking in Millcreek Canyon. The city’s cultural scene thrives through events like the Utah Arts Festival, and residents can explore historical sites such as Temple Square or immerse themselves in contemporary cuisine and art galleries in the vibrant downtown area.
The homebuying process in Utah
Now that you’ve discovered some popular locations, let’s dive into the homebuying process.
1. Prioritize your finances
Prioritizing your finances first in the homebuying process in Utah is crucial to ensure a stable investment and a comfortable financial future. With factors like varying home prices, mortgage rates, and property taxes, a solid financial foundation, coupled with tools like an affordability calculator, allows you to navigate the market more effectively and make well-informed decisions.
Various programs are available for first-time homebuyers in Utah, including the Federal Home Loan Bank: Home$tart Program, which can assist with up to $7,500 in down payment assistance.
2. Get pre-approved from a lender
Getting pre-approved from a lender is essential when purchasing a house in Utah. The pre-approval clearly understands your budget, strengthens your negotiating power, and expedites the buying process by demonstrating your seriousness to sellers.
3. Connect with a local agent in Utah
Local real estate agents possess in-depth knowledge of the area’s neighborhoods, market trends, and potential pitfalls, ensuring you make informed decisions and find a property that aligns with your needs and budget. So whether you need a real estate agent in Salt Lake City or an agent in Provo, they’re here to help.
4. Start touring homes
During home tours, focus on the home’s condition, layout, and potential for future renovations. Additionally, pay attention to the neighborhood, nearby amenities, and commute times to ensure that the property aligns with your lifestyle and preferences in the beautiful Utah environment.
5. Make the offer
Making an offer in Utah involves careful consideration of the property’s market value, recent comparable sales, and any unique factors that might influence the negotiation. Your local real estate agent can provide valuable insights into crafting a competitive offer that reflects the current market conditions while aligning with your budget and goals.
6. Close on the house
The closing process in Utah is the final step of the homebuying process, where ownership is officially transferred. It involves legal and financial procedures, including signing documents, paying closing costs, and finalizing the mortgage. Working closely with your real estate agent and lender ensures a smooth and successful closing experience in Utah’s real estate landscape.Check out Redfin’s First-Time Homebuyer Guide for more in-depth information about the homebuying process.
Factors to consider when buying a house in Utah
Along with the geographical location of Utah, there are essential factors to consider when buying a home.
Climate and weather
Utah’s weather varies significantly between regions, with colder winters, potentially heavy snowfall in mountainous areas, and arid, hot summers in lower elevations that can contribute to wildfires. It’s essential to consider the weather when buying a house, not only for lifestyle reasons but also for practical matters like homeowners insurance that may vary based on the climate and potential weather-related risks.
Water rights and usage
Understanding water rights and usage is crucial when purchasing a house in Utah due to its arid climate and unique water management system. With water scarcity a potential concern, comprehending how water is allocated, any restrictions on usage, and the availability of water sources ensures you can sustainably maintain your property and lifestyle.
Homeowners associations
Many homes in Utah come with homeowners associations (HOAs) which are essential to note when buying a property, as these associations often have rules, regulations, and fees that can significantly impact your ownership experience. Understanding the HOA’s requirements, fees, and any restrictions they impose ensures that your lifestyle aligns with their guidelines and that you’re financially prepared for the associated costs.
Dual agency
Noting that Utah allows for dual agency is vital when navigating the real estate market, as it means a single real estate agent can represent both the buyer and the seller in a transaction. This arrangement requires high transparency and communication to protect both parties’ interests adequately.
Buying a house in Utah: Bottom line
Utah offers an enriching lifestyle with stunning landscapes, outdoor options, and community and cultural events. Assessing factors like housing market dynamics and living costs is important, but the opportunity to create a fulfilling life makes buying a house here a promising and exciting prospect.
Buying a house in Utah FAQs
What is the average down payment on a house in Utah?
The average down payment on a Utah house is typically 10% to 20% of the purchase price. For instance, on a $300,000 home, a 10% down payment is $30,000, while 20% is $60,000. Different loans impact this; FHA-backed loans often require around 3.5% down, like $10,500 on a $300,000 home. Down payment needs vary based on mortgage type, lender policies, credit history, etc.
Do you need a real estate agent to buy a house in Utah?
While not mandatory, having a real estate agent when buying a house in Utah is highly recommended. An experienced agent can provide valuable local market insights, guide you through complex paperwork and negotiations, and ensure you make informed decisions. Their expertise can streamline the process and help you find the right property while avoiding pitfalls.
Is buying a house in Utah expensive?
The cost of buying a house in Utah varies depending on factors like location and property type. The median sale price in Utah is $543,700, which is higher than the national median of $425,571. Generally, Utah offers a relatively affordable housing market compared to some other states, but prices can still vary widely within different cities and neighborhoods. Researching local market trends and working with a real estate professional can help gauge whether the cost aligns with your budget and preferences.
Looking to buy a condo but need an FHA loan to get the job done? In the past this may have presented some challenges, but today it just got a bit easier.
Nowadays, the FHA requires an entire building to be FHA-approved, not just single units (no spot approvals anymore). It’s an all or nothing approach to ensure FHA loans only finance units in quality projects, thereby avoiding unnecessary risk for the agency.
But many prospective homeowners can only get approved for FHA loans because conventional financing is often out of reach for one reason or another. Additionally, many of these folks can only afford condos because homes are too expensive.
This also presents challenges to condo sellers who are limited to unloading their properties to those able to obtain a conventional loan. Obviously this can reduce demand and force the seller to take a lower price for their condo.
Apparently the Department of Housing and Urban Development (HUD) understood this was a problem and subsequently released temporary guidelines today aimed at easing condominium requirements so more borrowers can get FHA loans on such dwellings.
They’ve basically made three changes, effective immediately, which they believe will increase affordable housing options for both first-time home buyers and those with low- to moderate-income.
Streamlined Condo Recertification
If a condo is already FHA-approved
Recertification will be streamlined
Assuming there haven’t been any substantive changes since prior approval
Making it less of a burden to keep a building in the FHA’s good graces
First, they’re making it easier to recertify a condominium project that is already FHA-approved.
Existing guidelines require condos to get recertified after two years to ensure the project is still in compliance with FHA eligibility rules.
And the process needs to start six months before expiration, so it’s a constant bureaucratic nightmare.
It used to involve a lot of paperwork, including annual budgets, balance sheets, income and expense statements, occupancy review, and so on.
Going forward, the FHA will only require applicants to submit documents if there are “any substantive changes since the project’s prior approval.”
I’m not exactly sure what that means, but HUD refers to it as a streamlined process, so it should be easier for projects to maintain their eligibility.
Lots of building used to be FHA approved – hopefully now they’ll maintain that approval.
Eased Occupancy Requirements
The FHA requires 50% of units in a building to be owner-occupied
They have since lowered this requirement to 35% if some conditions are met
They’re also expanding the definition of owner-occupied
To include vacation homes (secondary properties)
Additionally, the FHA will also be modifying its calculation of owner-occupancy concentration, which should boost the number of units available for FHA financing.
At least 50% (half) of the units in a condominium project must be owner-occupied in order for borrowers to obtain FHA financing.
The FHA will now consider a condominium owner-occupied provided they are not:
• Tenant occupied; • Vacant and listed for rent; • Vacant and listed for sale; or • Under contract to a purchaser who does not intend to occupy the unit as a primary or secondary residence
So it looks like condos that are secondary residences (not vacation homes) will count toward owner occupancy. HUD refers to a secondary residence as a dwelling the owner occupies in addition to their principal residence, but for less than the majority of the calendar year.
Ideally, this will make the 50% concentration rule easier to meet and boost the number of projects available for FHA financing.
This has since been lowered to 35% if certain conditions are met, making it that much easier to finance a condo with an FHA loan.
Lastly, HUD will now accept an expanded array of master policy insurance coverage options for the entire project.
HOAs are required to maintain coverage in an amount equal to 100% of the current replacement cost of the building.
Now they’ll be able to utilize insurance that consists of pooled policies for affiliated projects, state-run plans, or coinsurance obligations.
Per NAR, less than 20% of condominium complexes nationwide have FHA approval, and condos are 27% less expensive than single-family homes.
The Realtors’ group had been pushing for changes at the FHA for a while now, and all that advocating looks to have worked.
Still, a lot of condos aren’t approved for FHA financing and probably won’t be even with these changes, so it’s best to ensure you can get approved for all types of mortgages when it comes time to buy a condo.
Some reader stories contain general advice; others are examples of how a GRS reader achieved financial success or failure. These stories feature folks with all levels of financial maturity and income.
Mark Ferguson has been a Realtor since 2001 after graduating from the University of Colorado with a business finance degree. He runs a real estate team of 10 that sells over 200 homes a year, fix and flips 10 to 15 homes a year and owns 11 rental properties. Mark also runs www.investfourmore.com, a blog that discusses Mark’s fix and flips, rental properties, becoming a real estate agent and everything real estate related.
Many television shows portray fix and flipping as a very profitable business that can easily be done in your spare time. Sure there are usually a few contractor problems, but in the end the house sells for a lot of money and the owners make a killing. In reality, you can make money fix and flipping homes, but it takes a lot of hard work and a lot of flipping to make a lot of money. It is also very easy to lose a lot of money if you do not account for all the costs or overestimate the value of your flip.
I have been a Realtor since 2001, and I have fix and flipped close to 100 homes over the last 10 years. I have 10 fix and flips going right now, and I can tell you it is not easy managing one fix and flip let alone 10! It takes a lot of money to fund fix and flips, more time than you think to sell a flip, a lot of experience to deal with repairs and contractors, and expenses are almost always more than you figure.
If you buy houses cheap enough with enough of a margin for error, you can make good money fix and flipping homes — but don’t expect to be a millionaire after a year or two in the business.
Are the Television Shows Accurate in Their Portrayal of the Flipping Business?
Most fix and flip television shows love to show the before and after pictures of a flip with the initial purchase price and the selling price at the end. There are a couple of shows that portray the expenses accurately, but most leave out many of the costs that flippers encounter. In the fix and flip business, many investors use the 70 percent rule to determine if they can make a good profit when they flip a home.
The 70 percent rule states the purchase price should be 70 percent of the after-repaired-value (ARV) minus the cost of any repairs. For example, if a house will be worth $150,000 after it is repaired and it needs $30,000 in repairs, the 70 percent rule states an investor should pay $75,000 for that house. Buying a house that will be worth $150,000 for $75,000 seems like a home run, but it is really just an average deal because there are so many costs associated with flipping.
What Costs are Involved in Fix and Flipping Homes?
The obvious costs involved in flipping are the purchase price of a home and the repair costs. In our example, there appears to be $45,000 in profit once you include the selling price and the repairs but there are many more expenses that many beginners do not consider.
Financing costs: Most people do not have $75,000 plus the costs of repairs and carrying costs to buy a flip. It is more expensive to finance a flip because banks make their money off interest paid on loans. The shorter time you hold a loan, the less money a bank will make. Most large banks will not finance flips, but some local lenders will. Hard-money lenders will fund flips, but they are very expensive, charging 12 to 16 percent interest rates plus 2 to 4 percent of the loan amount for origination fees. A hard-money lender is a not a bank but a company that takes money from investors at a given interest rate. The hard-money lender then lends that money to fix and flippers at a much higher interest rate.
Carrying costs: When you own a house, you have to pay for the lawn care, heating, insurance, taxes, HOA and more while you own the home.
Purchasing costs: Besides the loan origination costs, there are some other costs to consider when buying a flip. A home inspection will run $300 to $800. Some lenders will require an appraisal, which is $400 to $600. There will be a closing fee, recording fees, tax certificates and much more.
Selling costs: When you sell your house, you will most likely have to pay a real estate agent to sell the flip and possibly cover closing costs for a buyer. The real estate commission and closing costs can add up to be 10 percent of the sale price.
Miscellaneous costs: Depending on where and how you buy your property, it may have a tenant or the previous owner may still be living in it. You could have eviction costs or costs to pay the occupants to leave.
Here is an example of what the total costs would look like on a typical fix and flip I buy and sell. I have a great lender who charges me 5.25 percent interest rate and 1.5 percent origination, but they only lend on 75 percent of the purchase price. My loan costs are much lower than most flippers’.
Purchase price: $75,000
Loan amount: $56,250
Costs:
Loan costs: $2,500
Carrying costs: $1,600
a. Insurance: $400
b. Lawn maintenance: $300
c. Taxes : $400
d. Utilities: $500
Buying costs: $1,000 (I usually do not do an inspection or have an appraisal)
Repairs: $30,000
Selling costs: $7,000 (Since I am a Realtor, I only pay the buyer’s agent commission. I list the house myself and do not have to pay a listing agent.)
Miscellaneous: $5,000
Total costs: $47,100
If I sold the house for $150,000, my profit would be $27,900. That is a decent profit, but I want to make at least $25,000 on each flip because of the risk involved and the money I put into them. On this flip, I would need at least $50,000 of my own cash for the down payment, carrying costs and repairs. Beginning flippers could easily spend three times as much for financing costs and another $4,500 to pay a listing agent. That cuts the profit to under $20,000 for a house that sells for twice as much as it was purchased for. The next time you watch a fix and flip show, see how many of these costs they actually tell you about!
Will You Make More Money Fix and Flipping More Expensive Homes?
It is true that the profit potential goes up when you flip more expensive homes. However, there are many more risks involved when flipping expensive houses.
The repairs will be much more expensive because buyers will demand higher quality.
It takes longer to sell more expensive houses and your carrying costs will be higher.
The carrying costs will be higher due to HOAs, more maintenance needed, higher taxes, etc.
You will need more cash because down payments, carrying costs and repairs will be higher.
All your money is in one house instead of multiple homes, increasing the risk if something goes wrong.
The biggest problem with flipping more expensive homes is that the difference between the buy price and sell price is massive. Using the 70 percent rule, a house with a $500,000 ARV would have to be bought for $300,000, if it needed $50,000 in work ($500,000*.7-$50,000=$300,000). It is very hard to find a deal that has such a large difference between the ARV and the purchase price because an owner-occupant buyer would be willing to pay much more for the house. The owner-occupant can pay $400,000, put $50,000 into the house and still have a great deal. In the more expensive market, it is much more likely owner-occupants will have the cash to put into homes.
How Long Does it Take to Fix and Flip a House?
From start to finish, my goal is to have a flip for four months from the time I buy it to the time I sell it. I almost never hit that number because there are so many unknowns. The biggest delay I have is finding good contractors, especially when I have 10 properties at once. It takes me a couple of weeks to get a contractor started on the work, about a month for the work to be done, about three weeks for the home to be on the market before a contract is accepted and yet another month for the escrow/closing process — if everything goes perfectly.
Unfortunately, it often takes longer for the contractor to make repairs. We inevitably see a few things the contractor missed and they have to go back to the home to take care of those items. Then we have to line up cleaners and get the home listed. Sometimes it takes three weeks to get a good offer; sometimes it’s just one week, but it could just as easily be two months. In addition, the escrow process can vary from one month to sometimes two months. Now that I have so many houses and not enough contractors, I am looking at almost nine-month turn times on some of my properties.
Is All the Hassle Worth it When Fix and Flipping Homes?
After looking at all the costs and everything that has to be accounted for, it may seem a bit intimidating to flip a home. Especially when you consider we have not even talked about how to find a fix and flip that can be bought cheap enough to make money. Just like anything in life, it takes time to learn what you are doing and feel comfortable. I still am learning new techniques to find properties and finding better ways to fix and flip homes.
After you learn the business, it can be a lot of fun. I still get excited whenever I get a new deal under contract, almost as excited as when I sell one for a nice profit. Over the last two years, I have averaged about a $35,000 profit on each of my fix and flips. I completed 10 flips last year and should complete (buy, fix, sell) over 10 this year. On most flips, I make around $30,000 in profit; but once in a while, I will make more, like this property that I made over $50,000. In the last 13 years of fix and flipping homes, I have made over $100,000 twice on a single flip. My success has not come from making a huge profit on one or two flips a year, but on consistently making modest profits on multiple homes. There is much less risk flipping many lower priced homes than flipping one expensive home.
The best part about this business is that I do not flip full time. I run a real estate team of 10 and my primary job is running that team and selling houses. Once you set yourself up correctly with the right contractors, the right financing, enough of your own money and experience, the business does most of the work itself. It is not easy to get to that point and it takes a lot of time and reinvesting money back into the business.
How Do You Find a Great Deal to Fix and Flip?
Finding a great deal is the key to making money in the fix and flip business. I used to buy 90 percent of my fix and flips at the public trustee foreclosure sale. These houses were sold in as-is condition for cash, and many times the inside of the house could not be viewed or homes were occupied. When I bought a home at the trustee sale, I had no inspection period and no way to back out once the property was purchased. In the last two years, the competition at the trustee sale has increased and I have not purchased any homes from that sale in over a year. In fact, I do not even go to the sale anymore because people are paying close to the amount you could buy a house for on the MLS. When I buy on the MLS, I get to have an inspection done, I can use a loan to buy the property, and I don’t have to deal with any occupants.
Almost all of my deals are bought on the MLS now. There are a few tricks to getting a great deal, but it is not easy with rising prices and competition.
Act fast: I make offers within hours of homes being listed.
Become an agent: One of the reasons I can act so fast is that I write the offer, set up a showing and I do not have to wait on an agent.
Look for properties that need work: The more problems a property has, the more potential profit there is. Make sure you know how to fix the problems and how much it will cost!
Look for properties that have been on the market over 90 days. The sellers are more likely to accept low offers on these homes. If they are grossly overpriced, I do not even bother.
Make offers on homes that come back on the market quickly. I can set up MLS alerts to tell me when a house in a certain price point comes on the market or comes back on the market after a contract falls apart. Many times the great deals that need work have contracts that fall apart because buyers don’t realize how much work is needed until their inspection.
There are other ways to get great deals such as direct marketing to sellers who do not have their properties for sale or finding wholesalers who sell cheap properties to investors.
What Should You Avoid if You Decide to Start Flipping Homes?
If you have decided you want to give flipping a try, here are some tips to keep you from losing too much money on your first try.
Only do the repairs yourself if you know what you are doing and have time to complete them. Many flippers try to save money by doing the work themselves. They don’t realize how long it takes to make repairs, especially in their spare time. It ends up taking months to fix the property and the extra time will eats up the money you thought you saved by doing the work yourself. To make the situation even worse, the work won’t be as good as if a professional did it.
Do not overestimate the value of a home or rely on values to increase to make money. Many markets have increasing prices, but that doesn’t mean they will keep increasing. A lot of flippers went bankrupt during the housing crisis because they assumed the market would keep going up. When prices stopped increasing and then decreased, they lost everything. I kept flipping right on through the housing crisis because I based values on the current market and left myself room for adjustment.
Do not overprice a home when you list it. To make money flipping, you have to sell quickly and keep your money moving from property to property. If you have a house sitting on the market that won’t sell, it is most likely overpriced. I have found that the sweet spot for a house to be on the market is three weeks and then I usually get an offer. If I don’t get an acceptable offer after 30 days, I lower the price 5 to 10 percent, depending on the activity.
Don’t try to sell a house yourself unless you are an agent. If you sell a house for sale by owner, you lose market exposure by not being in MLS. Ninety percent of buyers use a real estate agent to represent them and those agents look on MLS to find properties for their buyers. If you use a limited service company that puts the home on MLS, you still have to pay for the buyer’s agent. You are saving very little money and the buyer has representation while you do not. Who will get the better deal?
Always assume your repairs will be more expensive than you think and the flip will take longer than you think. Even if you get a bid for all the work before hand, things always pop up that you didn’t see or you couldn’t have known about.
My Worst Flipping Experience
There is a lot of information in this article and I didn’t even come close to covering every topic involving flipping houses. I hope it gives you an overview of what it is like and what it takes to flip houses. It is not about hitting a homerun on every flip, but hitting a lot of singles over and over again. I have lost money on flips before, sometimes because of things I have no control over. Since I had many flips going at once, losing money on one flip did not destroy my business — but this was the worst experience.
A couple of years ago, I bought a flip at the trustee sale. I saw the interior of the home through the windows but never got inside the house before I bought it. It was a good deal on a newer house, with little work needed and I thought I would make some easy money. After I bought the house and got the locks changed, we found a brand new BMW in the garage. I knew something very odd was going on, so we tracked down the previous owners in California (I am in Northern Colorado). They claimed the bank had foreclosed wrongly and they were going to get the house for free. They ended up filing a lawsuit against the bank a week later and we had a house we could not sell because it was involved in litigation.
The previous owners had been convinced they would get the house for free by a legal aid. We offered them $5,000 to drop the case and they would not even think of it, because they knew they would get the house for free. Long story short, the lawsuit was frivolous and thrown out by a judge as soon as he saw the case. The problem was that it took the court almost a year to look at the case even after we had hired lawyers and paid them almost $10,000 to speed up the process. After carrying costs and lawyers fees, I lost about $15,000 on that house. There was no way to know that would happen, but sometimes that’s how it works when buying houses at the foreclosure sale. That is why I prefer to have multiple low-value houses at the same time, instead of one expensive house. I was still making money and turning other properties while that house was tied up. If all my money was tied up in one house that I could not sell for a year, I could have been in serious trouble.
Conclusion
I have been in the fix and flipping business for a long time and it has been very good to me. It is not easy to get started, to find great deals, find great contractors or to get all the money needed to flip. It is not impossible either, but it does take a lot of planning and education to get started. If you want to ask any questions in the comments, I’ll try to respond as quickly as possible.
Let’s start at the beginning: What is an HOA and why do communities have them?
According to Investopedia, “a homeowners association (HOA) is an organization in a subdivision, planned community or condominium that makes and enforces rules for the properties within its jurisdiction. Those who purchase property within an HOA’s jurisdiction automatically become members and are required to pay dues, known as HOA fees. Some associations can be very restrictive about what members can do with their properties.”
An HOA is typically established to make and enforce rules regarding the properties within the jurisdiction. And while they play an essential role in maintaining a community’s guidelines, HOAs can, at times, feel overbearing because of the many guidelines and restrictions they put in place.
And since many people wonder what makes living in a neighborhood with an HOA such a pain, we thought we’d share some of the crazy HOA stories people have posted on Quora — and let you decide whether living in a community with an HOA is the best option for you.
Bad experiences with homeowners associations
#1 Ken’s wooden beams, cherry tree and propane tank
“You do give up certain freedoms regarding maintenance of your home and property, as well as having to adhere to certain standards of conduct. For the most part, these rules are for the good of all and serve to enhance the quality of life in the community and help to maintain property values.
However, it all depends on the individuals who run the HOA. Unfortunately, these organizations are often controlled by retired people with a lot of time on their hands who delight in enforcing mindless rules.
I had several negative experiences with these organizations. The first two were in the Pittsburgh area.”
The wooden beams
“My home’s driveway was lined by wooden beams embedded in the ground. I had only lived there for about a year, and these timbers were rotting. I received a letter from the HOA telling me that these timbers must be removed or replaced in two weeks or I would be fined. Two weeks seemed pretty unreasonable for a considerable amount of work. These timbers were really only visible to someone actually on my property, so they weren’t a community eyesore. They had to have been rotting for quite some time, yet the former owners were not asked to replace them. I did agree that the work needed to be done, but two weeks was an unreasonable time frame. I asked for and received an extension to six months.”
The cherry tree
“My next incident was when I was having some trees pruned. There was a cherry tree planted very close to the house. When the worker was about to prune it, he discovered that the tree was basically hollow and infested with carpenter ants. I had actually noticed the occasional ant in my house. The tree was dying. Rather than pruning, I had it removed. The HOA was upset because I had the tree removed without permission. They tried to fine me $100. Apparently, I should have sent my worker home and then requested permission to remove a dying tree from my property, one that was leading to carpenter ants entering and potentially damaging my home. I sent them a rather nasty letter telling them that I would not pay a fine when the need to remove the tree was obvious. I didn’t need permission to get it pruned, and I only had it taken down because it was diseased. Obviously, permission would have been granted to remove a tree in this condition. They backed off the fine.”
The tank
“I’ve since moved to Hilton Head, SC, where most homes are in gated communities with HOAs. I had an recent run-in with them. On the side of my home, there was a propane tank. It had been there at least ten years prior to my buying the house. It was concealed behind some hedges. Someone from the HOA saw this and I was sent a letter informing me that, according to the rules, the tank must be enclosed in a service yard or have some sort of structure around it. Having it behind hedges was not acceptable.
The former owner who installed this tank, who still lives in the community, was once the head of the HOA. No action was ever taken against him. I am the third person to purchase this house since the tank was originally installed. None of the prior owners were fined. The HOA allowed the house to be put up for sale three different times while it was out of compliance with the community rules. Then out of the blue, they decided to fine me for a tank that had been in place for at least nine years and three owners before I ever owned the house.
I tried to protest, as the tank is not at all visible from the road (one of their stated reasons for this rule in the first place), but I was basically told that regardless of its history (and their failure to enforce the rules before), it was my tank now and I had to move it. So I had to pay nearly $300 for the propane company (which actually owns the tank) to move the tank into a service yard.“
Source and link to full comment
#2 Katrina’s grass length and nephew’s bike
Her thoughts on why you should never move in a neighborhood governed by an HOA?
“Because they control everything!
The height of your lawn, the color of your siding, how many cars in your driveway, what plants are grown out front, if you can have a fence, how high the fence is, what color of the fence…. I can go on and on and on. You have limited control of your own property, and you pay dues…. Yea!!”
The cars in the driveway
“My sister and her husband moved to a community with a HOA, she moved 200 miles away from us. Naturally, myself and my parents helped her move.
We decided to spend the night there, my they had a long driveway. It was meant for cars and boats because the community was near the water. So we pulled our 4 cars into the driveway. The last car had about 12 feet extra before reaching the sidewalk.
We were unloading her belongings when the local community police department showed up, they wanted to speak to my sister.
Apparently she broke an ordnance because more than 3 cars were in her driveway, we didn’t get the stuff out the car first…. It was a fine, our first 15 minutes at the property.”
The nephew’s bike
“Another time (same place) my nephew left his bike on the front porch, the same people show up to fine my sister for the bike… Yes a 6 year old’s bike barely visible on a porch was fine worthy.”
The length of the grass
“Grass, in Maryland it is hot and humid and the grass grows so fast, neglect your yard for a week and the grass is knee high. My sister’s husband cut the grass, almost weekly. They would routinely (every week) go on to the property with a ruler and check the grass height.
They were just over a bit and they came on to their property and cut the grass for them, fined them and charged them for the cut.”
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#3 Ted and his A/C-less summer
“One spring, found my A/C quit working at my townhouse. The compressor was located off a mini deck built one floor up specially constructed to hold the compressor. Problem is, I had to have it replaced. Another problem, they didn’t make SEER 10 anymore and had to get SEER 13. SEER 13 units are bigger, heavier and wouldn’t fit on the mini deck. I had a structural engineer check it out, would cost me about $13k to have that deck made bigger (long story). Alternative was to move the compressor to the front of my unit.
HOA made me contact three neighbors and have them sign off on my architectural mod. Then they took all summer to approve the job.
Read that part again.
I found the problem in spring, immediately complied by getting the neighbors signatures, and I didn’t have A/C until the job was approved in August.“
The window unit
“Oh, and as a stop gap measure, I bought a window unit to get me by the summer months until they allowed me to install the new unit. It took the edge off, kept it from getting over 90°F inside.
Took about a week before I got a nasty gram telling me to remove the window unit (against the rules) or get a hefty fine. So, I put it in the window where it shared space by the broken a/c compressor (in other words, hard to see). Got a nasty gram within two days threatening a fine.“
The grey front stoop
“Another story – my next door neighbor bought his place with his front stoop painted grey. He didn’t paint it; the prior home owner did. He gets a nasty gram saying painted stoops are against the rules. It’s gray paint, I didn’t even notice it was painted until it was pointed out. Neighbor fought it at the next meeting. Had pictures of other painted stoops throughout the community (a few others did exist). He made sure he also captured unit numbers. It was noted during the meeting that one of the painted stoops happened to be the porch of the HOA president. They dropped the complaint against him.”
Source and link to full comment
Now, we’re not saying that all HOAs are bad. Nor are we encouraging anyone to move to a neighborhood governed by one. But since knowledge is key when making a life-changing decision like buying a home, we thought these stories will give you a better understanding of some of the challenges you might face when moving to a neighborhood with an HOA.
Have any stories you’d like to share? Maybe some stories of how your HOA is doing a great job for your neighborhood? Drop us a line at [email protected]
More helpful tips:
Can You Sell a House and Buy Another at the Same Time? We Explore Your Options How Much Do Modern Prefab Homes Cost? A Step-by-Step Guide to Buying a Property for Airbnb
Inside: This guide will teach you about the different factors you need to consider when purchasing a home with a 70k salary.
There are a lot of factors to consider when you’re trying to figure out how much house you can afford. Your income, your debts, your down payment, and the interest rate on your mortgage all play a role in determining how much house you can afford.
Your situation will be different than the person next-door or your co-coworker.
Making 70000 a year is a great salary. You are making the median salary in the United States.
It’s enough to comfortably afford most homes and gives you plenty of room to save money each month.
But how much house can you actually afford?
It depends on several factors, including your down payment, interest rate, income, and credit score.
In this ultimate guide, we’ll walk you through everything you need to know about how much house you can afford making 70000 a year.
how much house can i afford on 70k
In general, you can expect to spend 28-36% of your income on housing.
Generally speaking, if you make $70,000 a year, you can afford a house between $226,000 and $380,000.
How much mortgage on 70k salary?
In general, you should expect to spend no more than 28% of your monthly income on a mortgage payment.
Thus, you can spend approximately$1633-2100 a month on a mortgage.
Just remember this is relative to the interest rate, term length of the loan, down payment, and other factors.
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
28/36 Rule
But there’s one factor that trumps all the others: The 28/36 rule.
Also known as the debt-to-income (DTI) ratio.
The 28/36 rule is a guideline that says that your housing costs (mortgage payments, property taxes, homeowners insurance, and HOA fees) should not exceed 28% of your gross monthly income.
And your total debt (housing costs plus any other debts you have, like car payments or credit card bills) should not exceed 36% of your gross monthly income.
You must follow the 28/36 rule.
How to calculate how much mortgage you can afford?
If you’re like most people, you probably don’t know how to calculate how much mortgage you can afford.
This is actually a really important question that you need to ask yourself before beginning the home-buying process.
The answer will help determine the price range of homes you should be looking at. Plus know how much money you’ll need to save for a down payment.
Step #1: Check Interest Rates
Research current mortgage rates to get an accurate estimate. You can also check your credit score and search for average mortgage rates based on your credit score.
Right now, with sky-high inflation, you are unable to afford a bigger house when interest rates are hovering around 6% compared to ultra-low interest rates of 2.5%.
With a 70k salary, this can be the difference between $50-100k on the total mortgage amount you can afford.
Step #2: Use a Mortgage Calculator
Use a mortgage calculator to get an estimate of the home price you can afford based on your income, debt profile, and down payment.
Generally, lenders cap the maximum amount of monthly gross income you can use toward the loan’s principal and interest payment to not more than 28% of your gross monthly income (called the “Front-End” or “Housing Expense” ratio). Then, limit your total allowable debt-to-income ratio (called the “Back-End” ratio) to not more than 36%.
You can use a mortgage calculator to a ballpark range of what house you can afford.
Step #3: Taxes, Insurance, and PMI
When planning for a home purchase, it’s important to factor in all of your monthly expenses, including taxes, insurance, and PMI.
This will ensure that you get an accurate estimate of your home-buying budget based on your household annual income.
Don’t forget to include these payments to get a realistic understanding of your monthly budget.
Step #4: Remember your Living Expenses
When considering how much house you can afford based on your $70,000 salary, you must consider your lifestyle and current expenses.
It is important to factor in other monthly expenses such as cell phone and internet bills, utilities, insurance costs, and other bills.
More than likely, you will be approved for a higher mortgage amount than you would feel comfortable with. This is 100% what lenders will do.
They want to provide you with the most you can afford – not what you should afford.
Step #5: Get prequalified
Prequalifying for a mortgage is an important first step to take when estimating how much house you can afford.
It gives you a more precise figure to work with and helps you make a more informed decision based on your personal situation.
Remember that your final amount will vary depending on a number of factors, especially your interest rate, which will be based on your credit score.
Taking the time to research current mortgage rates helps you secure a better mortgage rate, giving you more buying power.
Home Buying by Down Payment
How much house can you afford?
It’s a common question among home buyers — especially first-time home buyers. Use this table to figure out how much house you can reasonably afford given your salary and other monthly obligations.
The assumption is 30 year fixed mortgage, good credit (690-719), no monthly debt, and a 4% interest rate.
Annual Income
Downpayment
Monthly Payment
How Much House Can I Afford?
$70,000
$9,552 (3%)
$1,750
$318,412
$70,000
$16,215 (5%)
$1,750
$324,316
$70,000
$34,058 (10%)
$1,750
$340,581
$70,000
$53,573 (15%)
$1,750
$357,152
$70,000
$75,094 (20%)
$1,750
$375,468
$70,000
$98,933 (25%)
$1,750
$395,731
**Your own interest rate, monthly payment, and how much house you can afford will vary on your personal circumstances.
Mortgage on 70k Salary Based on Monthly Payment and Interest Rate
How much house can you afford on a $70,000 salary?
This largely depends on the current interest rate of the mortgage loan you’re considering. When interest rates are high, people aren’t actively buying as when interest rates are low.
By understanding these factors, you can better gauge how much house you can afford on a $70,000 salary.
The assumption is 30 year fixed mortgage, good credit (690-719), no monthly debt, and a 20% downpayment.
Annual Income
Monthly Payment
Interest Rate
How Much House Can I Afford?
$70,000
$1,750
3.25%
$406,796
$70,000
$1,750
3.5%
$396,231
$70,000
$1,750
3.75%
$386,101
$70,000
$1,750
4%
$375,994
$70,000
$1,750
4.5%
$357,554
$70,000
$1,750
5%
$339,954
**Your own interest rate, monthly payment, and how much house you can afford will vary on your personal circumstances.
Home Affordability Calculator by Debt-to-Income Ratio
Around here at Money Bliss, we always stress that debt will hold you back.
In the case of buying a house, debt increases your DTI ratio.
Here is a glimpse at what monthly debt can cause your debt-to-income (DTI) ratio to increase. Thus, making the house you want to buy to be more difficult.
Annual Income
Monthly Payment
Monthly Debt
How Much House Can I Afford?
$70,000
$2,100
$0
$440,085
$70,000
$1,900
$200
$404,584
$70,000
$1,800
$300
$382,334
$70,000
$1,600
$500
$337,883
$70,000
$1,350
$750
$282,208
$70,000
$1,100
$1000
$226,582
**Your own interest rate, monthly payment, and how much house you can afford will vary on your personal circumstances.
Increase your Home Buying Budget
Here are a few ways you can increase your home buying budget when buying a house on a $70k annual income.
By following these steps, you can increase your home buying budget and find a more suitable house for your income.
1. Pick a Cheaper Home
Home prices vary significantly in different parts of the country.
Moving out of a major metropolitan area with notoriously high housing costs can help you find more affordable homes.
There are plenty of ways to find a home that is cheaper than you would normally expect.
Look for homes that are for sale in less desirable neighborhoods.
Find homes that are for sale by owner or have not been listed yet.
Check for homes that are for sale outside of your usual price range and haven’t sold as they may drop their price.
Move to a lower cost of living area.
2. Increase Your Down Payment Savings
A larger down payment can reduce the amount you have to finance, which lowers your monthly payment.
Plus help you get a lower interest rate and avoid paying PMI.
Putting down at least 10-20 percent of the home sale price can help boost your home buying power. You can also take advantage of down payment assistance programs in your area.
3. Pay Down Your Existing Debt
Paying down your debts such as credit card debts or auto loans can help raise your maximum home loan.
Paying down your debts can help you qualify for a higher loan amount.
This is because when you have lower amounts of debt, your credit score is higher and your debt-to-income ratio is less. This means you are less likely to be rejected for a home loan.
4. Improve Your Credit Score
A higher credit score can lead to lower rates and more affordable payments.
You can improve your credit score by:
Paying your bills on time
Paying down your credit card balances
Avoiding opening new credit before applying for a mortgage
Disputing any errors on your credit report
This is very true! We had an unfortunate debt that wasn’t ours added to our credit report right before closing. While the debt was an error, it still cost us a higher interest rate and forced us to refinance once the credit report was fixed.
5. Increase Your Income
Asking for a raise, seeking a higher-paid position, or starting a side gig can help you increase the amount of home you can afford.
While you need two years of income from a side gig or your own online business to count as income, the extra cash earned helps you to increase the size of your downpayment. Plus it lowers your debt-to-income ratio with the savings you are setting aside.
What factors should you consider when deciding how much you can afford for a mortgage?
How much house can you afford on your current salary and with your current monthly debts?
This is a question that we are often asked, and it’s one that we love to answer.
We’ll walk you through all the different factors that go into this decision so that you can make an informed choice.
1. Loan amount
The loan amount is a key factor that affects the total cost of a mortgage.
If you have no outstanding debt, a 20% down payment, a high credit score, and a 3.5% interest rate from an FHA loan, you could be able to afford up to $508,000.
However, if you have debt, a smaller down payment, or a lower credit score, the loan amount you can qualify for will be lower.
Similarly, if you choose a 15-year fixed-rate loan, your monthly payments will be higher, but you will end up paying less in interest over the life of the loan than with a 30-year fixed-rate loan.
Ultimately, your loan amount will affect the total cost of your mortgage, so it’s important to consider all the factors when making your decision.
2. Mortgage Interest rate
Mortgage interest rates can have a significant impact on the cost of a mortgage. The higher the interest rate, the more expensive the loan will be.
For example, a difference between a 3% and 4% interest rate on a $300,000 mortgage is more than $150 on the monthly payment.
Remember, in the first few years of a mortgage, the majority of the payment goes toward interest rather than trying to reduce the principal amount.
3. Type of Mortgage
The primary difference between a fixed and variable mortgage is the interest rate and the amount of your payment
Fixed-rate mortgages offer the stability of having the same interest rate for the life of the loan.
Adjustable-rate mortgages (ARMs) come with lower interest rates to start, but those rates can change over the life of the loan. ARMs are often a riskier choice, as if the economy falters, the interest rate can go up.
Fixed-rate loans are typically the most popular choice, as the monthly payment amount is more predictable and easier to budget for. The terms of a fixed-rate loan can range from 10 to 30 years, depending on the lender.
Adjustable-rate mortgages (ARMs) have interest rates that can increase or decrease annually based on an index plus a margin. ARMs are typically more attractive to borrowers who plan on staying in the home for a shorter period of time, as the lower initial interest rate can make the payments more manageable.
The Money Bliss recommendation is to choose a 15-year fixed-rate mortgage.
4. Property value
Property value can have a direct effect on how much you can afford for a mortgage.
As the value of the property increases, so does the amount of money you will need to borrow to purchase it. This, in turn, affects the monthly payments and the amount of interest you will pay over the life of the loan.
This is especially important as many people have been priced out of the market with the rising home prices.
Additionally, higher property values can mean higher taxes, which will add to the amount you need to budget for your mortgage payments.
5. Homeowner insurance
Homeowner’s insurance is a requirement when securing a loan and it can vary depending on the value and location of the home.
Additionally, certain areas that are prone to natural disasters or are located in densely populated areas may have higher premiums than other locations and may require additional insurance like flood insurance.
As a result, lenders typically require that you purchase homeowners insurance in order to secure a loan, and may have specific requirements for the type or amount of coverage that you need to purchase.
Before committing to a mortgage, it is important to consider the cost of homeowner’s insurance and make sure it fits into your budget.
This is something you do not want to skimp on as the cost to replace a home is very expensive.
6. Property taxes
Property taxes are calculated based on the value of a home and the tax rate of the city or county where the property resides.
The higher the property taxes, the more you will have to pay in your monthly mortgage payment.
In states with high property taxes, the property tax bill can be a large sum of the mortgage payment.
It is important to consider these costs when comparing different homes and locations to ensure you can afford the home without stretching your budget too thin.
7. Home repairs and maintenance
It’s important to also consider other factors such as the age of the house, since some properties may require renovation and repairs that can cost more than the house price itself.
Beyond the cost of purchasing a home, homeowners will likely have other expenses related to owning and maintaining the property.
Also, many homeowners prefer to do significant upgrades to the home before moving in, which comes at an additional expense.
These can include ordinary expenses such as painting, taking care of a lawn, fixing appliances, and cleaning living spaces, which can add up.
Additionally, it’s advisable to buy a home that falls in the middle of your price range to ensure you have some extra money for unexpected costs, such as repairs and maintenance.
8. HOA or Homeowners Association Maintenance
This is often an overlooked factor by many new homebuyers, but extremely important as some HOAs add $500-800 per month to the total housing budget.
The purpose of a homeowners association (HOA) is to establish a set of rules and regulations for residents to follow as well as maintain the community or building.
These fees are typically used to pay for maintenance, amenities, landscaping, and concierge services.
HOA fees are used to finance community upkeep, including landscaping and joint space development, and can range from $100 to over $1,000 per month, depending on the amenities in the association.
9. Utility bills
When switching from renting to buying a home, you will have to factor in the costs of your monthly utility bills such as electricity, natural gas, water, garbage and recycling, cable TV, internet, and cell phone when calculating how much mortgage you can afford.
In addition, the larger the home, the higher the costs to heat and cool your new home.
Make sure to ask your realtor for previous utility bills on the property you are interested in.
10. Private Mortgage Insurance
The purpose of private mortgage insurance (PMI) is to protect the lender in the event of foreclosure. It is typically required when a borrower is unable to make a 20% down payment on a home purchase.
PMI allows borrowers to purchase a home with less upfront capital, but also comes with additional monthly costs that are added to the mortgage payment. These fees range from 0.5% to 2.5% of the loan’s value annually and are based on the amount of money put down.
PMI can also be canceled or refinanced once the borrower has achieved 20% equity in the home or when the outstanding loan amount reaches 80% of the home’s purchase price.
11. Moving costs
Moving is expensive, but also a pain to do. So, consider the moving costs associated with relocating from one location to another.
Typically fees for packing, transportation, and possibly storage, and can vary depending on the size of the move and the distance the move needs to cover.
Also, consider if by buying a home, you will stop having moving costs associated with moving from rental to rental.
FAQ
When determining how much house you can afford, it’s important to consider several factors.
These include your income, existing debts, interest rates, credit history, credit score, monthly debt, monthly expenses, utilities, groceries, down payment, loan options (such as FHA or VA loans), and location (which affects the interest rate and property tax). Also, think about the costs of maintaining or renovating a home.
Additionally, you should also evaluate your own budget and assess whether now is the right time to purchase a home. Taking all of these factors into account can help you set the maximum limit on what you can realistically afford.
A mortgage calculator can help you determine your home affordability by providing an estimate of the home price you can afford based on your income, debt profile, and down payment.
It works by inputting your annual income and estimated mortgage rate, which then calculates the maximum amount of money you’re able to spend on a house and the expected monthly payment.
Additionally, different methods are available to factor in your debt-to-income ratio or your proposed housing budget, allowing you to get a more accurate estimate of your home buying budget.
The debt-to-income ratio or DTI is used by lenders to assess a borrower’s ability to make mortgage payments.
This ratio is calculated by taking the total of all of a borrower’s monthly recurring debts (including mortgage payments) and dividing it by the borrower’s monthly pre-tax household income.
A high DTI ratio indicates that the borrower’s debt is high relative to income, and could reduce the amount of loan they are qualified to receive.
Generally, lenders prefer a DTI of 36% or less, which allows borrowers to qualify for better interest rates on their mortgages.
To calculate their DTI, borrowers should include debt such as credit card payments, car loans, student and other loans, along with housing expenses. It is important to note that the DTI does not include other monthly expenses such as groceries, gas, or current rent payments.
Closing costs can have an enormous impact on how much home you’re able to afford.
From application fees and down payments to attorney costs and credit report fees, these costs can add up quickly and affect your overall budget. Unfortunately, most of these closing costs are non-negotiable, but you can ask the seller to pay them.
When buying a house, it is important to research the different mortgage options available to you.
You can typically choose between a conventional loan that is guaranteed by a private lender or banking institution, or a government-backed loan. Depending on your monthly payment and down payment availability, you may be able to select between a 15-year or a 30-year loan.
A conventional loan typically offers better interest rates and payment flexibility.
While a government-backed loan may be more lenient with its credit and down payment requirements.
For veterans or first-time home buyers, there may be special mortgage options available to them.
Ultimately, it is important to talk to a lender to see which loan type is best for your personal circumstances.
When it comes to saving for a down payment, it’s important to understand how much you’ll need and how much it will affect your budget.
Generally, you’ll need 20% of the cost of the home for a conventional mortgage and 25% for an investment property. When you put down more money, it gives you more buying power and may help you negotiate a lower interest rate.
For example, if you’re buying a $300,000 house, you’ll need a down payment of $60,000 for a conventional mortgage. On the other hand, if you put down 10%, you can still afford a $395,557 house. But, you will have to pay for private mortgage insurance.
In addition, there are other ways to help you cover these upfront costs. You can look into down payment assistance programs.
Ultimately, the size of your down payment will depend on your budget and financial goals. You should never deplete your savings account just to make a larger down payment. It’s important to factor in emergency funds and other expenses when deciding on the best option.
Eligibility requirements for loan lenders can vary, but in general, lenders are looking for borrowers with a good credit score, a reliable income, and a history of employment or income stability.
For most loan types, borrowers will need to show a history of two consecutive years of employment in order to qualify. However, lenders may be more flexible if the borrower is just beginning their career or if they are self-employed and do not have W2 forms and official pay stubs.
Income verification also needs to be done “on paper”, meaning that cash tips that do not appear on pay stubs or W2s can not be used as income. The lender will look at the household’s average pre-tax income over a two-year period before determining the amount that can be borrowed.
In order to make sure that the borrower is financially secure, lenders will also pull the borrower’s credit report and base their pre-approval on the credit score and debt-to-income ratio. Employment verification may also be done.
For certain government-backed loan types, such as FHA, VA, and USDA loans, there may be additional or different requirements for eligibility. For instance, for FHA loans, the borrower must intend to use the home as a primary residence and live in it within two months after closing. VA loans are more lenient, and may not require a down payment.
The qualifications for VA loans vary based on the period and amount of time the borrower has served. There are many ways to qualify, whether the borrower is a veteran, active duty service member, reservist, or member of the National Guard. For more information on eligibility requirements for VA loans, borrowers can visit the U.S. Department of Veteran Affairs.
A good credit score will mean you have access to more lending options, better interest rates, and more purchasing power.
On the other hand, a poor credit score could mean you are approved for a loan, but at a higher interest rate and with a smaller house.
This means your budget will be more limited and you may not be able to buy as much home as you had hoped for. Additionally, lenders will also look at other factors, such as your debt-to-income ratio, employment history, and loan term, in order to determine your overall affordability.
What House Can I Afford on 70k a year?
As a borrower, you need to consider the interest rate, down payment, credit score, debt-to-income ratio, employment history, and loan term when determining how much house you can afford.
A higher credit score can often mean a lower interest rate, and a larger down payment can bring down the monthly payments.
All of these factors can have an effect on the amount of money you can borrow and the home you can afford.
Ultimately, understanding the impact of different factors can help borrowers make the best decisions when it comes to getting a mortgage.
Now that you know how much house you can afford, it’s time to start saving for a down payment.
The sooner you start saving, the sooner you’ll be able to move into your dream home. But you may have to wait if you are considering a mansion.
By taking into consideration this guide into account, you can make a more informed decision about the cost of a mortgage for your new home.
Know someone else that needs this, too? Then, please share!!
Mike and Georgia had looked for six months before they found their perfect townhome. Like many buyers, they were more worried about the sellers accepting their offer than they were about investigating the Homeowners Association (HOA). Turns out, the HOA almost ruined the deal. Because the HOA had let their FHA approval lapse, Mike and Georgia were not able to go with an FHA loan. When they switched to a conventional loan, they had to drain their savings in order to qualify for the higher debt-to-income ratios. At this point, they took a more careful look at the HOA’s meeting notes and were alarmed to read that roads would soon need major investments and that HOA fees had been rising higher and faster than local rents for the past five years. The entire scenario was a nightmare, costing Mike extra time and money—and he now gets to pay the association a pretty penny every month for the hassle.
HOAs aren’t usually top of mind when you’re looking to buy a home. In fact, HOAs can be completely overlooked until you learn that your dream house comes with one.
If you’ve carefully figured out just what you can afford to spend every month on a mortgage and then get hit with the added expense of an HOA, you may find your perfect home suddenly out of reach. But all the HOA news isn’t bad. Sometimes the benefits of an association can make homeownership more manageable—especially if you’re used to apartment or condo living.
Whether an HOA is part of your home shopping wish list or not, here’s everything you need to know to make a smart decision when it comes to joining an HOA.
What is an HOA and why do they exist?
One Salt Lake buyer, Kip. A., shared this insight, “HOAs are meant to ensure that a community maintains a good standard of upkeep and generally do a good job at that. Some HOAs might include lawn care, snow removal, and community amenities such as a clubhouse or pool.”
Homeowner associations are legal entities that exist to govern a planned community like a subdivision or apartment complex. HOAs ensure that certain rules and regulations (like what color you can paint your front door) are followed, and usually take responsibility for maintaining common areas like parking and sidewalks. An HOA will typically take care of at least some of the landscaping and exterior home maintenance.
As Kip noted, they can also provide community amenities like a pool, fitness center, and park areas. In some instances, HOAs provide road and waste management to areas that are outside city service areas. HOAs are funded by membership fees that are required to live on the property. Fees can range from $75 to more than $400 per month, depending on the neighborhood and the services provided.
Things to watch out for when it comes to an HOA
If you fall in love with a home that has an HOA, this is your must-do list before putting in an offer.
Dig into the fees: Find out what the current fees are, what they cover, and how often you can expect increases. Most HOAs in Utah have some limits on how much fees can be increased without homeowner approval. However, the board can usually approve a minimal increase without asking for input or taking a homeowner vote.
Verify what your fee covers: Be very specific when you look into what your HOA fee covers and what it doesn’t. If landscaping is included, find out the specifics—how often is the lawn mowed and edged? Is tree and hedge trimming included? What if you have a broken sprinkler? Verify policies for snow removal, waste and recycling, and which portions of your home are covered for repair under the HOA’s homeowners insurance policy.
Ask about big projects: HOAs need to maintain things like roofs, fences, and community amenities like swimming pools. Find out if any big projects are on the horizon and what the costs look like. Sometimes HOAs will impose a special assessment on top of your monthly fees in order to pay for something big like re-tiling the pool.
Read the minutes: HOA meeting minutes are public and available to all homeowners. Ask to review recent minutes, which should include the latest financials. Look for any complaints that seem consistent and note outstanding HOA fees from owners who are in arrears. The minutes should also include how much money is currently in the reserve account for emergencies and big projects. This can give you a clue into the health of the community and the potential for extra fees and increases.
Study the CC&Rs: The HOA governs the CC&Rs (Covenants, Conditions, & Restrictions) of the community. These are the rules that let homeowners know what modifications are allowed (painting, shutters, etc.) and what is not allowed. Some communities have liberal policies and others are highly restrictive, not even allowing wreaths on front doors or more than one small pet. Owners are fined if they violate the CC&Rs, so it’s highly important to understand what they are and whether or not you can live with them.
Life with an HOA… advice from Homie buyers and sellers
Many Homie buyers and sellers have lived with HOAs—and some have passed on a house because of the HOA—and wanted to share their experiences to help other home buyers.
Rob T. warns homeowners of the costs of an HOA over time, “Make sure that you understand the long-term costs of an HOA and consider if they are providing value equal to that cost. Since you are paying them monthly, make sure they doing their job. HOA‘s can be hit or miss. Some provide great value while others create huge hassles. Where possible, check with current residents in the area to see what they say about their HOA before you buy.”
Justin P. shared why he likes his HOA, “I like having an HOA to protect my property value from gross negligence or outrageous and inconsiderate decisions by neighbors.” However, he added this advice, “Read the CC&Rs to know what restrictions you may have as a homeowner, but judge the HOA’s ability to protect your property value by browsing the existing neighborhood to see how well kept it is.”
Clinton M. cautions potential buyers about possible fines and liens, “When purchasing a home in an HOA neighborhood, be well aware of the fact that your neighbors will be on the lookout for any infractions and are willing to turn you in (subjecting you to fines) for any violations. Be advised that your failure to pay your dues will result in a lien against your property and you can be foreclosed upon by your community. Not surprisingly, the community interest is at stake – if the HOA bankrupts, it goes on your credit too! The best advice I could give to any family or friend would be to think twice about purchasing in an HOA community.”
Homeownership is exciting, and it’s important to feel confident and comfortable about the community in which you buy. If an HOA is part of the package, be sure to do your research first. It’s nearly impossible to get out of HOA requirements and restrictions, and if you’re not happy with how yours is run, you could be in for a world of headaches, extra fees, and disappointment.
Last Updated on February 25, 2022 by Mark Ferguson
Finding a great rental property can be tough. In many markets, prices are increasing and being able to make money on a single-family house or multifamily building is difficult. One option is to buy the cheapest homes you can in your area and make them a rental. You can also buy a townhouse or condo and turn into a rental property since they are typically less expensive than a single-family detached home.
I think a townhouse or condo can be great investments, but you must look at the numbers closely. There are many costs associated with condos like HOA fees. The appreciation also may not be as much on condos and there are some very scary issues that can cause a great condo or townhouse investment to become a nightmare.
Why are condos and townhouses so much cheaper than houses?
Before I get into the pros and cons of condo and townhouse investments, I want to be clear on what a townhouse or condo is. A condo is a unit within a large complex of apartments or other condos. There may be units beside you, above or below you. You rarely have any yard except a shared space with other units.
A townhouse might have a small yard and may have neighbors beside the unit, but not above or below. Townhouses are typically worth more than condos because they have less connected neighbors and some land.
Both condos and townhouses are worth less than a single-family home that is otherwise similar.
How does an HOA work on a townhouse or condo?
Almost every townhouse and condo will have an HOA. The HOA takes care of the shared land in the complex and most HOAs take care of the exterior maintenance and landscaping. Many HOAs also pay for the water on a condo or townhouse and they may provide common amenities like a swimming pool, clubhouse or tennis courts. Some single-family neighborhoods have detached homes that are in an HOA as well. The HOA fees are usually much higher on a condo or townhouse because the HOA takes care of many more things. Here is a list of many things an HOA takes care of on a single-family detached home, patio home, and a condo or townhouse.
——————-Condo/Townhouse Patio Home Single-Family
Common Amen. Yes Yes Yes
Landscaping Yes Yes No
Water Yes No No
Exterior maintenance Yes No No
Exterior Insurance Yes No No
Clubhouse/pool Yes Maybe Maybe
Trash/snow removal Yes Maybe No
If you are wondering what a patio home is, that is usually a single-family detached home that has an HOA that maintains the lawn. The condo and townhouses have much more involved HOAs, which makes them much more expensive.
In my area in Northern Colorado, I see HOA fees for most single-family detached homes $400 or less a year (if they have an HOA). HOAs on condos or townhouses can are usually at least $100 a month and in some cases $400 a month. HOA fees can be even higher in larger cities with complexes that have security and many more amenities. Only one of my rental properties has an HOA and it is $300 a year.
Is it a bad thing to have an HOA on a rental property?
I have no problem with having an HOA on one of my rentals. The HOA takes care of the common amenities in the neighborhood and I have never had a problem with them. The only other job of this HOA is to make sure all the homes in the neighborhood are in compliance with the rules and regulations of the HOA. Many HOAs don’t allow work trucks to be parked outside, or excessive junk to be stored in the yard. For many people, this is a good thing and for others a bad thing. As a landlord, I think of it as another set of eyes on the property and I think it is a good thing to know if the tenants have junk everywhere or are not mowing the yard.
I don’t think having a small HOA with few responsibilities is a bad thing. A larger HOA will provide many benefits as well. Even though a larger HOA will be more expensive, it will lower many costs for a landlord. The HOA will pay for exterior insurance and maintenance, which will reduce the landlord’s expenses. The HOA will handle yard maintenance and snow removal, which can lower the landlord’s expenses as well. In my case, I invest in single-family homes and I have the tenants take care of the lawn and pay all utilities themselves so that does not save me much money.
HOA special assessments
The problem with a large HOA is they can create special assessments if they need more money for any major repairs or financial problems. I know of a couple of landlords who had their HOA fees increase greatly in a one-year span because the HOA had to repaint the exterior of the entire complex. The HOA fees went from just over $100 a month to $200 a month for every condo in the complex. Another HOA imposed a $30,000 special assessment on every single condo in a complex to pay for improvements. This particular landlord was planning on flipping the condo and all his profit disappeared with this assessment.
The HOA cannot impose a special assessment or raise the HOA fees without agreement from the HOA members, but in many cases, the members don’t show up to HOA meetings to oppose the changes. If you are buying a condo or a townhouse that has a fixed HOA fee, that does not mean it cannot be raised or a special assessment is levied upon the property.
Will the HOA allow rental properties?
Another problem that can come up with HOAs and rental properties is that some HOAs may not allow rental properties! My office recently had a home listed that was in an HOA and the HOA decided they would no longer allow rentals. The property was used as a rental property so the owners decided to sell it. Then the tenants decided to stop paying due to covid and it was a nightmare for the owners.
Be aware that HOAs can decide to ban rentals although it is rare.
Will condos or townhouses appreciate as much as detached homes?
Another factor to consider when buying a condo or a townhouse is the value of the property. Condos and townhouses are cheaper than detached homes because they are cheaper to build and demand is higher for single-family homes. You also own more land and have lower HOA fees with a single-family house. When you have an HOA fee that also reduces how much a borrower can qualify for when they get a loan. Usually, the condos and townhouses with the highest HOA fees will be worth less than similar condos or townhouses with lower HOA fees, because more buyers can afford them. A $100/month HOA fee could reduce the amount a buyer can qualify for by as much as $20,000.
I don’t invest for appreciation, I invest for cash flow when I buy rental properties. That does not mean I do not consider possible appreciation or depreciation on the properties I buy. There are some people who prefer a condo to a detached home, but most people want a detached house. In my area condos are the first to start losing value in a down market and the last to increase in value in an appreciating market. While condos and townhouses can appreciate and often do, single-family detached homes tend to appreciate more. It is the land that is causing the appreciation and detached homes have much more valuable land.
How can FHA rules affect condo prices?
FHA will loan on condos and townhouses, but they have very strict rules. FHA will not allow a buyer to use an FHA loan to purchase a condo in a complex if there are too many investors in that complex. If there are more than 50 percent investors in a particular complex FHA won’t lend to anyone in that complex. FHA is a very popular loan and it can greatly decrease values in a complex if the units cannot be sold using FHA. Here are some more requirements for FHA loans being used on condos. Even though conventional loans do not have to abide by FHA rules, some banks will also have guidelines similar to FHA to lend on a condo.
Is it smart to buy a condo or townhouse for a rental property?
As you can see there are many factors you must consider when investing in a condo or a townhouse. The number one factor should be cash flow and how much money you will make. You have to remember to factor in the HOA fees and the possibility that they may increase in the future. If you buy a condo in a complex that is older and will need work soon, you may see a huge increase in HOA fees or a special assessment. If many investors decide to buy units in a complex it could greatly lower the value of every unit due to FHA rules and don’t expect as much appreciation.
I think you can make money with condos, but given similar returns between a condo or townhouse and a single-family detached home, I will take the detached home every time.
My book, Build a Rental Property Empire, goes over my personal rental property strategy in depth. It covers how to find deals, finance rentals, manage them, and much more! It is available as a paperback and ebook on Amazon or as an audiobook on Audible.
Last Updated on February 25, 2022 by Mark Ferguson
The 50 percent rule is one way to estimate expenses on rental properties. The 50 percent rule states that the expenses on a rental property will be 50 percent of the rents. The 50 percent rule does not account for any mortgage expenses. One of the biggest mistakes new rental property owners make is underestimating the expenses on rental properties.
This rule is widely used on many online forums and by many investors, but I do not think it is something that should be used by all landlords on every property. I personally do not like rules that assume all properties are the same and perform the same. I prefer to run the numbers on each property to make sure everything is accounted for and the potential returns are as accurate as possible.
How is the 50% rule used to estimate expenses on rental properties?
The 50 percent rule states the expenses (not including mortgages expense) on a rental will be 50 percent of the rent.
Many investors use this rule to judge the profitability on a rental and only this rule. However, I think using a blanket rule like this is not the best way to analyze a rental property. I also do not like the 1% rule. Here is an example of what the 50 percent rule would say the expenses are on one of my properties.
Rental property number 4
Rent: $1,600 a month
Expenses: $800
Mortgage payment: $740 (without taxes and insurance)
According to the 50 percent rule I make about $60 a month on this property. However, I make much more than that. If I were to use my cash flow calculator, it shows I am making over $350 a month on this property. What is the difference? On the cash flow calculator, it figures all of the expenses, it does not use a blanket rule. Here are the expenses on this property using my calculator:
Property Management: $128
Taxes: $83
Insurance: $50
Maintenance: $160
Vacancies: $80
Total: $501 a month
The difference between my estimates and the 50 percent rule is $300 a month or $3,600 a year. Are my expenses really this low or am I just making stuff up? I did an analysis of my rentals last year and my expenses were almost exactly what I had estimated them to be. I have had rental properties since 2010 and my estimated expenses have been very close to what the actual expenses have been. This was not just a one-year anomaly.
To avoid tenant problems proper screening is vitally important and we now use SmartMove for credit and background checks.
Why does the 50% rule show the expenses are so much higher than what they actually are?
There are a number of factors why I do not like the 50 percent rule and I think it can overestimate the expenses on rentals. The biggest reason I do not like the rule, is it assumes all rentals will have basically the same expenses in every state and on every type of property.
Property Taxes: The property taxes in every state can vary by a huge amount. In Colorado, my taxes are less than $1,000 a year on most of my properties. In other states, those same properties would have taxes five times that amount. The difference in expenses on taxes: $80 a month versus $400 a month.
HOA dues: If you own a condo or townhome the chances are you have HOA dues. Many single-family homes have them as well. I have one rental with an HOA and the rest have no HOA fees. Some HOAs can charge hundreds of dollars a month. The difference in HOA expenses: $0 versus $200 a month.
Vacancies: Different types of properties have different vacancy rates and so do different towns. In Colorado, we have had extremely low vacancy rates. In some cases and years, the vacancies have been under 1 percent. In other parts of the country, the vacancy rate is over 10 percent. Single-family homes typically have lower vacancies than multifamily homes. College rentals will have much higher vacancies than other types of rentals as well. Some properties may have 5 percent vacancies expenses and others may have 15 percent or higher. The difference in vacancy expenses: $80 a month versus $240 a month.
Maintenance: Properties will need work, even if they are brand new. The amount of work will vary on the condition of the property and the type of property as well. Multifamily usually has more wear and tear than single-family and college rentals can have much more wear and tear. The older a property is, the more maintenance it will require. The worse shape a property is in, the more maintenance it will require. The maintenance expense can vary from 5 to 20 percent as well. The difference in maintenance expense: $80 versus $320 a month.
There are other expenses that will make a huge difference as well like insurance. If the property is in a flood or hurricane zone it will have much higher insurance. As you can see the expenses on similarly priced rentals, that may cater to different tenants, in different areas of the country can vary from $400 (once you add insurance and property manager) a month to $1,160 a month! If we took the same $1,600 in rent that I am getting on rental property number 4. My expenses could be 25 percent of the rent or over 70 percent of the rent. These are extreme examples of what the expenses may be on rentals, but they show how different properties will have much different costs.
What other reasons make the 50% rule inaccurate?
Another problem with the 50 percent rule is it uses the rent to determine the expenses. When I bought my fourth rental property in 2012, it rented for $1,300 a month. The rents have gone up over the last three years to $1,600 a month and it may rent for more than that if I were to get a new tenant. Look at how much the expenses changed because my rent increased.
With $1,300 a month in rent, the 50 percent rule says my expenses are $650 a month
With $1,600 a month in rent, the 50 percent rule says my expenses are $800 a month.
Did my expenses really go up by $150 a month because the rent is higher? It could be argued that because the rent is higher my vacancy expenses would be higher because when a month’s rent is missed I would lose more money. I agree with that but here is how much my vacancy costs would increase using different vacancy rates.
5 percent vacancy: Expense would increase from $65 to $80 a month
10 percent vacancy: Expense would increase from $130 to $160 a month
15 percent vacancy: Expense would increase from $185 to $240 a month
Even with 15 percent of the rents accounting for vacancies the increase would only be $75 a month, not $150 a month. With a 5 percent vacancy allowance, the extra cost is only $15 a month. Maybe the other expenses would be higher with the higher rent? My property taxes have gone up slightly, but less than $10 a month, my insurance has not increased, my maintenance has not increased, but my property management has. If we look at property management the increase is about $22 a month. On certain properties it possible that the expenses would increase $150 a month when the rent changes if many other things change as well. It is also possible that the expenses would not change much at all, which is the problem with the 50 percent rule. It is a blanket rule that does not account for the different expenses that different properties will have.
Conclusion
The 50 percent rule might be dead on for some properties, but for other properties, it could be hundreds of dollars a month off. This is why you cannot rely on a blanket rule to figure the expenses. You need to write everything out or you can use a cash flow calculator to help you know what all the expenses are. Knowing the exact expenses will make you a better investor and help you figure out what is and is not a good rental property.
We’re about to let you in on a little secret. Come in close, we promise it will be worth it, especially if you’ve been in a constant state of panic on how to truly price your house.
So are you ready? The secret to selling your house as quickly as possible for the greatest cash possible is … to find the dollar value both you and your buyer are happy with. That’s it. Sorry. Kind of anticlimactic, really.
The truth is, there’s no big secret those slick real estate agents are keeping stashed away, concealed in a safe, written in code on a device which self-destructs in five seconds Tom Cruise-style. It boils down to doing your research, maintaining realistic expectations and putting in the hard work.
We know it sounds hard and time-consuming, but we promise, it can actually be kind of fun! Let’s take a closer look.
The Home Pricing Tightrope
We can’t emphasize this point enough. Finding the right price for your home requires compromise. Sure, you may fondly remember your dad and his bicycle shorts parading around the yard with a weed wacker, but your buyer isn’t wearing those rose-colored spectacles. They’re seeking a house they can eventually turn into a home, and for now they have no memories to build on.
Which brings us to the cardinal rule of pricing your home. It’s a balance. For better or worse, it’s a tightrope you and your buyer will need to walk together.
This balancing act also has big implications for how you set your price to begin with. Here’s a slightly scary statistic for you:
Interest in a home market listing trails off sharply after about three weeks. That’s not a lot of time! In a mere 21 days, your property listing transforms from new and fresh like 2014 Jennifer Lawrence to “Oh yeah. We saw that one. Next” 2018 Jennifer Lawrence.
That doesn’t give you a ton of time to capitalize on that initial surge of interest. But there’s one effective way to start your tightrope walk on the right footing. Drum roll please….
List Your Home Below Market
Gasp. We know. How dare we. But here’s what happens: Most buyers will have a Realtor doing a lot of research on comparable homes. An underpriced home will stick out like a lime, polka-dot chimney. You can bet your home will end up on your Realtor’s short-list of early recommendations, and with any luck, buyers will look at your opening price and experience that thrill we all know and recognize — the thrill of a bargain.
Bam. They’re intrigued. They want to see this amazing (and really quite reasonably priced) house. They even like the lime, polka-dot chimney! Right there, you’ve set out on the pricing tightrope on the right footing. With any luck, other buyers will see it too and you may end up on the receiving end of a bidding war, which is a very good war to be in if you’re the seller.
Price Drops Can Scare Buyers Away
It can certainly be tempting to start with a higher price. But if no one bites, at some point you’ll have to lower your price anyway. When the price drops on a home, it’s often perceived as undesirable, making your house essentially the Urkel of the block that no one wants to take to prom.
Realtors working with their buyers might even see the price drop and keep their buyers away, focusing instead on other opportunities.
Shameless plug fact #1: It takes Homie only 16 days to sell a home. On top of that, you can save the 6 percent Realtor commission ($18,000 on a $300,000 home), and add a new polka-dot chimney to your next new home.
Here endeth the lesson of the home pricing tightrope and the importance of reasonable expectations! Let’s turn now to an equally important truth nugget in getting a great price on your home: research.
Zig When They Zag (With Careful Research)
We’ve all had a bespectacled, chalk-throwing teacher inform us at some point in our lives that Knowledge is Power. And when you’re selling your home, it’s certainly a lesson to remember.
Information is going to be your best friend as you negotiate the selling price of your home, giving you answers to the questions your buyers will inevitably ask. In short, it lets you know just how much “give” you should yield to their “take.”
So, what information should you have at your fingertips?
Comparable Home Sales
It’s imperative (serious face) that you look at homes for sale in Phoenix or Salt Lake City that are similar to yours. This means equivalent bedrooms, square footage, year built, and style. The more detailed you can get, the better comp you’ll come up with for your home. This gives you a hard line that is simple yet powerful: you know your home’s value. But wait, there’s more!
As a reward for this dedication to data (ya nerd), you’ll also gain a useful insight into how long your home is likely to stay on the market. Staying within your comp range will increase your probability of selling the home within a similar number of days as other homes you’ve comp’d against.
Sales of Homes in the Same Neighborhood
Comparing your home to those all over town won’t do much good. You need to compare apples with apples (or whichever fruit you prefer). To do that properly, you’ll need an insight into what factors drive prices up and pull prices down. Major lines of separation such as freeways, train tracks, and rivers often create natural borders. There may simply be a perception that houses on side X of the freeway belong to the less desirable neighborhood, while those on side Y magically belong to the good part of town.
If you don’t have that information, go out and find it. Looking at HOA divisions is a great place to start. HOAs usually have similar homes, making comparing homes more practical. There are exceptions though. If a HOA neighborhood backs up into mountain foothills (and has great views) they’ll tend to have higher comps, so avoid the million dollar listing unless you can touch Camelback Mountain from your back porch.
Failing that, talk to people! Find a local expert, sit them down with a margarita or a spiked iced latte, and interrogate them if necessary. Avoid shining a bright desk lamp in their eyes though. Most people consider that rude.
Price Per Square Foot
Then there’s more practical information to gather. Square foot pricing can really simplify comps. There may be a larger home within a neighborhood that obviously costs more. But is it a good value? If the average square foot cost is $120 per square foot and the large home is $130 per, it isn’t too overpriced. On the other hand, if the larger home was $165 per, that could be a problem.
Sales Over the Last Three Months
Another good factoid to have up your sleeve is how “hot” the market is right now. Looking at sales over the last three months will give you a good idea on the trend. Are sales slowing, going flat, or increasing? If you’re about to list your home and sales are slowing, you might need to come down on your initial list price to get ahead of slowing sales.
Shameless plug fact #2: As a licensed real estate broker, Homie merges all this deliciously useful info into one, convenient Home Value Report. This report is your best friend in helping you zero in on pricing that hits the “sweet spot” for both buyer and seller.
When Selling Your Home, Avoid Your Inner Alec Baldwin
Thus far, we’ve looked at two very practical foundations for selling your home at the right price: balanced expectations and careful research. This final piece of the sales puzzle might seem a bit “feely touchy” by comparison, but it’s no less important. In fact it may be the “one piece to rule them all.” Such a nerd.
It’s nice to be nice. Or as grandma used to say, you catch more flies with honey.
While you can get caught up on all the activity that goes into selling a home in Phoenix, don’t forget that there’s another party involved. You want the best price. That’s understandable. But so does your counterpart. In a sense, you share a common goal: to close the deal and leave the situation a winner.
If you and the other party seem far off on price, don’t give up just yet! You can always counter by getting closer to their price, adding an incentive, or other tactics that can get both sides closer to a deal.
If they see you giving a little, they’re likely to give as well. The selling process can actually be fun, and you might even end up actively working together to build the greatest possible outcome for both parties. Awwww.
Pricing your home right and making a successful sale is always a journey. It takes balance, research, and a willingness to work with your buyer. Fortunately, you have excellent resources at your disposal! With Homie, you have a powerful licensed real estate broker right at your fingertips and for a fraction of the cost a traditional agent charges.
Give yourself the best chance of getting it right. Give Homie a try. You’ll save on both time and commissions.