Real Estate: Buying and Selling

In a matter of 48 hours we're seeing some crazy stuff on the news. We're seeing things that I don't think anyone expected. And I was reading some blogs last night and it was really interesting. There was a lot of question, this is a local blog, so meaning North Carolina, but really interesting how many people asked if they could change their vote.

What?

Yeah, so I don't know what is causing it, but I think with a lot of new information being put across the airwaves about something other than the current president, I think it's caused a lot of people to second guess a lot of things. And who knows what's true, but boy, it just does not seem like this election is going to reach the finish line without a lot of uncertainty and change. And I think the market might be reflecting that today and yesterday. Yesterday was a nose dive. We have a similar setup today, which we've been writing about that for months.

We expected the market to get a little volatile going into the election, so I really don't think any of us are walking around surprised. We certainly didn't have our head in the sand. We started talking about this, gosh, back at the beginning of the summer really. And so no shock, but it's gonna be like that, I think, over the next several days until the markets know who's gonna be in the White House on January 20th. I think we're going to see the volatility, so it's here to stay for a while. But again, we've been saying that all summer.

Oh yeah, and if you haven't read our market perspective, go to our website, to our blogs, and Phil's latest market perspective was just put out this week, and it speaks to that. The past couple of market perspectives have, so he's right, we've been chatting about it for a while.

Yeah, and I think the most important thing that we talk about is, instead of focusing so much on the volatility, companies like BlackRock and so many other great wealth management firms or mutual fund or ETF firms, the one thing that they've proven through the decades is trying to time the market based on an election, it's never worked. We get volatility, but it's usually short-lived, and it's typically not something that creates major problem for portfolios. They generally recover pretty quickly if they go down.

But I think the biggest problem that the consumer has is when they sell out, it's trying to get back in. And then all of a sudden you've got this race to time it just right, and no one's ever done that effectively. So we're off about eight percent in the last several days, which in our opinion creates buying opportunities. So not a time to race to the exits. If you believe in this economy and you believe in our country and you believe in these companies, we're talking about some of the best companies in the world. If they're all gone, we got a much bigger problem. So in our opinion, you stay invested with great picks, great selections, great stocks, and you buy them when they're coming down and increase your holdings. So maybe some good opportunity here.

Yeah, we won't call it a great day, but in our eyes it's pretty awesome day to go by.

Yeah, yeah. Between yesterday and today we've got nice pull back here, and some things are on sale, so we'll see how that turns out. Let's talk a little more about conversation for this show, which is going to dig us into real estate. An unusual topic for us, but we're going to talk about real estate.

We are. And Phil says it's unusual, however, we are here for planning purposes. And when you are buying or selling a home, which is, those are the two sides of coin we'll talk about today, you need planning in place. Especially with interest rate solo and everyone's, yeah, a lot of people are moving remote for work, so they're saying, oh my gosh, I can live wherever, or I can move, I have all of this cash right now, and interest rates are low. So people are, this is a hot topic. I think everyone is at the forefront of their mind.

That's a great point. We do talk about real estate a lot. It goes into every plan that we construct, and it usually represents, for the average American, it represents the largest asset that they own. So to that end, you're right, we talk about it a heck of a lot more than maybe I give credit to. And so I think maybe it's a better subject than I realized. But we're in an interesting time with interest rates being at all time lows. We've seen, we've had clients refi or buy new properties, oh my gosh, two and a half percent on a 20 or 30 year note.

Yes. Yep.

My goodness, that's enough to get anyone's attention. I think you're right, with the remote workforce and all these other things going on, there's a lot of moving parts right now. But I think people are motivated to buy, first, because there is this thing in the air. It's not just the low interest rates, it's the excitement that real estate has rebounded so much post COVID, and it is setting records all over the country. So I think people, we talked about herding biases.

Yes.

So the more people that buy, I think the more follow. So everybody gets excited and let's go buy a house, and I think that's happening. But then if you add low interest rates to that, man, you get a recipe for some major selling, major buying.

It is truly, truly a seller's market right now if you want to sell and make some money on your house, as long as you want to move. So your point is, does it make sense to do this, right? But if you are ready, then yeah, absolutely do it now, put it on the market. But be sure you're ready, because if you put it on the market, the average sell time is less than three weeks right now. It is crazy. And I hear a lot of people talking about one day, two days, three days with multiple offers.

Right, yeah, it's crazy. We have our neighbors to the back put up their Intracoastal sign that says, not coming soon, something to that effect. And I have a feeling somebody's gonna snatch it before it actually, it'll never hit the market, I don't think. It will never get the full listing out there before people are calling to look at it. And the listing's not on Intracoastal's website yet either. So I have a feeling, because that's been up probably two weeks, I have a feeling somebody's already swooped in, has contract on it. It's nuts. You went through a home purchase this year. You saw how fast homes were moving.

Oh boy. We sold and bought, and literally we put our home on the market on a Wednesday night, and we had a live contract, had a couple of offers coming, but by Friday we knew it was sold, and even the negotiations were done mostly by Friday, and contract signed on Saturday morning. So three days and it was out. It is crazy right now. So if you don't want to sell your house, do not take a chance to just, a lot of people say, let me just see what will happen, somebody's going to buy this for an outrageous price. They will. Don't put it on the market unless you want to sell it, because people are paying, they're overpaying, they're getting into these bidding wars, particularly if the home is in a certain price range.

Speaking of price range, what can we afford? What should we afford? What does this look like, Sarah?

So this is an interesting question. It is. And really we go to the lenders, because they're the ones at the end of the day that set a lot of these boundaries, because most people are not paying cash for their home. They're getting a loan. And I know when we were working with lenders, and I ran across the internet, and I've seen it in my studies too, 28 to 30 percent is really, of your gross monthly income, is what you want to be paying towards your mortgage. And that's what they are looking for on whether or not you'll get approved or not.

Everything with a bank is debt to income ratio driven, and if you have too much debt, they're going to push down the amount of mortgage you can qualify to receive. And so it all goes into the same bucket when they're looking at your cost. And so gross income, and then all of your expenses, so everything, and then how much mortgage can you afford. So the mortgage piece can be roughly 25 percent. I think they typically want to see 35, no more than 40 percent total debt to income. Is that about right?

Yes, that's about right. I was working with Jason on one of his clients, and I don't know what they were purchasing, but we were working with the banker, and that was kind of the magic number.

I think if you're 40 or under and you've got great credit, when now is a good time to be buying. You can get a lot of home, low interest rate, lock it in. You can lock it in. I've been in this business a long time, I've financed a lot of things, and I've owned a number of homes, and I never remember interest rates being sub 3.

Well, they are not for 30-year money, right?

Maybe 10-year money, maybe 20, we've seen it get close to that. But even at the height of the recession in, say, 2009, 10, when rates were falling, but not two and a half. And I've been hearing numbers consistently around two five, two six, two six four, two six five. That is cheap money, and a lot of experts think it goes lower before we hit next summer, which is insane.

I know. I had a recent meeting with clients down in Georgia, and we were discussing refinancing for them, and there's that sense of urgency for people right now. So they're panicked: oh my gosh, your interest rate's gonna rise. Don't let this be a stressor. It shouldn't be a stressor.

And I think you're right, though. A lot of people are beginning to have this real sense of consternation, and they're thinking, oh my God, rates are going to go up drastically and real quick.

Yeah, that's what they're thinking.

They're not. There is absolutely nothing that's going to drive rates. The Federal Reserve, just so everybody listening knows this, the Federal Reserve has made it clear that while they were looking for a certain level of inflation to think about raising rates again, now they have made it clear they're going to let inflation overshoot, simply because they want to be sure that the economy is on solid footing. We don't really have a lot of inflation in the picture right now. It is starting to show in certain areas, and particularly in areas that have been overrun, like building. So the housing market, we've seen lumber prices and materials go up in well over inflation. Precipitous. It's been crazy how much they've gone up. Someone told me recently that a 2x4 that cost 2.50 today is selling for around six dollars, so that's a huge increase. So we're seeing some big time change in those calls, but overall inflation is not a major issue at the moment.

So to think that rates are going to all of a sudden rally, and then here's the other thing, we've just put about, what, several trillion dollars on the balance sheet, and they're talking about another multi-trillion dollar deal. That by itself says that interest rates aren't going up anytime soon. That is going to absolutely depress rates. So I'd say if you're trying to make a decision, don't be rash, right? Just chill, take a chill and take a chill pill. You got some time here. Don't get crazy.

Don't get crazy. One thing to not get crazy about is how much home you can afford. So we're talking about that, and a lot of our listeners may know and some may not, if you've never bought a home, if you're in a certain age range, purchasing a home is Greek, and until you go through it once, you're really not going to understand all of it. I can speak from experience on that.

It's true.

But there's a lot of things that go into that monthly payment that, again, your lenders are going to look at, right? Those are going to be principal, interest, taxes, and insurance.

Boy, nobody likes that one.

No, nobody likes the taxes either.

No. Well, obviously taxes are a big deal. It's been one of the things most talked about heading into this election, so if you don't like taxes, pay attention to that. But principal, interest, taxes, and insurance, that's a lot going into what most people think is just simply a payment for the home.

Oh, absolutely. But that payment is driven by multiple factors, and in addition to these, insurance, you're speaking of traditional homeowners insurance, but then if you live, say, where Sarah and I live, on the coast, and so on the coast you have another set of insurance. If you're close enough to the water, you might be obligated or required to have flood insurance and wind insurance, and all of a sudden that can add significant dollars to that mortgage cost, because they'll bundle all of that with these other things that Sarah's talking about. So I have seen flood or wind and flood insurance

be in the ten to twenty thousand dollar range if you're living near or on the water or in a flood zone, right? And there's a lot of flood zones around here.

Yes, absolutely. And another one is PMI, so private mortgage insurance. And that is if, say, you don't have the cash flow to put 20 down at the moment, but you can still lock in that great interest rate, you really want to do it, you have to add PMI to that monthly payment. And that can also just really skyrocket that monthly payment.

Yeah, a lot of people don't want to put the down payment into their new property, or they don't have it, right? So you take a lot of folks right out of school, maybe we'll take a doctor for example, or a dentist. They can qualify for nearly a hundred percent of their mortgage, and that's because the bank believes that they're a good risk. They're going to be able to make enough money to pay that debt.

Well, having to pay that extra insurance can be pretty costly, and it also, it's there for a reason, and there's a reason why 20 is the number. So we won't get into those details, but I'll tell you, if you don't have enough to put as a down payment on a home, now might be the only time that I would say, okay, maybe we'll consider doing it, because interest rates are so low. So you've got an incredible offset right now. But generally speaking, you need twenty percent down to give you a much better set of numbers on that mortgage, and it creates less risk for you.

Because we saw in 2008, Sarah, when home values took this incredible nosedive, people that didn't have enough equity in their homes, they were upside down. And so all of a sudden these repossessions, if you will, or foreclosures were happening. No matter where you looked, there was foreclosure going on everywhere. And a lot of that was because not enough equity had been built in that home, so they were financing way too much money. And back then, you may not remember this because you probably weren't buying a home then, but—

No, I was sitting in English.

Yeah, you were still in. Yeah, so, but in that period we had no doc loans. So you didn't have to show your tax return or anything else.

I can't imagine this.

You remember what your banker asked for when you bought your home?

My God, everything but your left arm. They want to come live with us for a month.

100. And they probably ask you for your firstborn. So here you've got to give all this data, but back then, I am not exaggerating, you could walk into a bank and you could choose one of two programs. You could do a stated income, so you just simply said, okay, I make X dollars, and you'd pay a little higher interest rate for that, but they took your word, right? Or you could do a no doc, and very little documentation that the bank needed. And I think everybody knows that ended in a really ugly way. So we had a calamity, to say the least.

Today, I think people realize that putting a good down payment on a home makes a heck of a lot more sense, because then you have a little bit of leeway there. If markets come down a little bit, or real estate values come down, you're not going to be upside down that quick, and you have less of a, there's lesser chance for a foreclosure.

Right. So the main point of all this is when you are buying, make sure that you are planning for everything. A couple of things that I don't think I even put on there were closing costs, inspections, moving cost. Those are a huge, they may be one-time things, so you're not really planning to do that monthly, but that is a very large cost that you may not be prepared for. You may not realize you're going to have to dole out.

Well, and here's one of the things, and I blame this a lot on bankers, because some of them are not thinking about the financial solvency of the client in every way that they should. They're thinking about, can they make the payment? That's all I really care about. They want to get the mortgage in place, that's how they get paid. But I think a lot of times they should step back and recognize that when they show up a person how to roll all of those expenses into the mortgage—

Oh gosh, right.

So for example, they'll say, hey, you qualify for this, let's just do all of this, you can get some cash back at closing, and that'll cover all these costs. You're paying for those things over 20, 30 years. And so that is a huge mistake, but I see it being made all the time, where new furniture or upfit cost, all these things, they get rolled into a mortgage, and you pay for those things for a long, long time, which absolutely increases their cost.

Oh my gosh. So we, my husband's military, so we went the VA route. I don't believe VA allows things like this, for good purposes, to keep you in a good financial standing. So we had to write a lot of checks. I had to go get, buy a checkbook actually, because I didn't have one before. So I went to the bank and said, he checked, she gave me—

You're all electronic, right?

Absolutely, of course. So she gave me three, and those were going like that within the first week. So you have, you are writing a lot of checks.

I know with us, I am fortunate to have a wife who is well versed in money. She's a CPA by education and a CFO by trade, and I don't have to do a thing, as much as I have to talk money, no pun intended, every day. It's my—

Yeah, I know. We need sound machines.

You know what, we have some sound things over here on the board in case we've got recorded stuff.

Well, they are, but I've got these cool little sound snippets, I could put those on. There's one that does what you just did, which is the little Trump thing.

Yeah, I might. We need to learn how to use those.

So, but she has taken care of all of that, and I think maybe I've written one or two checks this summer with this transition, but I can't tell you how many things she's had to write checks for. So it is not simple, and you need to be prepared for that.

Yes, and if you, again, my long wasn't, you're not allowed to roll it into your mortgage, and obviously I'm thankful for that, because I didn't even see that that was an option. But you just, I'm not kidding, there's so many little things, there's so many inspections and so many different people to pay.

Oh boy.

Make sure when you're buying a home you're doing a lot of planning.

Yeah, that might be the best advice anyone can hear. And if you're a listener that isn't in the market for buying or selling, I bet you've got friends or family or grandchildren or children, they might be in the market. Make sure you coach them on these things if you haven't already. And if they need a little bit of guidance, we have a number of white papers and pieces that we can send to them, and we're happy to share that. Those things are really designed to talk about these basics and make sure that you are knowledgeable in this realm of life. You need to know how to buy, and more importantly, you need to know what the blind spots are so you can avoid them.

Absolutely. So let's again flip the coin to selling. Phil said it's a seller's market. You put on the market and it's gone. You're probably gonna get what you ask for too.

Yeah, and maybe more. My brother sold his house this summer, and he and his wife were shocked that it sold so quickly. But his realtor said, set your price, but be sure that's all you want.

Oh, and they're in South Carolina, correct?

Yeah, they're in South Carolina. And he called me and he said, what do you think about this? And I said, well, if that's what she said, she knows her market. And now, sure enough, it sold in, it's just a matter of days, maybe it was a week or week and a half, but it was sold quick, and really no caveats. It was a quick close kind of thing.

And yeah, so I think it is a seller's market by and large. I was talking to my wife Natalie the other day, and she was telling me about the number of closings that their company is seeing all the time, every day right now, and they're setting records, which is amazing. And I know that Intracoastal Realty, a company that's been around here more than 40 years, they're not the only one, even though they're one of the largest. Others are feeling this same effect. And so they're having to cap, they're having to say, we will not accept any more, especially closing attorneys.

And yeah, I was talking to one of our favorites—

Let me guess, Leon.

I was on the phone with Leon yesterday, and he said things have finally leveled to a point that he can catch up a little bit.

Yeah, but that's a sigh of relief.

But he said that doesn't mean we've gotten slow. He said we are still just hitting it about as hard as they can. And then our folks at National, National Finance—

Yes.

They have been just unbelievably slammed all year.

Crazy.

I was talking to one of them just a few days ago, and he said we're at a point where we have to say no to some people because we just can't keep up with the load. So yeah, it's definitely a seller's market. So if it's a seller's market, what do the sellers need to know? What's most important? What can we tell them today that helps give them enough advice or enough information that they make a good decision?

Well, one of the questions you ask yourself is, are there potential buyers? And we've answered that 10 000 times already today.

Yeah, there's potential buyers.

I will say, if your house is over, and Phil, you can correct me, I believe it's over one, two, one a half to two million, that market is not quite as hot as the more affordable homes.

That's a true statement.

Yep. So if you are at that price point, that would be something to consider. Are there potential buyers, and do you have a plan in place if you stay at that home, especially if you're planning on downsizing?

Yeah, so you're anticipating things getting cheaper.

You may have to hold on to that home a lot longer than you think.

Yeah, that market is getting a little better. But I rely on Natalie a lot to help me understand how that market's working, and then of course nationally you can find those numbers. But that market has gotten a little better. But usually people that are spending that kind of money, they're going to go the custom build route. They're going to do what they want to do, get what they want, and probably they're not going to be buying a home like that. And if they do, as a seller you should expect a lot of potential negotiation. They're going to want a deal, because probably they want to come in and renovate, and they're going to give themselves room to do that, so as not to overspend in total on that property. So if it's a million dollar home, we see a lot of negotiations that are 15, 20 off of that price in some cases. So yeah, so that's a different situation. So keep in mind the price point has a lot to do with what we're talking about today.

Yeah, really here we're talking about 750 000 down. And the next wrong or category would be if you're at about 300 or lower, they are flying off the shelf. That's the fastest selling market, or that's the fastest selling price range today.

All right, so say you sell your home and your basis is very low and you're going to make a lot of capital gains. There is one saving grace: you can exclude up to 250 on those capital gains. You can actually do 500 if you're married filing jointly. So that is a huge break in taxes.

It's giant if you've got a lot of equity in your home and that thing has appreciated. And your home, let's say you paid 250, and today that home's worth a half million, you got zero capital gain as long as you've lived in it two out of the past five years.

Two out of the past five years, that's what classifies it as a permanent residence or primary residence.

And if you don't fit that criteria, then be careful. You're probably gonna owe some pretty significant capital gain taxes.

But if you were to sell now, assuming that we're in a lower capital gain bracket than we will be should the former vice president Joe Biden, if he's elected—

Our understanding is we could see those gains go up. So I suppose the benefit here is if you sold it now, your capital gains are likely lower, depending on who you think gets elected. That'd be a chance you have to take. But if it's your personal or your primary residence and you're married to your points here, you can take away up to a half of a million dollars in

gain zero tax. And different from the old rules, you don't have to reinvest that money. The sale or the proceeds don't have to be reinvested in another residence, and that used to be the kicker, almost like a 1031. If you didn't do that, you were going to spend a lot on taxes. Today you've got up to a half million as a couple, as long as you're married filing jointly. What a win.

That is such a win. And 1031 has come up with a couple of clients. That is going to be investment property, so you can't use that on your private residence. So if you have heard of that and you think, oh, I'll do a 1031 exchange, that's not going to work.

Yeah. For example, if you bought a home, and this has been happening around the coast here a lot, and I'm sure it's happening in other parts of the country, but we just heard, one of our clients was just sitting in here last week and he told us that someone sold a home and nearly doubled their money.

Yeah, in two or three years.

He was three years young. Crazy. But this person sold that home for almost double, so this half million dollar thing comes into play in a big way.

Oh, absolutely, because that was a very expensive, very, yeah, very good location home. riseful night 900 and sold it for one five, one six.

One six, I think.

Yep. That is insane. So what a great deal for him. But I think if you didn't plan properly, you could get hit with some pretty hefty taxes. And in his case, pretty sure it might have been a rental, so 1031 now comes into play. He's going to use a lot of that money, I think, to build a new home or buy a new home for himself.

Correct. He was purchasing land and then building on that land, so that made sense for him.

Yeah, for sure. What a heck of a deal that he got there. So know the rules, otherwise you're going to be subject to some tax.

Definitely know your tax consequences. Know that you have buyers or not, no, but plan on how long you think it'll take for your house to leave the market. You don't want to go buy another three million dollar, two million dollar home and then be stuck holding one for a few years, right? And then it's stretchy thin.

Yeah, I agree with that. There's nothing like good planning, and we see it a lot in our industry, in our profession. We see more and more the need for planning because so many people, they just don't plan. They make these impetuous decisions because they get excited or they follow the herd, whatever it is. So it could be one of those emotional biases that we talked about a few weeks ago that generally leads to mistakes or regrets, and life's too short. You don't want to live with a lot of regrets. So plan first, purchase second. Be sure that what you're about to do makes sense.

And if you're not sure how to plan for that, reach out to us. We've got all the technology to help you do that. In fact, if you want to do it, we can give you access to some of the more simplified versions of what we use and allow you to see some of the before and after, and then you can decide if you want us to take a deeper dive on it.

So, and I love your last question here: what is your why for selling, and is it reasonable? That goes back to, does it fit in your plan? But I love the way you couch it, is what's your why. If you don't have a really good why for doing this, that might be a good indication that you need to step back for a minute and just wait. Give it the 24, 48 hour rule.

This is a 48 hour one, probably.

Yeah, and maybe 72. So just be sure, because this is a big move, big purchase. As we said, it's generally the largest asset that you'll own unless you're a business owner. And so be very judicious as it relates to this kind of purchase, and really any kind of major purchase. But homes, once you're in, it's tough to get out without some major cost, so be sure it's a good move.