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Taxes, Insurance, Fees

Real Estate “Get Rich” Euphoria May Be Distasteful, But Not The Root Of All Evil

December 11, 2006 | 10:57 am | |

The billboards and announcements proclaiming that you can get rich in real estate, while distasteful to many (self-included – wondering how people that attend these seminars can be so gullible, but it does make them feel good, I suppose), haven’t created much of a cynical backlash, probably based on the values of most Americans, according to a recent Gallup Poll Most Americans Do Not Have a Strong Desire to Be Rich [link expires tomorrow]. In other words, over half of Americans seek more money as a personal goal but does not think badly about people already with wealth.

Of course, this is only a poll, and I wonder if the results wouldn’t have been reversed about two years ago, when real estate was a different animal.

Look at the game show phenomenon [WSJ].

Recently we had “Who Wants to Be a Millionaire” and now there are others:

Next Tuesday, Walt Disney Co.’s ABC unveils “Show Me the Money,” a splashy series hosted by William Shatner. Contestants win money by answering trivia questions and then choosing among 13 female dancers, who carry scrolls containing secret dollar amounts.

It joins the popular game shows “Deal or No Deal” and “1 vs. 100” on General Electric Co.’s NBC. Meanwhile, News Corp.’s Fox has “The Rich List” and CBS is working to remake “Name That Tune,” a program that first aired in 1953.

Get rich seminars seem to be more about energy and optimism than specific investment techniques. Here’s a seminar recap shared by someone who attended one held here in New York this year. (note: I accurately guessed what was said before they shared the substance of the event) :

  • You have to love what you do
  • Be passionate about your efforts
  • Look for hidden value, think differently
  • Surround yourself with smart people
  • Work hard and never give up
  • Work smart and take calculated risks

Of course, there were also some specifics, primarily dealing with tax implications.

I might have missed a few choice ideas but you get the idea. Of course there are always exceptions and those who succeed are who get included in the advertising campaign. I’d be wary of anyone who teaches get rich in real estate seminars for a living. If they were so successful as real estate investors, then why are they teaching you instead of doing deals? Carlton Sheets on the late night infommercials comes to mind. Here’s a great summary of all the supposed real estate gurus.

Trump is the exception. He made his fortune in real estate and keeps working at it and has greatly expanded his efforts, seemingly everywhere in the US these days. He provides the celebrity factor to the Learning Annex efforts and gets paid a fortune for very little time committment. Its a smart investment on his part.

I sort of view these seminars like playing the lottery. The demographics of people that play the lottery on a regular basis are least likely to afford playing it.

Ok, back to the poll…

recent Gallup Panel survey asked a nationally representative sample of American adults for their attitudes about money and wealth. The poll finds that most Americans apparently do not have a strong desire to be rich, although half say making more money is a personal goal. The public tends to think that those who make a lot of money deserve it, but not to think that those who are poor deserve their lot in life. A majority also believes that anyone can get rich. Men, especially younger men, tend to desire to be rich more than women do.

Some other results…

The public does not begrudge rich people — a majority of Americans, 54%, say that those who make a lot of money deserve it. They also believe that almost anyone can get rich if they put their mind to it, by a 53% to 46% margin. At the same time, Americans strongly reject the notion that those who are poor merit their situation — only 14% agree and 85% disagree that “people who are poor deserve it.”

Some other points:

  • 42% of lower-income respondents (residing in households in which the annual income is less than $35,000) say they would be happier if they were rich, the same percentage as respondents in higher-income households ($75,000 or more per year). Thirty-three percent of middle-income respondents (incomes between $35,000 and $75,000) say they would be happier if they were rich.

  • Just 34% of people in upper-income households agree that money is the root of all evil, compared with 48% of those in middle-income households and 52% of those in lower-income households.

  • 23% percent of lower-income respondents say that poor people deserve to be poor, a much higher percentage than found among middle- (12%) or upper-income (5%) respondents.

Of course, with all my cycnism about get rich seminars, I didn’t make a fortune in real estate either.


This Land Is Your Land And It Is To Be Appreciated

February 15, 2006 | 12:01 am |

With the rapid run-up in real estate prices over the past several years, its probably not a bad idea to make sure that your insurance coverage is adequate especially if you did a major renovation or expansion. This Real Estate Journal article Taking Inventory of Your Home To Get Adequate Insurance applies more to personal property within the home.

However, insurable value, the value of your home should catastrophy strike, is the amount needed to replace the existing improvement (the house). It is NOT the purchase price of your home because a large portion of the value of your property is found in the land. This concept applies to condos and co-ops as well.

This is one of the most misunderstood aspects of housing – values that appreciate and depreciate relate largely to the land value, not the value of the house. Yes, sure, the cost to replace your home will increase due to higher labor costs, higher cost of materials, inflation, etc. during a tight housing market and renovations and extensions or expansions may also impact value as well, but the value largely runs with the land.

Cart Before The Horse: PMI Discusses Housing Risk Without Analyzing Housing

January 18, 2006 | 12:01 am |

PMI releases its Economic and Real Estate Trends quarterly report [PMI]. Its “a narrative publication based on an internally developed PMI model. Issued quarterly, the report includes commentary on the national economy and regional housing price trends. In addition, select metropolitan areas are analyzed. The 50 most populated metropolitan areas are featured in a tabular presentation (Metropolitan Area Economic Indicators), based on a statistical model utilizing economic data, real estate variables and market expertise. The model provides several risk measures to gauge relative residential lending risk.”

Download Report [pdf]
Download Appendix [pdf]

The report is based on the premise [MW] that since appreciation was lower in the third quarter (They use OFHEO 3rd quarter data) the housing boom is over. They also indicate that mortgage rates are going up. Remember, a big chunk of the “sales” data in the OFHEO reports are not based on actual sales data, but rather refinance data [Matrix].

I am not arguing that the market is not seeing lower appreciation rates, and the risk of higher mortgage rates, however there does not seem to be any analysis in the report to support such statements and its the lead-in to why lenders should encourage borrowers to take out PMI insurance.

In other words, this seems to be more of a direct marketing piece than a research tool. In addition, there is no explanation on how the internal model was derived or what the logic is. How can this report be relied on?

See Chicken Little Uses PMI Insurance [Matrix]

OFHEO 3Q 2005 Housing Appreciation


Silent Mortgages Could Make A Lot Of Noise In The Gulf

January 17, 2006 | 12:01 am | |

Jeffrey Lubell, the Executive Director of the Center for Housing Policy in Washington, DC writes commentary called: Let’s Talk Out Loud About ‘Silent Mortgages’ [WSJ]

For the devastated Gulf Region, silent mortgages could be an effective way to rebuild in addition to FEMA grants and SBA loans.

Download the discussion draft [pdf]

With silent mortgages, no payments are due until the homes are resold. Because the source of repayment is the property itself, rather than the family’s income, poor credit and low incomes are less significant obstacles, enabling far more families to qualify.


All Is Not Well On The Gulf Coast (FEMAVille)

December 13, 2005 | 12:01 am | |

Can we imagine a country without New Orleans? One could argue it will never be the same. Of course this story is not running on CNN all day so public interest in the devastation appears to be waning.

The post FEMAVille Update makes the point if many of the developers jockeying for reconstruction rights get their way, the whole Gulf Coast may end up not resembling anything like its old self. [NYT]

Some other developments:

FEMA is could cut its federal obligation by counting as in-kind contributions if a proposed law if adopted. [Louisiana Weekly]

Wells Fargo & Washington Mutual are giving an extra three months to storm victims to resume making mortgage payments and possibly longer [WSJ]

I know of an appraiser in New Orleans who lost all of her investment properties – wiped clean off their foundations. How long will they take to be rebuilt, if ever? FEMA wants the properties rebuilt higher off the ground and sturdier. There are many who simply want to rebuild it the way it was [NYT].

Whats the best way to proceed? Its not clear to me what the best course of action is. To simply rebuild the levees to withstand category 3 storms proved to be ineffective and costly in terms of lives and resources. To rebuild at category 5 or 6 strength is signficantly more expensive and would take years. FEMA has encouraged development in flood plains by providing (subsidizing) low cost flood insurance [Matrix] that encourages construction in low lying areas.

What a mess.


Welcome To The Club: IRS May Require Membership In Trade Groups

December 12, 2005 | 12:11 pm | |

The Senate recently approved S. 2020, the Tax Relief Act of 2005 that allows the IRS to define an appraiser as being a member of an appraisal trade group [Valuation review]

The measure, which got the Senate nod last month, requires appraisers performing valuations for tax purposes to be designated by the Appraisal Institute or another professional appraisal organization or meet comparable requirements to be determined by the IRS in forthcoming regulations.

“The appraisal reforms contained in S. 2020 are consistent with recommendations that have been made by the Appraisal Institute, American Society of Appraisers and the American Society of Farm Managers and Rural Appraisers,” said Bill Garber, director of Government Affairs for the Appraisal Institute. “The Senate-passed bill has effectively ‘raised the bar’ with regard to appraisals performed for tax purposes, which is a move that is welcomed by the professional appraisal community.”


These appraisal trade groups have worked very hard for passage of this bill since the passage of appraisal licensing in 1991 rendered them inconsequential to the appraisal process and their membership has been in decline ever since. Their argument is that membership or designation would improve quality of appraisals that the IRS sees. This seems hypocritical since licensing came into effect for the very same reason – these trade groups were ineffective at influencing quality, or if they did, it was so poor that it didn’t really matter. It also gives bad appraisers something to hide behind. In other words, I think these organizations are worthy and expand the base of information a professional appraiser has access to, however, it is not the panacea for quality appraisals.

In fact, it has been our experience that appraisal quality is not improved if the appraiser has a designation. The poorest reports we review for lenders appear to be equally represented by members of these organization and those that are not.

The real problem is not whether an appraiser is a member of a trade organization, it has more to do with the structure of the industry and the bad habits it creates so that appraisers can survive.. We need to install some sort of controls to protect appraisers from influence because a change in the structure of the industry is how quality will improve.

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This Just In: Appraising Is Not An Exact Science

November 30, 2005 | 12:01 am |
Source: NY Public Library

In the article Md. court rules ‘appraising property not an exact science’ [Valuation Review]

“A U.S. District Court in Maryland denied a debtor’s bankruptcy appeal that was founded on claims that the bankruptcy judge erroneously judged the value of her property.”

Appraisal: Art Or Science? [RealtyTimes]

Here’s my position on appraising as an art or science:

This point has been debated for eons. I always found that when appraisers have said appraising is an art, they usually didn’t have good comps.

The appraisal process includes many points of subjective interpretation and thats the “art”. Adjustments and theory, thats the science. When I hear the use of this phrase I think of the artist Jason Pollock, splattering paint all over a canvas shouting “Here’s The Value!”

As appraisers, please don’t resort to this sort of phraseology, its corny and dilutes our professionalism.

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Home Closing Costs Vary Widely By State: Allowing Wyoming Tourists To Afford A Visit To New York

November 18, 2005 | 10:23 pm |

A study was recently completed that shows the wide range in closing costs by state [].

Wyoming had the lowest mortgage-related fees and New York had the highest in’s 2005 survey. That’s without taking taxes into account.

Bankrate surveyed nine to 15 lenders in each state, plus Washington, D.C., and asked them to estimate the closing costs on a $180,000 loan to a buyer with an excellent credit history who had made a down payment of at least 20 percent on a single-family home in the state’s largest city. The survey showed that:

*The biggest differences among states came from the wildly varying costs for title insurance;
*fees for settlement services and title searches accounted for much of the rest of the disparities;
*origination costs — the fees that lenders control — didn’t vary much from state to state (but they did differ from lender to lender).

Closing Costs Listed By State []
Hawaii’s Closing Costs Second Highest In U.S. [Star Bulletin (Hawaii)]

Closing Costs Mapped By State []
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A Taxing View Leads To A Revolt

October 31, 2005 | 9:48 pm |

In New Hampshire, town assessors are beginning to treat view amenities as a separate line adjustment. The idea is that if a property has a value premium because to its views, it is taxed over above other properties. In some markets, the view adjustment is a separate line item [Washington Post]

The concept here is that the overall value must be accurately reflected. It appears that the view amenity was not fully accounted for and it was significant enough for the state to itemize the adjustment which was the subject of the recent complaints.

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Chicken Little Uses PMI Insurance

October 22, 2005 | 1:24 pm |

There has been a lot of coverage on the PMI Market Risk Index [Big Picture] this week and while I find it interesting, I have issues with the sincerety of the PMI report altogether since they are in business to sell PMI insurance. PMI insurance is usually required for mortgages where there is less than a 20% down payment. It is designed to protect lenders (not homeowners) on the portion of the value of the collateral above the 80% threshold should a borrower put less than 20% down. It does not cover the entire mortgage. I believe there is certainly increased risk to the lender associated with a lower down payment, but this is generally factored into the underwriting analysis. [Note: Underwriters, I’d love to hear your comments about this.]

The Homeowners Protection Act of 1998 allowed homeowners to cancel their private mortgage insurance if rising markets made their loan to value ratio 80% or less. Before that, homeowners would be saddled with the extra monthly payment (not tax deductable) for the life of the original loan. The use of private mortgage insurance has likely diminished as the housing boom has allowed people to get out from under PMI, namely due to this legislation.

Since insurance is about measuring risk, and there has been a lot of media coverage of a cooling housing market [AP/Businessweek] this fall, this PMI Market Risk Index [REJ] report will be prominently covered at each release as Janet Morrissey of Dow Jones Newswires did this week. Here are some of the interesting points she makes in the article:

PMI calculated its Risk Index by tracking and comparing home-price appreciation, labor markets, employment levels, affordability and the percentage of monthly income that a mortgage takes up in each market. The Risk Index estimates the chances of a price correction of any size in the next two years.

Click here for the PMI report [PDF]

Boston, San Diego, Long Island, N.Y., Santa Ana, Calif., and Oakland, Calif.have more than a 50% chance of a market correction in the next two years. New York City only ranked 14th, with a 33% chance.

On a national level, the risk of any size price correction, no matter how large or small, in the 50 largest housing markets moved from a 21.3% chance last quarter to 21.8% chance this quarter. Thats a 0.5% increase in risk, yet this is now widely covered in the media, more so than in recent quarters. I am not trying to sound like an advocate of the national housing market here, but a 0.5% increase? a total of 21.8% risk? That doesn’t seem commensurate to the coverage of the report.

PMI just added a Valuation index, which is based on home-price appreciation, the cost of a 30 year fixed mortgage and the level of demand in each market. I am not sure how they measure demand and am not sure why the affordability is based on 30 year fixed financing. Interestingly, New York City is not on the top of the list.

Source: Dow Jones

I Just Saved A Bunch Of Money On My Flood Insurance By Switching To The National Flood Insurance Program!

September 22, 2005 | 9:36 pm |

With all the devastation caused by Hurricane Katrina and possibly more from Rita in two days, its probably a good idea to consider flood insurance if your property is vulnerable. Yet only about one-quarter of the homes in areas most vulnerable are insured against flood loss [], according to the Federal Insurance Administration (FIA). In those areas, flooding is 26 times more likely to occur than a fire during the course of a typical 30-year mortgage.

[FEMA’s official flood insurance web site []]

John Stossel of ABC News provided commentary on his experience with his waterfront beach house that was washed away in a winter storm [ABC News]. He contends that the federal government should not be in the insurance business. The low premiums (hundreds instead of thousands) actually encourages development in low lying areas. There is a cap on the amount covered but not the number of times the property owner can be reimbursed.

The average annual cost is $450 per month and many homeowners don’t realize flood damage is not covered in standard household insurance policies. Now insurance companies are offering high end houses full coverage or supplemental coverage [REJ] in addition to the federal program.

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Real Estate Taxes: The Size Of Homes Expand And Contract

September 15, 2005 | 7:54 am |

This article, Measurements Amiss: Size matters–on your property tax bill struck a particular chord with me, both as an appraiser and a homeowner.

The square footage of properties found in assessor records may be well off the mark. Appraisers should use caution when pulling comps from town hall. Public records are not always accurate. After driving by the comp, if something doesn’t seem right, call the broker who sold the property (you should be doing this anyway).

Square footage is an important consideration for homeowners as well because it affects your tax bill. One of the easiest things to look at is the size of your home versus the size recorded with your town hall. Its a tangible amenity and much easier to make a case for getting your tax bill reduced. With the explosion of home additions, there is ample opportunity for errors in the tax records.

Although this pertains to a commercial building, there’s that old Manhattan joke that the “Empire State Building is more than twice as large as originally constructed.”

Concern over square footage doesn’t just apply to single family houses. Condos also see significant inconsistencies. The developer may include varying parts of the exterior space, such as a terrace, in the total square footage of the apartment, depending on the municipality. While such an amenity provides additional value, there is not an apparent standardization of how much, if any, of these sort of amenities. A small portion or all of this additional area may be included. We have seen condos that must have must have common area included in their gross living calculations. (Its a stretch, but I suspect that was intended to make the price per square foot value appear lower than competing properties.)

There are one family standard measurement techniques set by ANSI and a condo standard required by Fannie Mae which relies in the interior perimeter.

A below grade basement and attic space is usually excluded from square footage. However, there are exceptions. A prior home that I had owned was a Cape Cod style house that had been expanded several times that was lovingly called a “bastardized cape” in that particular market. At least 40 years prior, the attic had been converted to 2 additional bedrooms and a full bath as were most of the other capes in the neighborhood. A portion of this living area should have been considered as part of the square footage which seemed to keep our taxes low as compared to neighboring homes.

[Matrix] Length x Width Is Negotiable

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