According to the survey by the National Association of Realtors, the reported cancellation rate doesn’t mean that one of every three transactions are falling through, rather more than triple the number of agents are facing  deal-jeopardizing problems in 2011.

 Some of the issues reported:

• Appraisals below contract price.   Appraisers hired by the mortgage company may have a different opinion of the value of the property, sometimes significantly below the price agreed in the contract.  Foreclosures being used as ‘comparables’ to value non-distressed properties are part of the problem here.  Inexperienced appraisers who are unfamiliar with local trends also contribute to this trend.
• Stringent underwriting and documentation requirements.  Restrictive underwriting rules at the Federal Housing Administration, Fannie Mae and Freddie Mac can derail signed contracts or delay them for months.
• Poor service by lender staff.  Agents report “lack of customer service” and “generally bad attitudes” as contributing factors to delays and some contract failures.  However, agents also need to be on the lookout when loan processing deadlines start to lag or communication breaks down, and facilitate the progress of getting it moving again.

The key to closing on a home is to make sure you choose the right agent, lender and other team members who will help you understand the rules and requirements before hand, and stay on top of the professionals involved in your transaction.

Based on Los Angeles Times article.

Buying a home is the single biggest purchase most of us will ever make. For many, it is a transaction full of fear, worry, and stress. Here are a few secrets to help the stress melt away.

1. Education. Since most of us fear what we don’t understand, educate yourself. Ask questions, and own up to not understanding something. The only ‘stupid’ question is the one that is not asked. Keep asking until you understand the answer.
2. Surround yourself with experts. Finding the right people to help you through the transaction can make all the difference. They will help you manage expectations. Board approvals and financial statements are fraught with pitfalls that your Real Estate Agent and accountant can help you navigate.
3. Be Prepared. Like a Swiss watch, real estate transactions have a lot of moving parts. Any one delay could send the whole timeline into a tizzy. Make sure you plan for delays like attorney reviews and board approval, and add in some breathing room to reduce the stress. 
4. Expect the unexpected. Even when you think you’ve covered all the bases, there can be challenges that will try your patience. The board application can be long and tedious, seemingly prying into every aspect of your life. Requests for clarification give you a chance to fill in the blanks that could mean the difference between approval and denial. 
5. Control what you can. Focus your energy on the parts of the transaction you can control; working on your credit, saving, and finding trusted professionals who will guide you through the process. Having a clear vision of your daily life and personal finances in your new home will help you see past the obstacles to the goal. “An obstacle is what we see when we take our eyes off the goal.” Focus on the goal, and let your trusted professionals guide you through the obstacle course.
6. Let go of the rest. There’s a big difference between knowing what can happen and planning for the possibility, or dwelling on every possible disaster. If fate throws up a roadblock, take a deep breath, consult your experts, and make the best decision you can.

Inspired by Trulia article by Tara-Nicholle Nelson

Basics of the home mortgage interest deduction

• Taxpayers who itemize deductions on Schedule A can include interest paid on mortgages with certain limitations:
• Only interest paid on a loan secured by a principal residence and second home is deductible
• Only deduct interest on loans for which they are legally liable, so paying someone else’s mortgage doesn’t count.

Once the above conditions are met, the following applies:

• Only interest on the first $1,000,000 of debt for first and second residences combined can be deducted, for Single or Married filing Jointly and married filing separately, the limit is reduced to $500,000 each.
• Only the interest on the first $100,000 of home equity loan debt.
• In this example, an unmarried taxpayer with a mortgage and home equity line of credit could deduct the interest on $1,100,000 in total.

Recently the IRS ruled that, for an unmarried couple who jointly owns the home together the $1,100,000 limit applies to the residence, not the taxpayer.

• One or two homes which are the principal and second homes cannot provide more than a home mortgage interest credit on $1.1 million of debt total regardless of how many people own the homes.
• Once the $1.1 million of interest deduction is used from the first and second home, no further interest deduction can be claimed.
• In this example John and Jane own two homes jointly but are not married.  Home one has a mortgage debt of $1.5 million and home two has a mortgage debt of $1 million, with no home equity line of credit on either property.  According to the ruling, John and Jane cannot together claim interest on more than $1 million of total mortgage debt.  However if John owned home one and Jane owned property two, then each taxpayer could claim the full limit providing they were otherwise eligible.

 Tax planning becomes very important in this situation.  Seeking the advice of a qualified tax professional can be extremely helpful prior to purchasing a home to be sure the structure permits maximum deductions.

Based on blog article by Jerry M Feeney, Residential Real Estate Attorney.  Information in this article is to be used for informational purposes only, and not to be considered legal, tax or financial advice by the Real Estate Geezer.

On the one hand, mortgage rates are near record lows, but you know that won’t last forever.  Apartment prices are, on average, lower than last year, but sales are up.  Rent, on the other hand, seems set to be rising thanks to low vacancy rates. 

• Neither mortgage rates nor rents are likely to rise rapidly
• Apartment prices, relative to rents, remain higher than their long-term average (?)
• If you plan on moving again in the next few years, renting is usually better than buying.
• If you’re planning to settle in one place for at least 5 years, buying makes sense

So let’s use the example above where the goal is to buy or rent an apartment on the Upper East Side consisting of 2 bedrooms and 2 baths in a full service doorman building. Let’s say you’ve just seen the First Quarter Rental Report from Prudential Douglas Elliman   , or The April rental report from MNS Real Estate Group  or the Citi Habitats’ First Quarter Report  .

You can use a Rent vs. Buy calculator or you can get to know your Rent Ratio:  Take the sale price of apartment divided by annual cost of renting an equivalent apartment.  Below 15 is where most people lean towards buying.  The New York Times recently reported  that according to Moody’s Analytics, at the end of last year, the rent ratio for Manhattan was hovering around 29. Still down from the peak about 5 years ago, but still higher than the decades before the housing bubble.

I generally suggest using a rent ratio of 15 to 20 as a beginning point of discussion for the rent vs. buy calculations.

So let’s say you want to pay up to $4500/month for a rental ($54,000 per year). Using the rent ratios of 15 to 20, it may be advantageous to buy an apartment costing between $810,000 (15 x $54,000) and $1,080,000 (20 x $54,000).

Rencenty, I did a property search on the Upper East Side (60^th Street to 96^th Street from FDR to 5^th Avenue) for 2Br + 2Bth coops and condos with full time doormen. I limited the maximum price to $1,080,000.

Of the 87 listings,  19 are condos or condops and 68 are coops. The search results show the average price is $937,000 and the monthly charges average $2076. 87.  

Although the benefits could outweigh the costs (tax deductibility of mortgage interest, tax deductibility of coop maintenence, etc.), additional costs of ownership must be considered:  closing costs, borrowing costs and maintenance or common charges. Not to mention the need to have $200,000+ as a minimum down payment required either by the mortgage people or the Board.   

Consulting your buying team (broker, attorney/financial advisor and mortgage banker or broker) will help you make the right decision.

It is no more difficult for a foreign national to obtain a mortgage than for an American citizens buying in New York City if the residence is to be a primary residence (or at least a pied-à-terre). However,  an investor who is not prepared to pay in cash and wants to obtain a mortgage for a property that will be used as an investment (i.e. with rental income), will find it difficult or impossible to find a mortgage with low rates.

The foreign national buyer, in addition to putting together a search team including a real estate broker and a mortgage lender (if necessary), should search out a New York City attorney who may be able to help save thousands of dollars in taxes or at least alert you to the tax consequences of the purchase.

For just such an investor, I recently had the pleasure of working with Michael C. Xylas of Abrams Garfinkel Margolis Bergson, LLP. One of the partners, Neil Garfinkel, recently published an extremely informative discussion, very helpful to foreign buyers, summarized below and found in its entirety here.

Foreign investors are lured to US real estate by the stability and security of the US Real Estate market.  Generally they can enjoy a steady appreciation of US real property and without the volatility of financial markets, making the prospect of economic gain through rental income and capital growth the strongest attraction.  With relative political and economic stability in the US, there are fewer barriers to foreign purchase of US real property.  The weaker dollar and lower property prices make these investments even more attractive for foreign investors.

While easy to purchase as a foreigner, real property comes with reporting and tax consequences that must be considered.

“For the purpose of US Income Tax, a Foreigner or non resident alien (NRA) is an individual who is neither a US Citizen, a green card holder nor US Tax resident.  The test to determine if an NRA qualifies for the same status as a US citizen or resident individual is based on ‘substantial presence’.  This is defined by the number of days that one must reside in the US to achieve such status.   For the purpose of US Estate and Gift Tax, the test is more subjective, based on one’s intent of permanency in a particular country.  Importantly NRA’s are nevertheless subject to estate and gift taxes on any asset that are actually situated in the US.”

It is extremely important for foreign investors to work with a qualified team of legal, accounting and brokerage/valuation advisors who understand the rules in the foreigner’s home country as they correlate with the laws of the United States; if handled correctly, the transaction will be most suitably structured with consideration for investment, accounting and tax purposes.

Consider the Structure used to purchase the asset while planning your purchase:

• Individual owner (Direct Ownership) and Single Member LLC
  • Real property used as a residence for personal use
  • Least complex
  • Required to file US Income Tax return
  • Estate Tax issues, Federal and possibly State
• Shareholder in a domestic or foreign corporation
  • Domestic Corporation
    • Provides a liability shield
    • The Corporation is the taxpayer, eliminating the need for individual annual tax returns
    • Does not avoid US Federal estate tax liability
    • Two levels of tax imposed on corporation income:
      • Corporate level tax imposed
      • 30% withholding tax on dividends paid to individual owner/imposed (this could be lower based on a favorable tax treaty between the foreign investor’s country of residence and the US)
  • Foreign Corporation
    • Limits tax liability, mostly used to avoid US income tax as well as US estate tax.
    • Pass on US real property to estate beneficiaries without paying US  taxes
    • No individual US Tax return, however
      • 30% branch profits tax against the foreign corporation ‘dividend equivalent amount’ (regardless of any current distributions to the shareholders, the tax is imposed on corporation’s taxable income that is effectively connected to a US trade or business.
  • Foreign corporation which owns a US corporation
    • More complex structure, both foreign corporation and domestic US corporation are formed
    • Foreign Corporation owns the Domestic US corporation which owns the real estate asset.
    • more costly and complicated
      • Investor is provided a limited liability shield and does not file any US tax return
      • Federal estate and gift tax are not applicable
      • Branch Profits tax not applicable
      • Ultimate investor would be transparent
      • Income tax would be taxed at a less favorable rate compared to individual ownership

Once you’ve decided you want to buy and that your financial basics look sound, the smartest thing you can do is put together your own dedicated search team – a buyer’s broker, a real estate attorney and a bank/mortgage broker.  Choose carefully and make sure they are well-versed in real estate in New York City.  Ask them about their experience.

Buy Into a Buyer’s Broker

A buyer’s broker will help you at every step of your purchase, from helping you figuring out what kind of apartment you want at the price you can afford, to the subtleties of the co-op interview.

Make sure you like your broker – you’re likely going to be spending a lot of time together.  Be sure that he or she listens to you and really hears what you’re saying.  Otherwise, you’ll spend a lot of time seeing spaces you’re not interested in.  Want a big kitchen?  Lots of light?  Outdoor space?  An older, pre-war building with lots of charm or a brand new, sleek and modern place, a view of the Empire State Building?  If he or she can’t get into your head, the search process won’t be as pleasant as it should be.

Be aware that most agents in New York are seller’s brokers.  If you meet an agent at an open house, for example, you need to keep in mind that you’re speaking with the seller’s representative.  Any hints you give about how much you’re prepared to spend will be reported back to the seller – in which case, you’re likely to spend top dollar.

Why?   Because you’re chatting with a seller’s agent, whose top priority is to show the property in its most favorable light and negotiate the highest price and best terms for the seller. New York law is crystal clear on the duty of listing and selling agents – they must provide “undivided loyalty” to the seller.  So if they can figure out how much you’re prepared to spend, their job is to make sure you spend every cent.

The seller’s agent may offer to have another agent at their firm to act as your representative in making an offer and negotiating for the purchase.  That’s perfectly legal, but being asked to step in and assist the buyer at the last minute may not be the ideal scenario.  First and foremost, it doesn’t give the buyer the advantage of having a dedicated advocate for his or her needs nor can he or she negotiate as effectively as a buyer’s broker who has been working with you all through the process.

Be Prepared

The other representatives you’ll need when you want to buy a property are a banker/mortgage broker and a real estate attorney.

Finding a good banker and pre-qualifying for a mortgage will not only make you an attractive buyer to all those folks hoping to sell their homes, but it will also ensure that you’re looking in the right price range.  A loan officer should request your credit score to do a pre-approval letter, stating that you qualify for a mortgage up to a stated amount (you’ll need to pay for a credit check, usually $20 or less), and be able to explain what kind of rates and mortgages her or his company could offer you today along with what information they will need if you apply for a mortgage with the company.  You’ll know exactly what you can – and can’t afford.   You won’t fall in love with something you can’t have – and when you do find that perfect place, you’ll be in a strong position to negotiate for it.

Locating a real estate savvy attorney will also smooth the way. An attorney in addition to being expert in  New York City real estate, should be well-versed in reviewing co-op and condo financial statements (your accountant could help here), should plan to read its board meeting minutes to look for items like upcoming expenses, lawsuits pending etc. and be familiar with the latest inclusions/exclusions in NYC real estate contracts.

So, first things first.

When you decide to start looking, take time to find the right folks to ensure your search is a success– your buyer’s broker, real estate attorney, and loan officer.  You can call around, ask friends – and even ask prospective members of the team to recommend others they’ve worked with in the past.

With your team lined up, you’re ready to look, and to buy.  Now, about that sofa …