The Fiscal Cliff

No real danger, just be advised there is a "Fiscal Cliff" ahead.

No real danger, just be advised there is a “Fiscal Cliff” ahead.

As the end of 2012  looms on the approaching horizon, so does the so called “fiscal cliff.” But what does that even mean?

The “fiscal cliff” refers to a combination of spending cuts being implemented to reduce our deficit, as well as various tax cuts slated to expire at midnight on December 31st, 2012 if our congress fails to take action.  And, as you may well know, the ever widening partisan politics of our legislative branch now dangles these very same tax cuts and spending cuts in each other’s face and, consequently all of us, over the highly propagandized “fiscal cliff.”

How will this affect you and me?

Among the laws set to expire and/or take effect at midnight on December 31st 2012, are the payroll tax cuts, a rollback of the “Bush tax cuts” from 2001-2003, and certain tax breaks for businesses. At the same time, the taxes related to President Obama’s health care laws will also go into effect as will spending cuts agreed upon as part of the debt ceiling deal of 2011.

Let’s take a closer look.

Payroll Tax – The expiration of last year’s temporary payroll tax cut would result in a 2% tax increase for workers moving the employee payroll tax rate of 4.2% back up to 6.2%.

Bush-era Tax Cuts – At the end of the year, the Bush-era tax cuts are also slated to expire. Unless they are extended, tax rates will revert to 2001 levels and nearly all Americans will see their tax rates go up.

Capital Gains and Dividend Taxes – The expiration of the Bush-era tax cuts will also bring changes to capital gains and dividend taxes. In 2013, the top capital gains rate for most investors is slated to go from 15% to 20 %. Taxpayers in the current 10% and 15% tax brackets, who currently don’t pay tax on long term capital gains and dividends, will pay 10% on long term gains.

The treatment of dividend income – At the moment, income from qualified dividends is treated as capital gains and taxed with a rate of 15%. In the new year, dividends income will be taxed as ordinary income, with a top rate of 39.6%. These changes in particular could result in substantial increases for high-income earners.

Estate Tax – The estate tax is also scheduled to jump from 35% to 55% in 2013, while the value of estate assets excluded from estate taxes will drop from $5.12 million to $1 million.

In general, Republicans want to cut spending and avoid raising taxes, while Democrats are looking for a combination of spending cuts and tax increases. Although both parties truly want to avoid running off this “fiscal cliff,” a compromise appears to be very difficult to achieve as this problem in an ongoing one that our politicians have had well over a year to address. As of this publication, it would appear that a compromise of any kind will not be reached until after the December 31 deadline.

Regardless of what happens to the tax code in 2013, it’s important to plan for your financial future. Working with a tax professional and a financial advisor can help you prepare for these changes. If you need a referral, I happen to know the two best tax professionals in the entire nation: Lawrence and Linda Chaves, my mom and dad.

Call me today to discuss your real estate goals for the new year. 310-722-5959.

Lawrence Chaves
DRE #01893036

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Step 4: Making the offer

handshakeNow that you’ve received a pre-approval letter from the bank and you’ve picked out the house you want, you are now ready for the next step,… making the offer.

Oral promises aren’t quite going to be enough when it comes to something as intricate and expensive as a home purchase. Besides that, they are not legally enforceable when it comes to real estate. Therefore you’re going to need to write up a contract that actually is enforceable. This is known as a “Purchase Agreement.”

What exactly should the Purchase Agreement contain?

The Purchase Agreement, if accepted, will become an binding sales contract. It is therefore important that it contains clear instructions on all the items and agencies involved in the purchase. These items generally include:

  • Address of the property to be acquired.
  • Purchase price.
  • Terms of the deal. (Is it an all cash purchase, or is it subject to obtaining a loan for a given amount or selling your current house before purchasing the new one?)
  • Seller’s promise to provide clear title.
  • Target date for the close of escrow and date property will be turned over.
  • Amount of earnest money deposit accompanying the offer, and how it’s to be returned to you if the offer is rejected or kept as liquidated damages if you back out for no good reason.
  • Instructions as to who will pay for title insurance, termite inspections, home warranty and escrow fees, and what companies are to be used.
  • A disclosure stating which agents and brokers are representing the buyer and the seller.
  • Type of deed to be given.
  • A time limit after which the offer will expire.

Next month we’ll review tips on just how to make your offer a strong one.

If you’re ready to start the process of purchasing your first or next home, call me today to set up an appointment. 310-722-5959.

Sincerely,

Lawrence Chaves,

DRE# 01893036

Click “follow” and “like” at the top of the page to subscribe to L.A. Real Estate 101, and stay on top of the L.A., and National, real estate markets.

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The Greatest President EVER… or… How to Fix a Broken Country

Franklin Delano Roosevelt, America’s 32nd (and arguably greatest) President.

The 32nd president of the United States, despite suffering from polio, and being a paraplegic, lead the United States during a time of worldwide economic depression and a world war. He campaigned against an incumbent, Republican President, Herbert Hoover, winning 57% of the vote and carrying all but 6 states. On top of which, he is the ONLY American president elected to more than two terms, FOUR in fact, earning Franklin Delano Roosevelt the title of Greatest President EVER!

When Roosevelt was inaugurated on March 4th, 1933 the U.S. was in the worst depression in its history. A quarter of the workforce was unemployed, production had fallen by more than half in the four years prior, and over two million US citizens were homeless. To make matters worse, by evening that very night, 32 of the 48 states had closed their banks and The New York Federal Reserve Bank was unable to open the very next day, as huge sums of money had been withdrawn by a panic-stricken United States.

Right out of the gate, in his inaugural address, President Roosevelt blamed the economic crisis on, guess who,… Wall Street bankers. Through their greed and reckless investments they had collapsed the economy. (Imagine that, if you can.) But it went further. Roosevelt realized that the Depression was being compounded by people no longer spending, or investing, their money. Those that did have money, clung to it in desperation, AFRAID that they would be next to go bankrupt. Thus the backdrop of his famous line, “The only thing we have to fear is fear itself.”

To combat this, Roosevelt spearheaded major legislation, beginning with his world-renown  New Deal. The New Deal consisted of a variety of programs that historians categorize as “relief, recovery and reform:” relief through government jobs for the unemployed, a recovery plan for the economy, and of course, the reform of the Wall Street banks.

The very next day, following his speech, Congress passed the Emergency Banking Act declaring a “bank holiday” and announced their plan to reopen the banks.  Roosevelt knew the first step to recovery was to reestablish American’s confidence in their banks. He then signed one of the most vital pieces of banking regulatory bills ever, the Banking Act of 1933,  and with it, the Glass–Steagall Act .

The Glass-Steagall Act, named for its Congressional sponsors, Senator Carter Glass (D) of Virginia, and Representative Henry B. Steagall (D) of Alabama refers to four provisions of the 1933 Banking Act that attempted to separate commercial and investment banking. The acts prohibited any member bank of the Federal Reserve System from being affiliated with a company that engaged principally in “the issue, flotation, underwriting, public sale, or distribution” of securities. It also prohibited  any business or person from taking deposits if it was in the business of “issuing, underwriting, selling, or distributing” securities. Simply put, if you are bank that holds people’s money, you are not permitted to make risky investments with that money. If you’re an organization that is in the business of making possible risky investments, you cannot use the faithfully deposited money of the citizens, it must come from investors.  This insured that banks holding it’s citizen’s money could not go bankrupt through risky investments.  However, years later, in 1995, the new Chairman of the House Banking Committee, Representative James A. Leach (R-IA), introduced a bill  called the Gramm-Leach-Bliley Act that would repeal Glass-Steagall, allowing the purse strings of Wall Street to loosen up once again, eventually leading to our current recession.

Throughout his presidency, Roosevelt continually cut the federal budget where he saw “useless commissions and offices,” including a reduction in military spending from $752 million to $531 million. In addition, Roosevelt’s New Deal initiatives that fixed our broken economy and consequently our  country, included $3.3 billion of spending through the Public Works Administration to stimulate the economy, the repeal of prohibition which brought in all new tax revenues, and the introduction of payroll taxes to fund the new Social Security program in 1937. And to top this off, during World War II Roosevelt pushed for an even higher income tax rate for individuals and corporations (reaching a marginal tax rate of 91%) as well as a cap on high salaries for executives. In fact, he went as far as to issue Executive Order 9250 (later to be rescinded by Congress) which raised the marginal tax rate for salaries exceeding $25,000 (after tax) to 100%, thereby limiting salaries to $25,000 (which would be in the neighborhood of  $350,000 today, and slightly higher than what it takes to join the 1%).

With his expansion of government programs Roosevelt redefined the role of the government in the United States, and through his advocacy of government social programs he was instrumental in redefining liberalism for generations to come, all the while establishing the United States as a leader on the world stage.  Reflecting on Roosevelt’s presidency, his biographer, Jean Edward Smith would later state,  “He lifted himself from a wheelchair to lift the nation from its knees.”

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Is Obamacare raising taxes on real estate sales?

I’ve been getting this question from the left, and most definitely from the right, for the past several days now. I hear your concerns, and it is my intention to be your local and national real estate expert so, I figure it was definitely worth taking a closer look at the Patient Protection and Affordable Care Act, or more commonly referred to as… Obamacare.

Just this morning I had a meeting with CALIFORNIA ASSOCIATION OF REALTORS® Assistant General Counsel and Staff Vice President, Gov Hutchinson. Here is what he said: Among the various Senate Bills and new laws going into effect on January 1st, 2013  is infact a 3.8% surcharge that will be imposed on any commercial, investment, or income properties for individuals making over $200,000 and couples making over $250,000.

Does that mean if you sell your house after December 31st, 2012 you will be charged an additional 3.8% tax on the sale? NO. It means if you are a high income taxpayer and you make over $200,000 a year (or $250,000 as a couple) on the sale of your COMMERCIAL OR INCOME PROPERTY (not primary residence) then yes, you will be charged a 3.8% tax surcharge on the sale.

This does not pertain to just real estate. This is on ANY CAPITAL GAINS including money made from the stock market. On a side note, this tax increase is estimated to bring in $210 billion between 2013 and 2019.

As for capital gains made on the sale of your PRIMARY  RESIDENCE, the first $500,000 in capital gains is TAX FREE. So, if you sell the house you live in, you will not be charged this tax unless you make over $500,000 on the sale. If you bought that house in last 6 years, I’m thinking you’re pretty safe. However, if you are still worried about this capital gains tax, and you think it may pertain to you, call me today to make an appointment 310-722-5959.

I WILL SELL YOUR PROPERTY for you BEFORE December 31st, 2012 and you can avoid the 3.8% tax. Problem solved.

To read more about the Affordable Care Act, here is the direct link to the entire law as it is written. http://www.healthcare.gov/law/full/

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Where are you, at the end of Q2?

Rising interest rates costs you money.

Last month I mentioned I’d be talking about “making an offer” in this month’s Real Estate 101, but instead I decided to veer off topic a bit and talk about something else as we come to the end of Q2 (Second quarter) and roll into the summer months. I want to take moment to address some things that I feel all my clients should, and need, to know.

Let me share a few things you may not have realized.

First of all, if you weren’t already aware of it (if you’ve followed my writing you should be) INTEREST RATES HAVE NEVER BEEN THIS LOW IN OUR ENTIRE LIFETIME!!!

Just how low varies depending on the bank, but my new in-house lender, Bank of Manhattan, is now offering  3.375% on 30 year fixed conforming loans up to $417,000, and 4.125% on 30 year fixed jumbo loans up to $1,500,000. Try getting a credit card that offers that kind of interest rate.

I cannot stress the importance of a low interest rate enough, but I do not want people to think I’m writing this as a marketing ploy. I’m not. I’m writing this to educate my friends and potential clients, thus the title Real Estate 101.  So let me take a moment to explain just how important it is to lock down a low interest rate.

Most home purchases are done on debt. A LOT of debt. The buyer puts down anywhere from 0-20% on the overall price of the house. The lender, or bank, covers the rest. That lender is “banking” on you to pay off this debt over time, 15-30 years in most cases. They get their money by charging you interest on the debt owed.

Most buyers tend to focus solely on the PRICE of the house. What they should be concerned about is the overall COST to buy the house. What’s the difference? PRICE is simply the actual price tag the buyer pays the seller for the home. It does not take into account any financing costs. COST is what a buyer will pay for a home overall, including interest rates accumulated over the lifetime of the loan.

While buyers wait months for home prices to hit rock bottom, interest rates can rise. And higher interest rates will definitely effect a buyer’s overall purchasing power and monthly mortgage amount.  For example, on a $400K loan,  the payment increases $190 a month when the rate jumps from 4% to 5%. That’s nearly a car payment for some families and that’s without including property taxes and PMI (private mortgage insurance).

When you consider the entire life span of the loan, the total paid on INTEREST ALONE for that same $400K loan at a 4% interest rate is $229,982. At 5% it is $298,418. That’s $68,436 over a 30 year period with the interest rate having increased only 1%. Thinking of purchasing an $800K house. Double all those numbers. 
Want to see for yourself?  click here.

Higher interest rates will also affect any current purchase offer and loan approval that a buyer may have. So for someone looking in the $400k range now with a rate 4%, that same monthly payment will only get a home for $360k if the rate increases to 5%.

Lastly, I want to break the long standing idea that you need to rely on a 401K or savings account to retire.  That is not true. What you do need when you retire is steady income coming in each month. If you’re not working, that means Social Security or money from investments that you’ve made throughout your life. Right now with low interest rates and a market of short sale homes and foreclosures, investing in income property right now is a SMART INVESTMENT.

So here are four simple questions I have for you as we enter Q3:

1)    What does your real estate portfolio look like?

2)    What are your real estate goals for this summer?

3)     How can I help you with your real estate needs?

4)     Where do you want to be at the end of Q3?

Please do not hesitate to call me with any questions you may have. 310-722-5959.

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Step 3: Your ticket to the show

Before you start shopping for a home, you need to work with a lender to get pre-approved for a mortgage. Pre-approval is basically a promise from the lender that you’re qualified to borrow up to a certain amount of money at a specific interest rate. This promise is subject to a property appraisal and other conditions, but it is essentially your golden ticket to ride around town looking at gorgeous homes.

In the pre-qualification process, you spoke with a lender, briefly, maybe even over the phone, and he or she gave you an estimate of what you’ll probably be able to afford. Now, in the pre-approval process, the lender is going to take a much closer look. They’ll want that credit score we’ve spent all last month raising, and they’ll need to verify your income. They’re about to loan you a ton of money. If they’re smart, they’ll want proof that you can, and will, pay it back.

When you’re pre-approved for a mortgage, it means that a lender has looked closely at your credit report, your employment history, and your income and has determined which loan programs you qualify for, the maximum amount that you can borrow, and the interest rates you’ll be offered.

In order to get pre-approved, you’re going to need a few things:

  1. Your last two years’ tax returns and W-2s.
  2. Your most recent pay stubs.
  3. Your bank account statements.
  4. A signed authorization to order your credit report.

Once verified, the lender will then give you a pre-approval letter, stating that your loan will be approved once you make a purchase offer. That pre-approval letter means that the lender is confident that you can make the necessary down payment and that your income is sufficient enough to cover the mortgage payments. At this stage, only one concern remains. The lender needs to make certain that the property’s value offers sufficient collateral in relation to the loan amount. In other words, the home must be appraised for an amount more than, or equal to, the purchase price. But that’s a lesson for another day. For now, here are some reasons why the pre-approval letter is so important to both the listing agent and the buyer’s agent.

1. You’ll know exactly how much money you qualify to borrow. Most people have a rough idea of how much they would feel comfortable paying every month on their mortgage. However, most people forget to add in many key factors such as down payment percentage, mortgage insurance, property taxes, home warranty, adjustable interest rates, car payments, insurance, credit card bills, alimony, child support… and so on. Therefore…

2. A pre-approval letter is far more reliable than a pre-qualification letter. Getting a pre-qualification letter is easy. You just call a mortgage broker or lender, provide some basic financial information, then wait a few minutes for the letter to be emailed to your phone.

A pre-approval letter, on the other hand, involves verification of the information. Rather than taking your word on faith, the lender needs documentation to confirm your employment, the source of your down payment and other aspects of your financial circumstances. This additional due diligence is exactly why the pre-approval carries more weight, which is why…

3. You’ll have more leverage in negotiations with the seller. Sellers often prefer to negotiate only with pre-approved buyers because they’ll know for certain those buyers are financially qualified to obtain the financing needed to actually purchase the house. A pre-approval letter is especially favorable in a close, multiple offer situation, which is exactly what we are seeing in the market now. Theoretically, you can make an offer in the billions if you want, but if it hasn’t been pre-approved, it is literally not worth the paper it is written on. So, with a pre-approval letter, your offer moves to the top of the stack and…

4. Escrow runs much smoother and could even lead to a faster close. Because there is no window period while your loan application is processed, the lender can speed up the entire processing procedure and appraisals can be ordered immediately. It may even be possible to shorten a 30-day closing to two or three weeks, which comes in handy if a seller needs to quickly move and can’t decide which offer to accept. If you can accomplish the seller’s need to quickly close, once again your offer moves to the top of the stack

The pre -approval letter essentially signals all parties involved that you’re a well-qualified buyer who is serious about purchasing a home. Also, the increased likelihood of a closed sale, and a commission, will naturally motivate your agent to devote more time and energy to you. In fact, some agents won’t even show property to buyers who don’t have a pre-approval letter, which is why the pre-approval letter is your ticket to the show.

Next month, we  start looking at homes. Bring your checkbook.

Sound like a plan? Call me today to start the process 310-722-5959.

Sincerely,

Lawrence Chaves,

DRE# 01893036

Click “follow” and “like” at the top of the page to subscribe to L.A. Real Estate 101, and stay on top of the L.A., and National, real estate markets.

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Step 2: Repairing your credit

Last month I explained how step 1 in buying a home was getting prequalified. This includes getting your general credit worthiness  taken in the form of a credit score. This is one of the absolute factors required in prequalification because you must have a credit score determination prior to any vetting of information.

And as I stated last month, for an FHA loan, you’ll need a credit score of at least 580.  So, if you haven’t done so already, go ahead and check your credit score for FREE right here with one of these links: freecreditscore.com or freecreditreport.com

If your score shows up lower than a 580, no need to worry, but we’re going to need to raise it a bit. Here’s how:

1.Don’t have a credit card? GET ONE!!

Having and using a credit card are essential to building your score.  If you can’t qualify for a regular credit card, get yourself  a debit card where the bank gives you a credit line equal to the amount that you deposit into the account. Also, look for a cards that report to all three credit bureaus.

2. Now, purchase something and pay it right off.

When attempting to climb your way out of debt most financial advisors  will recommend that you pay off the credit card card with the highest rate first.  However,  the strategy I want you to employ here is paying down the cards that are closest to their limits. Lenders like to see a big gaps in the amount of credit that you’re using compared to the amount of credit that you actually have available to you. In other words, getting your balances below 30% of the credit limit on each card is GREAT!  Below 10%, even better.

3. Don’t go crazy, limit your purchases.

If you regularly use more than half your limit on a card, consider using other cards to ease the load. Also, try making a payment before the statement closing date to reduce the balance that’s reported to the bureaus. Just be sure to make a second payment between the closing date and the due date, so you don’t get reported as late.

4. Got an old card that you don’t use? Use it.

Much like step 1, the logic here being that the older your credit history, the better. But if you stop using your oldest cards, the credit card company may decide to close the accounts or stop updating them to the credit bureaus. The accounts may still appear, but they won’t be given as much weight in the credit-scoring formula as your active accounts.

So you might want to charge a recurring bill to one of those little-used accounts, or treat yourself (or a friend hint, hint) to dinner and a movie.  But remember, be sure to pay off the balance in full.

5. Dispute negatives marks, and use a sob story

If you’ve been a good customer, a lender might agree to simply erase a late payment from your credit history. More than often you’ll have to make the request in writing, but it can’t hurt to ask, and speaking with someone over the phone puts a real human, with real struggles, in front of the lender (or at least in front of an employee) on the other end of the line.  It’s been a rough few years for EVERYONE, and it’s not easy to make someone’s life harder, especially when they are sincerely asking you for help.

Here’s the stuff that’s usually worth the effort of correcting with the bureaus:

  • Late payments, collections or other negative items that aren’t yours.
  • Credit limits reported as lower than they actually are.
  • Accounts listed as “settled,” “paid charge-off,” or anything other than “current” or “paid as agreed.”
  • Accounts that are still listed as unpaid that were included in a bankruptcy.
  • Negative items older than seven years (10 in the case of bankruptcy) that should have automatically fallen off your reports.

Other actions to beware when you’re trying to improve your scores:

  • Asking a creditor to lower your credit limits. This will reduce that all-important gap between your balances and your available credit, which could hurt your scores. If a lender asks you to close an account or get a limit lowered as a condition for getting a loan, you might have to do it — but don’t do so without being asked.
  • Making a late payment. The irony here is that a late or missed payment will hurt good scores more than bad ones, dropping 700-plus scores by 100 points or more. If you’ve already got a string of negative items on your credit reports, one more won’t have a big impact, but it’s still something you want to avoid if you’re trying to improve your scores.
  • Consolidating your accounts. Applying for a new account can ding your scores. So, too, can transferring balances from a high-limit card to a lower-limit one or concentrating all or most of your credit-card balances onto a single card. In general, it’s better to have smaller balances on a few cards than a big balance on one.

By the way, all these suggestions work best if you have poor or mediocre scores to begin with. Once you’ve hit the 700 mark, any tweaking that you do will tend to have less of a positive impact. And if your scores are in the “excellent” category, 760 or above, pat yourself on the back. You’re done. It’s not gonna get any better than that.

Next month we’ll turn your prequalification into an actual pre-approval letter. That way, all you’ll need is your checkbook and  a knowledgeable realtor, like me, to get you into the right house.

Sincerely,

Lawrence Chaves

DRE# 01893036

Click “follow” and “like” at the top of the page to subscribe to L.A. Real Estate 101, and stay on top of the L.A., and National, real estate markets.

What's your credit score?

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