Do you ever drive through a neighborhood of million dollar homes and wonder how on Earth people afford them?Read More
Home ownership has long been part of the American Dream. But if you’re not careful, it can be a nightmare.
Here are some things to consider before committing to that 3BR/1.5B rancher you saw on ZillowRead More
Should I be renting or buying? And how much house can I afford anyway? Buying a home is the biggest purchase of most American's lives. It's important to make the right one for your family and for your finances.Read More
We've talked a lot about home buying on the Wela blog and on The Money Revolution but there's another side to home ownership, selling your house. To find out more about the process of selling (and what can go wrong if you're not careful) we turned to our friend Ben Kubic, co-founder of Atlanta-based Virgent Realty, to get his take on the five most common mistakes people make when selling their home.
1. Pricing your home too high
Many homeowners that we’ve worked with want to price their home as high as possible to start out with and reduce that price over time if they don’t see any showing activity, but this philosophy can cause some major problems. The longer a home sits on the market, the less likely buyers are to visit because they assume the home has some issue. Secondly, many buyers start their home search by filtering available listings by price range, so even though a buyer may be able to pay a price you’re willing to accept, your house will never show up on their search if it’s listed too high.
Homes that are priced at or below market value are not only much more likely to attract buyers, but also more likely to bring in multiple offers which ensure the home is sold for its maximum possible value. So what’s the magic behind pricing a home effectively? It’s a long(ish) answer, and you can read about it here.
2. Not getting your home inspected before listing
Most homeowners associate inspections with the closing process, but getting an inspection before you even list the property can save a lot of headache down the road. Buyers love using the home inspection as an opportunity to negotiate price reductions even though the repair price may be a lot less than they are asking. By getting a preemptive inspection and repairing any deficiencies before you list, you can eliminate renegotiations that could reduce your home equity or even kill the deal altogether.
3. Investing in home upgrades that don’t pay off
Almost no renovation projects return 100% of the investment on resale so the time to invest in your home is when you expect to stay there for a long time, not right before you’re planning on selling. HGTV has given many homeowners the impression that renovations done right before listing increase equity in one’s home. With the exception of replacing your front door, you will lose money by making updates right before you list.
Even if you have no intention of selling anytime soon, be cognizant of your local market. If the average home in your neighborhood is selling for $300,000, that $100,000 kitchen renovation won’t pay off at sale time because buyers use neighborhood comps to determine how much they’re willing to pay.
4. Using low quality listing photos
You have 20 seconds to impress a viewer with your first listing photo. If that photo doesn’t entice the viewer to look for more information, then you’ve just lost a prospective buyer and a chance at an offer. Since most listing photos are now viewed on HD devices, grainy photos taken with an iPhone or low quality camera will quickly turn off buyers.
High quality photos, like those taken with a DSLR camera, not only attract buyers, but they can actually increase the selling price of your home by up to $100,000. It’s also a great way to differentiate your listing, since only 15% of listings use high-end photography. Shameless plug: We at Virgent provide professional photography for all of our clients for this exact reason.
5. Overpaying real estate commissions
Of course we couldn’t help slipping this one in here, but it’s still absolutely true. Most homeowners never even think to ask about the commission when they sign with a listing agent, but that oversight can quickly cost you tens of thousands of dollars extra, in addition to a lot of time-consuming pre-listing visits, physical paperwork, and phone calls.
If you're curious about selling your home checkout Virgent's free interactive home valuation.
Ben Kubic is the co-founder and CEO of Virgent Realty, where he focuses on developing the technology behind the company's seamless customer experience. Ben founded his first company as a sophomore in college to serve the educational needs of lower-income students in the surrounding area; he sold that company after growing it for 5 years. He holds his MBA from Harvard Business School and a B.A. in Political Science and B.S. in Operations Management from the University of Maryland.
Things are heating up in the housing market as we start to see more millennials move out of their parent’s house and into their own home. Many of these buyers want to take advantage of the current low mortgage rates… because these rates are definitely going up, right?!
It seems that everyone has been threatening rising rates for years, but rates have remained low. People wanting to take advantage of low rates over the past couple of years have already re-financed to take advantage of the even lower rates.
This time, though, it’s different when people threaten the rising rates. Rates are almost certainly bound to go up, and given the scorching temperatures of the housing market that we are currently seeing, now is a good time to get into a new house.
If you’re looking to buy a new house, you have to ask yourself, “What is best for us and our budget? Should we go with that 15-year mortgage that shows an extremely low rate around the 3%, or should we carry our home mortgage for 30-years and go with a slightly higher rate and spread this out?”
The answer comes down to whether you want financial flexibility or to make the technically correct financial decision. Surprisingly, Wela’s answer happens to lean against that “technically” correct answer.
Flexibility Versus Cost
Flexibility is king when it comes to this decision. The benefit of having a 30-year mortgage is that, despite our rate being higher, our actual mortgage payment tends to be considerably lower. The reason for this is that we are spreading out the mortgage payment over many more years… 15 more to be exact! The con to this is that we are now forcing ourselves to pay our mortgage for a longer period of time.
It’s a financial principal to try and eliminate your debt. However, another financial principal is to make sure we are able to financially handle all of the curveballs that life throws us. Whether that is a pay cut, a lost job, or an emergency expense that arises, most people will find in their lifetime that they need financial flexibility.
Taking on a 15-year mortgage is the “technically” financially sound decision if we were just looking at the numbers and nothing else. Get the debt paid off quicker and reduce the amount of interest we have to pay those big wig banks is typically the best financial decision. However, let’s look at a more specific scenario. Say we have a $200,000 mortgage and assume the rates are close to what the national average is currently. Over the life of the 15-year mortgage, you would pay about $52,000 in interest. And over the life of the 30-year mortgage you are paying about $151,000 in interest.
That’s $100,000 difference in interest cost alone! So yeah, in this regard the 15-year mortgage makes a whole lot of sense. There are, however, two other important factors to take into account. By going with the 15-year mortgage, you are locking yourself into having to pay nearly $1400 per month for the mortgage. Whereas with the 30-year mortgage you are only obligated to pay $975 per month. The keyword here being “obligated.”
If your financial situation changes to the negative, you are still obligated to pay $1400 per month with that 15-year mortgage. With the 30-year mortgage, you can always pay more. If your financial situation is great right now, you can go ahead and pay more on that loan… but if things change you have the ability to reduce that spending and use that extra money on living and getting through that difficult financial situation without having to necessarily move out of your house.
As things continue to get better within the economy it’s easy to fall into that “invincible” mentality. We aren’t necessarily as wound up or worried about our job security as we were just a couple of years ago. These folks might be saying, things won’t change… until they do and they’re stuck with that greater mortgage amount.
Don't Waste Your Savings
The 30-year mortgage offers a 30% lower monthly payment than the 15-year mortgage. That means you could actually save that extra 30%, and it could go towards your retirement savings. Or perhaps you are in high growth mode within your family and kids are starting to cost you a bit more. Well, now you have 30% more savings, relative to the 15-year, which you can put towards your kids’ education or possibly their extracurricular activities. Let’s be real, it might even just be food to keep those growing teenagers fed!
Again, it just allows us to be flexible and not bound to a higher payment. Because maybe today things are good, but we don’t know what tomorrow will bring. Financially speaking, it is always great to have flexibility and to limit the ‘contractual’ obligations that we have within that expense category. Ultimately, we never know when we may have to buckle up with our financial situation.
Now it’s hard to ignore that huge chunk of change you’ll be paying in interest to a bank in a 30-year mortgage versus a 15-year mortgage. To make sure that you’re not simply throwing that money away, you have to actually invest that money you’re actually saving.
We get it. Who wants to take that additional $400 or so every month and save it in their investment account? That's tough to do for even the most disciplined. However, there is a trick to force yourself to do this. Instead of looking at that money in your bank account each month, just increase your contributions to your 401k based on the difference in savings you have with the lower mortgage payment.
So, with our example of a $200,000 mortgage and current mortgage rates, we are saving about $5,000 every year in mortgage payments. So, the day you close on your new house, go to your 401k provider’s website and boost your contribution by whatever percentage necessary to start saving an extra $5,000 a year to the 401k. This way it is automatic, and you won’t even notice it.
This leads to multiple benefits. One is tax savings because the money comes out of your paycheck before taxes and thus lowers the amount of your salary that you are forced to pay taxes on. Secondly, it could boost the amount of free money that you can get from your company. If your company currently matches your 401k, this can boost the amount that is being contributed to your 401k every year by the company. Lastly, it allows you to partake in the power of compounding to an even greater degree than perhaps you’re currently utilizing.
Again, the benefit of doing this as well is that you have flexibility in what you contribute to your 401k. So, if you find yourself in one of those emergencies that calls for financial flexibility, then you can reduce the amount you are contributing to the 401k and utilize the extra cash flow to help you cover that spending need that you currently have.
Now that we have an answer to what mortgage makes more sense… the next major decision we need to make when it comes to buying a home is how much home can we afford and should we buy?
We suggest you try the home buying tool we have within the YourWela.com portal. It's based on your financial picture, and you can quickly turn it into a goal to help you track your saving. Just sign up for a free account to try it out today!
Home ownership is a cornerstone of the American Dream. But if you don’t do your financial homework before that house warming party, it can become a nightmare.
Buying too much house can cripple your finances in both the short and long term.
So, how much house can you really afford? Let’s run the numbers.Read More
Wela Financial Advisors on what we saw, what we learned, and what we should do on this week’s episode of Life or Debt on Spike.
The McCray/Gucatan family has found themselves in serious cash flow issues due to financial decisions made throughout the years, both independent of one another and together as a couple. Bottom line, they need to clean up their financial baggage before trying to pack in the same suitcase!
Filing for Chapter 7 bankruptcy may be the best possible solution for Pat as she has personally guaranteed business debt and this will allow for a complete liquidation and financial re-set. Scot needs to look at Chapter 13 which is a reorganization of debts and would allow him to potentially keep his home and avoid foreclosure. In order to qualify for Chapter 13, however, Scot will have to move back into his main residence to avoid it being classified as an investment property which you can’t maintain in this type of bankruptcy proceeding. This is a serious lifestyle consideration as he won’t be living in the same residence as Pat and the kids. Tough decisions, both financially and emotionally, must be made!
Both Scot and Pat have been making great income so this isn’t a story of low wages but rather too much SPENDING. Pat and Scot need to develop a realistic budget they can stick to. With household income as high as theirs is, there’s no reason to rack up the amount of credit card debt and other personal loans. Yes, they do have a lot of mouths to feed but this comes down to prioritization. Mink coats and $1,000 car payments can’t come before the necessities of basic living. So while living within a budget is paramount to their success, the question we must ask is how do we decide whether or not to rent or buy a house?
At the end of the day, cash flow and flexibility are KING! How much can you afford to pay for the place you live? In today’s low-interest rate environment buying has never been so affordable but that still doesn’t mean it is right for you. How much can you realistically put towards a down payment? 5%? Or the recommended 20%? What kind of commitment do you want? When you buy, you’re on the hook for the life of the mortgage. When you rent, you’re typically only locked in for a year before you can make a change. These and many other decisions play into the answer of whether to rent or buy.
If you're currently facing the question of whether to buy or rent your next residence, here are a few articles that may help you decide.
Banks tell us that we can take on a mortgage that is up to 30% of our monthly gross income, but that might not the best the plan for your budget. Learn how we suggest you budget each month at Wela using TSL.
The other day I had a great learning experience when working with one of our clients. Our client was deciding whether or not he and his wife could afford to purchase a new house, and reached out to me to learn if he was financially prepared. Unfortunately, after reviewing his situation I told him he was not able to buy a house because he was carrying other debt that would hold him and his wife back from having any flexibility with their income streams. It was the perfect example of why we need to be careful with how much we leverage ourselves with debt.
At Wela, we follow the TSL budget - Taxes, Savings, Life. It's a rule of thumb that says that you should spend 30% of your income on taxes, 20% on savings and 50% on life. If you are able to maintain this rule of thumb, then we believe you are in a solid financial position.
The family I was working with brings in about $100,000 a year. They wanted to buy a house, and the price of the house was actually a steal. The mortgage payment would be well within reason based on what they make each year. The problem was that they are currently servicing other debts - student loan and credit card debt - which has a monthly payment that is only slightly less than the current mortgage payment. If they were to buy the house they would be putting 36% of their income, $36,000 every year, towards debt servicing. This is in the maximum range of what we feel comfortable with at Wela. So, I had to tell him that from a financial standpoint it wasn’t a smart decision to buy the house.
We always try to figure out how to balance both consumption and frugality at Wela, but sometimes it just doesn’t work. The reason it doesn’t here is because if they bought the house and had that much debt to service they would be tying up too much of their after-tax income to debt servicing. They would be putting themselves into a situation where they'd have to incur more debt in an emergency which would be a major financial setback. The best thing for them to do is to really focus on paying off their debt as aggressively as possible. Instead of putting money towards a mortgage, they need to put their extra cash flow towards reducing their other debts as quickly as possible. We recently released an ebook on starting a 30-Day Economic Shutdown. This could be a good way for this family to jump-start debt reduction.
Let's look at this family's proposed budget in terms of the TSL budget. If this family had 36% of their income going towards debt servicing along with 30% going towards taxes and even just put 10% towards saving, they are left with a minimal amount of cash flow for living expenses like buying food, gas, car insurance, utilities, etc. On top of this, if they own a home then they also have maintenance costs. Heck, on $100,000 income we are talking about having $2,000 a month for life expenses, and they are already spending about $1,700 on necessities outside of rent. On top of all of this, the couple is currently expecting their first child. These numbers just make their budget too tight. Could they buy the house even with the other debt? Yes, but it would really squeeze them, and the first mishap that arises with the house or anything else could likely lead to them incurring more debt.
This example just shows that even if you are able to borrow… like this client who would likely be approved by the bank for the mortgage… doesn’t mean that you should borrow. The ability to borrow money versus if you should borrow money are two drastically different situations and deserve two different criteria. Here is a situation where they could borrow, but they shouldn’t.
If you have a similar question, or would like advice on your financial situation, create your free Wela account and start your game plan. Our advisors analyze your financial situation based on the information that you provide and then speak with you about your questions, goals and actionable steps for your situation. Try it out today.