Bogus Home Appraisals May Derail Real Estate Recovery

A huge number of home value appraisals may be wrong, with most of them being much too high. That is causing banks to back away from mortgages. A house that has been appraised for $400,000 might support a $350,000 home loan. If the bank looks a the property and says it is only worth $300,000 the mortgage application gets put into the waste basket.

The over-valuing of homes could kill a turnaround in real estate and make the persistent and hard drop in property values continue longer than many economists predicted that it would.

National Association of Realtors chief economist Lawrence Yun said the appraisal problem is serious.

One of the by-products of the appraisal problem is that sellers often have to take less money for their homes than they had planned. This further depresses the value of real estate and often makes sellers take on debt to pay the difference between their mortgages and the amount they get for their homes. People who take on new, large debt burdens are not likely to be consumers. Real estate values are directly linked to consumer spending.

The problem is hard to solve. Banks almost always rely on outside firms to handle appraisals. If lenders believe the information they are getting is routinely inaccurate, they may sharply curtail their overall mortgage operations. Risk and leverage are not words bankers want to hear right now. The financial debacle of the last two years has cut lending to unprecedented lows. Bogus home valuations will only make that worse.

Real Estate News - July 2009

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Should You Buy Your Kid a House?

Low interest rates and a depressed real estate market have some affluent parents asking financial advisers if buying their children a house could accomplish a one-two punch of moving assets out of their estate while grabbing a good deal on property.

The answer is, not exactly.

While parents may get a bargain on real estate, purchasing a home for children may not get them the best bang for their estate-planning buck, particularly if that estate is sizable and includes income-producing assets like securities or a private business interest.

As the federal tax law currently stands, a married couple can give, during their lifetimes or leave to their heirs at death, $2 million before any tax is owed. "A home isn't an income-producing asset, so it makes more sense to save the $2 million lifetime gift exclusion for other estate-planning techniques which can generate a lot more upside in the future," said Mark Luscombe, principal tax analyst with Wolters Kluwer, a business that provides tax and legal information.

Instead, advisers say parents intent on helping their children become homeowners consider a cash gift instead.

Individuals are allowed to gift up to $13,000 per person in a given year without dipping into their lifetime gift tax exclusion. That means a couple could give their daughter and her husband $52,000 a year to go toward mortgage payments or the down payment, while removing some assets out of their estate each year. In this situation, the kids would have to buy the home, but would get another break this year: Qualified first-time home buyers who purchase a home before Dec. 1st are eligible for an $8,000 tax credit. This may apply for parents and children who buy the house jointly, although the credit begins phasing out at a modified adjusted gross income of $150,000 when married and filing jointly.

There are other options, like making the kids a loan.

The government sets minimum rates for loans, among family members and others, to not be considered gifts. Those rates now are historically low, ranging from less than 1% to about 4 1/2% depending on the loan term. This method doesn't actually move money out of the estate, thus freeing up the $2 million exclusion to pass on other assets that are more likely to appreciate over time. Children can use income generated from the appreciated assets to pay off the loan. Parents could use the $52,000 annual gift exclusion for their daughter and husband to forgive both the interest and principal of the debt if they choose.

First Time Homebuyers Are Finding Bargains

Want to see what bargains are out there right now? Contact us or leave us a comment. We'll get back to you as soon as possible to help you find a home in this buyer's market!

Homeowner Insurance: What Happens When Your Home is Vacant

If your home is vacant for any length of time, it may not be covered under your existing insurance policy. Rather than assume your home will still be insured, check this list of steps to follow with your insurance company to make sure you have coverage.

1: If you describe a vacancy situation to your agent or the insurance company, do not rely on a verbal conversation or acceptance that "everything is OK." (Get this in writing whenever possible.)

At the very least, document the situation to your agent or the insurance company and save the email. If they do not reply back to you, it could be interpreted as acceptance.

WHY BE CAUTIOUS? There have been thousands of situations where the homeowner was told that their existing policy would be fine, they don't make a switch over the a vacant homeowners policy (or landlord policy in the case of a tenant) and then find out the insurance company is denying the large claim because none of the primary family was living in the house at the time of claim.

2: If your existing homeowners insurance company is willing to continue to insure your home while it is vacant (or you have a tenant) make sure you understand that the coverage will most likely not be the same as when you were living in the house. In many cases it can be drastically reduced and by most estimates, 90% of homeowners do not understand what the differences are.

3: Know the amount of time you and your family can be out of the house before you have a coverage problem with the existing homeowners insurance company. Some coverage can end or be reduced after just 30 days with the most common peril lost from vandalism. There is no way you can expect your existing homeowners insurance policy to cover a $20,000 vandalism claim, if after their investigation, they find out the home had been empty for a certain period of time.

4: Just because "on paper" it appears you officially have coverage, and the insurance company has cashed your check while sending back documentation showing you are insured into next year, don't assume you have coverage if you or a member of your PRIMARY FAMILY is not living in the home. The insurance company will be more than happy to return all paid premium to you instead of having to pay a $90,000 claim, caused by running water when the house was vacant for 120 days (for example).

Your best bet, cancel your existing policy if your home is going to be vacant or rented and get a proper vacant homeowner's policy or landlord / tenant policy.