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My friends always ask me for financially advice for some reason...maybe because I'm the one with logical no nonsense advice. I wanted to get a second/third etc. opinion on this message board for the following situation.
One colleague has home for sale in Maryland.
He purchased it for 550K at "peak 2005 prices" (with about 15K closing cost, plus he got 5K "rebate" back from his real estate agent...yeah I know that's kinda of illegal to be "gifting" a 1% real estate commission back). His cost basis for the home was 560K.
He took out a 500K interest-only mortgage (why he did this is a mystery to me cause that's almost his yearly income and he could more than afford to pay the principal).
Anyways he has home on the market for 550K and he has an offer on the table for 503K (Maryland hasn't suffered as bad as the rest of the country but prices are down 10-15% from peak in more affluent areas).
I told him to take the offer. He feels like he will lose 85K on the home. I tell him he's not really losing 85K. It's actually a lot less than he thinks.
First off, his interest only mortgage plus real taxes and HOA comes out to about 3K a month. (3K x 48 months he's lived there=144K in payments over 4 years).
Second if he would have rented the home for 4 years, he would have had to pay the same or more without the tax deductions. He would have been out 144K in rent payments anyways. Probably even more since a rental price for the type of home he has would go for at least $3300-3500 since its in a very good school district.
So if you calculate his tax savings (say write off $2900 in mortgage interest/re taxes) would be almost 11K a year in his 35% tax bracket.
11K tax savings per year x 4 years= 44K in tax savings.
So even buying at peak 2005, he's only losing (85k lost- 44K in tax savings)- 41K. If his selling price is 503K. His cost basis is 560K (includes closing cost). plus 5.5% Real Estate commission (about 27.5K). 503K-27.5K (comissions)= 475.5K total cost. (560K-475.5K=84.5K lost)
Don't you all agree that people do not take into "tax savings" they get with owning a home, even when selling for a lost? People who "break even" really aren't breaking even, they are actually making money since they've gotten to live there for an X amount of years "rent free".
He's looking at 85K "lost" figure because he looks at the cost basis vs. selling point with real estate commission fees.. I'm looking at a 41K "lost" and including his 44K in tax savings over the past 4 years.
I see your point; He had a tax savings, in mortgage interest, that he would not have had if he had been renting.
BTW - It's not against the law for the agent to credit the buyer (or seller, for that matter) with a portion of a commission. There is nothing wrong with a buyer coming to the table with money as a gift (say perhaps, from a parent) as long as the lender approves. As long as it is listed on the final settlement statement, accepted by the lender - disclosed to all parties, it's ok. The final settlement statement is disclosing all monies - who paid what to whom for what. What is not ok is any type of side deal, cash under the table - money not disclosed. All that said a lender may not allow a gift to serve as a total downpayment. Since the lender will want the buyer to have some money invested in the property.
I see your point; He had a tax savings, in mortgage interest, that he would not have had if he had been renting.
BTW - It's not against the law for the agent to credit the buyer (or seller, for that matter) with a portion of a commission. There is nothing wrong with a buyer coming to the table with money as a gift (say perhaps, from a parent) as long as the lender approves. As long as it is listed on the final settlement statement, accepted by the lender - disclosed to all parties, it's ok. The final settlement statement is disclosing all monies - who paid what to whom for what. What is not ok is any type of side deal, cash under the table - money not disclosed. All that said a lender may not allow a gift to serve as a total downpayment. Since the lender will want the buyer to have some money invested in the property.
I looked at his 2005 HUD-1. And it's clearly listed as a 5K "credit" from his agent. So you are correct. It is legal since his agent actually had it listed in the HUD-1 closing settlement. Anyone listing it there does not seem to circumvent the law since it's a legal piece of paper.
When I talk about "break even" or a "profit" or a "loss," I usually don't include the monthly payment b/c as you said, I'd be paying that anyway as rent somewhere (rents in my neighborhood are pretty equal to my mortgage payment). When calculating whether or not I made a profit, (if it's a principal residence, not so on my investment properties), I calculate what I paid, what the loan cost me, the closing costs, and any improvements. When I sell, I also include the realtor fees, the closing costs and the mortgage payoff. Then I take tax benefits into consideration also. Subtract one from the other and come to the "profit" or "loss" number.
If I'm understanding your friend's situation, he did not get the full value of the mortgage interest and tax deductions because his income is high. The fed. income tax law limits the amount he may deduct. So you would need to factor that into your calculations.
If I'm understanding your friend's situation, he did not get the full value of the mortgage interest and tax deductions because his income is high. The fed. income tax law limits the amount he may deduct. So you would need to factor that into your calculations.
You are correct. Deductions are limited in higher income tax brackets and Obama wants to make it even more limited. I'm sure my friend know that but that will make him want to hold onto it.
But the end game is the same, I think it's in his best interest to just unload and move on. He's losing money but he can afford to lose it unlike many people.
If he has a solid buyer for a halfway decent price, then IMHO he isn't 'losing' anything- get out, dust himself off and move on
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