Your Neighborhood Tax Man

Today on CNN Money there is a piece about tax (un)friendly places … Tax Friendly States.

The primary result for us Nutmeggers is that we have one of the highest state and local tax burdens in the country at 12.2%. Connecticut ranks 8th in the Bureau of Economic Analysis’ report that ranks State and Local Tax Burden as a percentage of income. Vermont pays the most at 14.1%, while Alaska pays the least at 6.6%.

Since CT has the highest per capital income in the country, and our percentage paid is 8th, on a dollar basis we are paying the most in the whole country. Now there’s a victory to get excited about; UConn couldn’t get it done, but the tax man can. Go Connecticut!

Once we pile on the Federal income taxes, social security and Medicare our tax picture becomes downright depressing.

Perhaps there is a glimmer of hope. Most people don’t want to move from CT to Alaska, so our best option may be to head north to New Hampshire where they sport the second lowest burden at 8.0%. Or we could follow Killington, Vermont’s lead and try to secede from the state to join NH.

How Long Should I Stay Put?

You bought a house 2 years ago and now you’re getting the itch to move. Maybe you’ve outgrown the space, would like a different neighborhood, or want a closer commute. You’ve started going to Open Houses on Sunday, feeling out the market. This is what one of my colleagues refers to as the “Torture Tour.” Maybe you’ll find something and want to put in an offer. But what is your current house worth? Will you have enough equity to cover the costs of the sale and still make a profit so you can buy the next house?

Unfortunately, most likely not, unless you are looking to downsize or move to a community with lower home prices. Typically you need at least 3 or 4 years in your current home to realize enough market value appreciation to cover the sale costs such as agent commissions, conveyance taxes, and attorney fees. In today’s market where home prices have leveled off, this is especially true. If you bought a home and put in quite a bit of sweat equity, you may be able to eek out a profit.

If you find yourself in a position where you’ve only owned for a year or two and want to move, call a Realtor and have a Comparative Market Analysis done on your home before you start the “Torture Tour.” This will allow you to understand if you’ll clear the sale with a profit. The Realtor should provide you with an Estimated Net Equity sheet. This will show you if the estimated sales price will cover all of the costs (mortgage payoff, agent commissions, state and local conveyance tax, attorney fees, deed recording fees, paperwork costs, etc.). From there you can determine if you want to sit tight or can start to look.

Home Inspections

You should always try to attend the home inspection on the property you want to buy. It is typically a 2-3 hour walking consultation about the home. You’ll receive first hand information about the condition of the property, how the house operates, where the main shut-off valves to the utilities are located, etc. If defects are discovered, the inspector will explain possible causes and solutions whenever possible. They may be able to give you estimated costs to repair issues.

Typically, the top 10 defects in a home inspection are:

1. Roof leaks due to poor flashing and/or roof material failure due to poor installation.
2. Water penetration in the basement or crawl space due to poor surface water control.
3. Electrical safety issues due to age of the home or homeowner alterations.
4. Deterioration of the interior wall material behind the shower and tub surround areas.
5. Safety concerns associated with improperly installed decks, stairs, or railings.
6. Heating unit and distribution system problems due to age and workmanship or alterations.
7. Structural concerns due to improper construction and/or alterations, or excessive unbalanced load.
8. Fire safety issues related to fireplace chimneys.
9. Wood deterioration caused by termites or other wood destroying organisms due to local environment or conducive conditions.
10. General fire and safety issues with home ownership.

Zillow

Most real estate agents I know HATE Zillow. Most consumers I know LOVE Zillow. Why the disconnect?

I believe agents dislike Zillow for 3 main reasons.

· Agents are afraid that consumers will gain access to information that previously only agents could access. Asymmetry of information pushed clients to agents because it was difficult to understand how houses were priced and how the real estate market worked.

· Agents are afraid of what Zillow could do to our business model. Most agents are not tech savvy and do not understand how they will need to adapt as real estate consumers do more research on their own. Compensation models could evolve and agents that have been in the business for many years do not look favorably at changing how they are paid.

· Agents believe that the pricing information Zillow provides is not necessarily accurate because it has no idea about the condition of the home, location in a neighborhood, etc. Agents have years of intangible data about area houses locked away in their brains and an algorithm machine like Zillow can never access this information.

Agents’ loathing of Zillow is something of an overreaction because there are some definite benefits to the site. Obviously I am a fan of consumers having all of the information they need to make educated decisions. I wouldn’t be writing this blog if I was concerned about keeping real estate topics a mystery. The Wiki that Zillow provides is an excellent place to get general information on real estate transactions. Recent sales price data can be interesting to analyze. And using Zillow’s pricing tool to understand the potential range of pricing for your home, your neighbor’s home, or your boss’s home satisfies the curious.

However, there are some faults with Zillow’s pricing model that users need to understand.

· If you live in an area that has both multi-family and single family homes, Zillow will compare these. A competent agent would never compare a multi to a single family because multis are typically used for investment purposes. You would always do a different type of financial analysis.

· Zillow often pulls homes that are in adjacent, but differing neighborhoods. I live in Hartford, but close to the West Hartford town line and Zillow often pulls comparison homes from West Hartford. Houses in West Hartford cannot be compared because of differing school systems, tax structures, crime rates, etc.

· Zillow has no way of knowing the condition of your house or the condition of the neighboring houses. You may live in impeccable home, but your neighbor’s home may be a dilapidated shack. This will greatly affect your home value, but Zillow has no uniform way of identifying this information or adding it to their pricing model.

Zillow is a great place to start if you’re simply looking for a rough estimate of your home’s value, are curious about other home values, or just looking for real estate information in general. If you’re thinking about selling, or just want to understand a more accurate price range for your home, calling an agent is still your best option.