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.

Why Do I Need a Building Permit?

Spring is here and you’re thinking about doing some renovations on your home. Maybe you’re having a new roof put on, a new kitchen installed, or building a new deck. You’ve heard about building permits, but do you really need to apply for one? What are the implications if you don’t? And how much do they cost?

Permits are required to protect your health and safety, and the health and safety of the community where you live. Town staff review your improvement requests and ensure that all changes align with minimum safety and community standards (referred to as “Code”). Permits (building, electrical, plumbing, etc.) typically cost approximately $25 per $1000 of the estimated improvement cost, but it will vary from town to town.

If you’re not doing the improvements on your own, always hire a licensed contractor. They should pull the necessary permits for you. Ask them if they plan on pulling permits on your behalf for the job. Any reputable contractor will say “Yes.” If they don’t, request that they do pull a permit, or consider hiring someone else. Ask for copies of the permits before they start the work. Once they finish the job, the contractor should schedule a time for the town inspector to come through and verify that the work performed meets Code. Your permit will then be closed and the work has been legally and safely performed, per the town. A Certificate of Occupancy will be generated, if applicable. Always keep this documentation for your records. It will be valuable for legal purposes and if you later sell your home.

If you’re planning on doing the work on your own, call the town Permits and Licenses division in order to understand exactly what permits you need. They will guide you through the paperwork process. When you’re finished with the improvements, you’ll need to schedule a time for the town inspector to verify the work meets Code. Again, your permit will be closed if the work has been legally and safely performed and meets building code.

But what happens if permits are not pulled? If you choose not to pull permits and it is discovered by the town or a future buyer, you could have a costly situation on your hands. Work that has been done and paid for may not comply with Code. The work may need to be removed. Imagine ripping out your new bathroom because it didn’t meet plumbing code! Additionally, insurance coverage could be denied. You may be fined for not pulling a permit before the work was performed. Legal action could be initiated to ensure compliance.

So, in order to avoid a potentially costly situation down the line, always call the Permits and Licenses division in your town to understand what permits you need for your specific project.

Property Taxes

I am often asked how CT property taxes are calculated and how they may change. Here’s an explanation.

In the state of CT, real estate is taxed at the municipal level. There is no property tax levied by the state. Each town estimates expenses for the upcoming year and sets the local tax rate (called the Mill Rate) that is needed to support the budget. The town generates a list of all taxable properties that includes real estate and autos. This list, referred to as the Grand List, contains an estimated Assessment Value of all properties. Typically the Assessment Value is 70% of market value.

Most years, your property value and taxes will remain the same. Changes to Assessed Value typically only occur when you make improvements to your home, like upgrading your kitchen. However, each town must revalue properties every five years, either by physical observation or statistical analysis, or some combination of both. Physical inspections for reassessment purposes are required by CT law to take place every 10 years.

However, if your town changes the Mill Rate, your tax bill will also change.

Taxes on a property are calculated by dividing the Assessment Value by $1,000 and multipling by the Mill Rate. This gives you your estimated tax bill.

This year we heard a lot about taxes because several towns did reassessments and property assessment values jumped by 75%-200+%. Mill Rates also changed. With the changes came potentially huge tax increases for homeowners. Let’s look at a quick example.

I live in Hartford and my house’s previous assessments for 1999-2005 were based on a fair market value of $158,700. The Mill Rate fluctuated through the years and in 2005 my estimated tax bill was $4,776. But in 2006 the city did an external physical observation and statistical analysis to reassess all city properties and changed the Mill Rate once again. We received our letter from the Assessor’s office indicating that our new fair market value was $425,000. Our estimated property value increased 167%! So what would our new tax bill be?

Assessed Value        $425,000 x .70 = $297,500

2006 Mill Rate           42.30 for residential property

Estimated Tax Bill      $297,500 / $1,000 x 42.30 = $12,584

Our taxes nearly tripled! While the Mill Rate was lowered from the previous year, the huge change in Assessment Value outweighed the impact of the Mill Rate change.

So that’s how property taxes are calculated. Battling my tax bill will be another story for another day.