If you are a current homeowner or looking to become a homeowner, make sure you maximize the financial potential of the home, and you definitely do not want to be underwater investing or owning on a home more than it’s worth. Here are the five this you should know:
- The Comparable Market Analysis (CMA)
First thing first, check how much is the value of the home. Not how much you are willing to pay for your dream home or at what price your neighbor sold his home. Understand how your home is actually evaluated, and that number, the value of the home, will guide you in the proceeding decisions. The home’s value is always impacted by similar properties sold in the area in the last six months. Sometimes you can compare up to twelve months if needed. This is called the Comparable Market Analysis (CMA). You compare to a similar style, size, and finish level, at a certain distance from the property, keeping other criteria such as township and school zone. Your realtor can advise you, and you can find estimated values on websites such as Zillow.com, Realtor.com, and others. Those websites can have a range of errors, but usually, it gives you a good general idea. Your realtor will be more specific with the actual fixtures of the home and the properties it is compared to. An appraisal will provide you with the most accurate home’s value based on the price per Square Foot of the comparable homes.
The Price per Sq. Ft. is equal to the Home Price, divided by the home’s finished Sq. Ft. above ground. You do not include the garage, the basement, balconies, or screened porches in the Sq. Ft. calculations. There are other considerations with a split level and a ranch atrium (when you have one level open to the lower level), but as a rule of thumb, you calculate the entry-level area and up, not the total living area Sq. Ft. that can include any finished area. For example, a home at $360,000 with 1800 Sq. Ft. is more expensive than a $396,000 home with 2,200 Sq. Ft. The first one is $200 / Sq. Ft. and the other is $180 / Sq. Ft.
- You want to avoid being underwater; do not overpay
The home value is essential, so you do not find yourself owing more than the home’s worth, which can impact you in several ways when buying a home and while owning the home. If you offer at the home purchase over the asking price and in the purchase process, the appraisal comes back with a lower value than the purchase price you offered the seller, as the bank authorizes the mortgage amount as a percentage of the home’s value, you will need to come up with more money, in addition to the down payment and closing costs you estimated. If you need to sell the home in the short term, maybe in two or three years, after considering the expenses related to a sale, such as a realtor’s fee, closing costs, and more, you have a high probability of finding yourself in a loss. Sometimes, you have a particular situation in which you have to buy in a certain time frame, and it is a seller’s market; when the demand for houses exceeds the supply, there are multiple offers on each property, pushing the purchase price significantly above market value. In this case, be aware of your actions, and weigh your options.
As a homeowner, you invest in your home, renovating, adding specific fixtures, and often you expect to get your money back when you sell your home. Here is the tricky thing. Not all investments in the home will increase the home’s value. If you do not invest strategically, you might lose money on your home. So how do you invest strategically?
- Invest strategically. Is there home appreciation potential?
The math is simple. Learn the value of your home, and learn what can increase the value of your home in the current market. Do not rely on future appreciation. Ensure that the total amount you invest in your home will remain less than the market value. Remember, you have expenses when you sell your home.
What can increase the home’s value, and what expenses can you enjoy the outcome but will not impact the home’s value? If you paint the home, replace vanities, and some flooring, do a beautiful garden or install a hot tub, you can enjoy it all, but there will be no appreciation. It can be much more appealing for a potential buyer but do not count on receiving your money back at the sale. If you buy the house in an overall dated condition and renovate it, the value of the home increase. Assure you do not overspend on the renovation.
Increasing the finished square foot above ground level will appreciate the home’s value. It can be an addition, finishing an unfinished area, or enclosing a porch. How do you know you do not overpay for your renovations?
The goal is that the cost of renovations, labor, and materials, will never exceed the total home value, preferably much less. For example, if you bought an 1800 Sq. Ft. home at $288,000. This is $160 per Sq./Ft. Let’s assume several houses in your neighborhood with the upgrades you plan to do sell between $190 and $200 per Sq./Ft.
This means your home can be appraised at $54,000-$72,000 more after renovations. (multiplying 1800 Sq. Ft by the $30-$40 range difference.
If your renovation costs $80,000, you will enjoy the renovation, but you will not make any profit. If you spend 20,000 on renovations, you will see the gain at the sale if the home’s market value remains the same. Same if you add Sq/Ft by construction or enclose part of the home such as a screened porch.
- Use home equity if beneficial
Knowing your current home market value will provide you with two more pieces of information:
- The percentage of your home’s debt compared to its value. It is called Loan-to-Value (LTV).
- The amount of money you have in Equity. Equity is the current home’s value, less the liens attached to the house.
If you have enough equity in the home, you might want to access some of the cash by refinancing your home in a cash-out transaction. If the goal is to save money, why are we talking about increasing the home loan? Because you want to pay the least amount of interest to any lender. If you have other debts with high interest as credit cards or other expected expenses, you can benefit from debt consolidation or cash for other purposes.
- Benefit from tax-exempt capital gain
What should you do if you bought a home a year and a half ago, the real estate market has increased significantly, so you want to put your home on the market and enjoy the profits. Should you sell? Selling the home at the same price in a month or six months from now will not result in the same profit for you. You will lose money if you sell your home in a month!
When you sell a primary home where you lived at least two years in the last five years, if you have a capital gain from the sale, you may qualify to exclude up to $250,000 of that gain from your income or up to $500,000 of that gain if you file a joint return with your spouse.
If you sell in a month, you will pay taxes on your capital gain. If you sell in six months, as you lived in the home for two years in the last five years, you have a significant tax exemption on your capital gain. Use the benefits of homeownership to your advantage!