When Pipes Burst!

The Superbowl Sunday thaw-out after the deep freeze gave me a different touchdown as one of the pipes in our guest quarters burst. Unfortunately it took several hours before we found it and by then the place was wrecked. It caused me to consider the importance of homeowners insurance and what we need to keep in mind about our coverage.

Homeowners’ insurance is deceptively simple. We know it’s the coverage you need in the event of significant damage to your house, yet not all policies, or situations, are equal. You may be covered in the event of a fire, but what about a flood or other type of disaster?

Insurers have gradually phased out so-called guaranteed replacement cost policies, and many consumers are faced with more limited policies that may not take into account fast-rising construction costs or extensive retrofit work. In addition, these policies often require the policyholder to update the insurer about expensive upgrades such as hardwood floors or an addition.

Without periodic reassessment, victims of a disaster may find their insurance funds fall short of paying for a new home of the same quality. If your policy is five or 10 years old,  and it doesn’t keep up with replacement costs, you may be under-insured.

Ideally, a good policy would cover you only for what you’d need to rebuild your home on your property. Unfortunately, too many don’t do that.

What should you buy?
Residents tend to over-insure when it comes to protection against fire and the like. But that may not be the greatest danger when it comes to homeowners’ insurance — exclusions are. Buying a policy without knowing what you won’t get, and why, is like walking into the lion’s den covered in catnip.

Consider the thousands of homeowners devastated by Hurricane Katrina. For many of the survivors, the worst damage was caused by flooding. Problem is, most hurricane coverage relates to destruction caused by high winds, rather than high water. If you’re thinking that’s a ludicrous and somewhat arbitrary line to draw, I’m with you. Just know before you buy that profit-seeking insurers usually disagree.

Therein lies the real problem for homeowners. Too many of us don’t know exactly what our insurers will and won’t pay for. And we’re not at all clear about, how, what we don’t know, affects what we pay annually in premiums.

That’s why many experts recommend a regular review of coverage. Doing so annually seems to be a good idea. As you go through the process — or seek a new policy — consider these questions:

1. What does it cost to build in your area? There’s simply no way to effectively price insurance without knowing what it would take to rebuild your home. You’ll want to know the per-square-foot average construction cost for your ZIP code. Multiply that by the total area of your home, and you have a replacement cost. Insure for that amount, and then recheck pricing annually. One caveat: This data’s rarely freely available, so be sure that your agent is relying on a credible source in writing your policy.

2. What risks does your home face? Exclusions and riders are common for homeowners’ insurance. Common exclusions can apply to older homes, where outdated plumbing or fixtures may lead to greater risks. Be sure you understand what risks your insurer is willing to accept on your behalf; they may be far fewer than you realize.

3. What funds do you have? Many suggest that the best way to save money on a homeowners’ policy is through the deductible. The higher, the better — assuming, of course, that you have or could easily raise the cash to make common repairs without involving your carrier.

Homeowners’ insurance is essential protection. So be prepared, but don’t pay any more than you have to. Know the replacement costs, and update your numbers annually.

Life Isn’t Linear

People are naturally drawn to trends. We like to think that there is order in the world and that life progresses one step after another. For that reason, we are attracted to graphs that are neat and tidy and move left to right in an upward trajectory.

Unfortunately, life doesn’t work that way. Life is two steps forward, one step back, with a step or two to the side. That’s why it is important to keep the long-term in mind, even though our daily lives are focused on the short-term.

In the short-term, it appears that foreclosures will continue to plague the real estate market as any recent improvements may be as a result of the foreclosure moratorium. Therefore, we should expect more inventory to hit the market, and more inventory means lower prices if demand fails to keep pace.    

That fear is that sliding prices mean an increase in negative equity, which is already a concern.  An increase in negative equity could mean more foreclosures, which means more inventory, which means more pricing pressure. You get the picture; it’s a vicious circle.

However, it might not be all that vicious. We are talking about national averages, after all. And dealing with averages can be deceiving. For example,  place Warren Buffett, Bill Gates and 10 of us ordinary-folk in a room. If you were to average the wealth, it would suggest that everyone in the room is a billionaire, which is why averages can mislead.

This short-term perception has undoubtedly kept many naive home shoppers out of the  market. However, real estate is a long-term proposition. Over the long-term, real estate is a good deal, and never more so than when purchases are made in a temporarily price-depressed environment with very favorable financing rates (and 5-percent 30-year fixed-rate loans are very favorable).

I believe and have been repetitive on the sentiment that it is buyer perception and media nay-sayers that have continued to affect our local real estate market. It is worth repeating! The Dallas market is far better off than many of other urban markets around the country.

The Lastest Remodeling Trends

As we are well into the New year and with resolutions maybe already by the wayside; let’s not forget our list of remodeling projects we planned to start around the house this year. At least that’s what remodelers and contractors are hoping! So, what remodeling projects are the top trends for 2011 and on top of everyone’s list?

The National Association of the Remodeling Industry (NARI) conducted an exclusive poll of their top builders and developers and found that while most people are not starting major renovation projects due to the economy, the over-arching trend for 2011 is to tackle small projects and take care of the smaller jobs around your home.

1. Save Money: Remodel Your Bathroom. Old tile getting a little grungy? It looks like 2011 is the year for a bathroom update. Dennis D. Gehman, president of Gehman Custom Remodeling says, “Bathrooms are the hottest project, we think it’s due to the economy. Baths cost less than a kitchen or addition and most houses have more than one bath, so there are more available to be remodeled.”

2. Must-Do Remodeling Projects. Rather than going through major renovations, next year people will continue to only complete the projects that need to be done, like repairs to siding or roof leaks. Mitch Speck of Specktacular Home Remodeling says he is seeing a trend of people doing “‘have-to’ projects instead of ‘want-to’ projects.”

3. Warming Up The House. Warmer tiles and colors are coming back. People tend to be moving away from minimalist, white designs in favor of cozier, earth tones. The trend, however, is not rustic. Instead, it’s a mash-up of earthiness and modern design. Judy Mozen, president of Handcrafted Homes, Inc., says she is seeing people favor rooms that are more contemporary and calming, but are “still not totally contemporary.”

4. Getting Decked Out. George Christiansen of Pequot Remodeling Corporation says his clients are building outdoor spaces for themselves. “It appears that people want to sit outside again and are staying at home more frequently. Many pools are also being built in the neighborhood.”

5. Hiring A Great Contractor. Darius Baker of D & J Kitchens and Baths, Inc. says that “consumer diligence” is on the rise. “Folks are finally getting the message that it is important to look closer at the companies they are considering for their project. They are asking the questions we have been telling them to ask for years.”

6. Paying in Cash. Rather than taking out loans for renovation projects, homeowners are using cash for projects. Steve Klitsch of Creative Concepts Remodeling, Inc. says homeowners are giving themselves a budget and picking and choosing what projects they can do with the money. One way to save money is by updating features, like cabinets, but not remodel an entire room.

7. Opening Up Rooms: “Open floor plans are in, so we’re removing interior walls and opening up the spaces in older houses to modernize them,” says Gehman. Open floor plans help families be more flexible with the square footage they already have.

8.Bronze Age. Along the with warmer tones in homes are warmer tones in metallic features. Kathy Adams of J&C Adams Co., Inc. says “oil rubbed bronze, aged bronze, or distressed hardware” will be big in the coming year.

9. Going Green. Bamboo floors, grass thatched roofs, and bark siding may sound like something from “Jungle Book,” but they are just a few of the newest green home products. In addition, people are getting energy efficiency upgrades. Adams says upgrades on glass will be continue to be big, and adds that “people are even asking for tri-pane (windows)!”

10. Industrial Flair. Exposed beams will continue to be popular, but so will “stainless  steel cable and architectural products,” says Michell Milestone, director of sales and marketing at JG Development, Inc. With so many people working from home, home will take on more of an industrial or commercial look to enforce business credability.

11. Creating Relaxation Space: With home values still falling in many areas and a new prediction of three more lousy years of real estate, homeowners are more stressed than ever. So it’s no surprise that when they are developing new spaces, tranquility comes to mind. Mozen says people are asking for “zen-like” bathrooms. “The bathrooms don’t have to be big-but they have to be relaxing and soothing. They seem to prefer showers with the works-steam, seats, body sprays, etc.”

12. Planning ahead: “We are seeing many clients thinking about their retirement years,” says Jillian Renner of Golden Rule Remodeling & Architecture, Inc. Her clients-even those far from retirement-are putting in easy-opening cabinetry, hand-held showers, and more accessible kitchens and baths. Renner adds, “Even though the clients don’t need those things right now, they are planning for when they might find them needed.”

Are you planning a remodeling project this year? How much are you willing to spend? Contact me for advice on the big dilemma of cost vs. value and what to keep in mind from a reselling perspective!

Your Buying Power

Experienced home buyers know that one of the first-steps in beginning a successful search for a new house is taking a hard, objective look at finances. Determining how much money you can dedicate to the purchase of your new house affects almost every aspect of buying a new home – including how we write the offer, which mortgage programs you will qualify for, shopping for the best mortgage loan and which homes are truly in your price range.

Here are the questions that each home buyer should ask:

  • How much cash is available for a down payment? The amount you have available for a down payment will affect what types of loans for which you can qualify. Learn more.
  • Am I ready to write a check for the earnest money? Earnest money is a cash deposit made to a home seller to secure an offer to buy the property. This amount is often forfeited if the buyer decides to withdraw his offer.
  • How much additional cash will be available to pay for closing costs? There are certain standard costs associated with closing the sale of a house. These fees are split between the buyer and the seller, as spelled out in the sales contract. Learn more.
  • What is the maximum monthly mortgage payment that I can afford? Most lenders will use the 28/36 rule to determine the maximum mortgage payment you can afford.

The 28/36 Rule
No more than 28% of your gross income can be applied to your mortgage, real estate taxes and insurance. And no more than 36% of your gross income can be applied to your mortgage expenses plus your regular debt expenses (car payments, credit cards, other loans, etc.).

Front Doors

Our front doors are more than a point of passage. It is an introduction, a prelude; and it conveys protection, security and warmth. It reveals the very soul of our home and as eyes are the windows into our souls; the front door of our homes is the window into our lives. As we pass through its threshold, we may not realize how the reaction we have to its color will linger with us beyond our departure.

Many cultures associate complex meanings to the colors we choose for our home, and especially the color of our front door.

Red – Divine Luck and Prosperity

In Feng Shui, a red front door means “welcome.” and symbolizes good luck. In early American tradition, it meant a safe haven and if a home had a red front door, tired travelers who might be traveling by horse and buggy would know the home was a place where they would be welcomed to stop and spend the night or rest. In Scotland you painted your door red when you have paid off your mortgage.

Blue – Abundance and Calm

This heavenly color reminds us of water and blue skies and it brings calm and peace to our lives. In turn, bringing feelings of tranquility to our guests and family who enter through a blue door into our homes.  There are many hues of blue from light, to bluish-green to deep indigo blue; blue is also thought to bring lots of positive energy into a space.   

Royal Purple

It is said that Leonardo da Vinci meditated in a purple-colored light to improve its  effectiveness. Purple is associated with wealth, nobility, stature, religion, piety and magic. It is a mix of soothing, calm blues with boisterous, energetic reds and conveys wealth and extravagance. It is the color of kings and high honor, such as the purple heart awarded American soldiers wounded or killed in war. In Feng Shui, it is the color to face any direction; and a purple front door tells you world that you are open-minded and versatile to life’s possibilities. You think out of the box.

Cheeky Yellow & Vibrant Orange

Yellow is a color that evokes mental clarity, perception, understanding, wisdom, confidence, curiosity, humor and merriment. Orange is often called the “social” color, as it creates the energy to promote lively conversations and good times in your  home. In the winter especially, it reminds us of summertime dreams, as well as resembles the cheerful flickering of deep and vibrant color of a warm and welcoming log fire.

The Enchanted Door

H.G. Wells wrote of a mystical green door in his short story, “The Door in the Wall.” The door opens into a garden of wonder and mythical creatures, giving a young boy his first glimpse of happiness in life. The term, “beyond the green door,” refers to an otherwise plain establishment where people are carefree and enjoy life. It symbolizes life, growth and safety, and its calming effect reduces stress and headaches.  and other minor medical issues.

And just like any other room in the house, the accessories of our front door are the finishing touches we place on our entry: door hardware, house numbers, door knockers, door bells, mailboxes, doormats, lighting and plants.

Regardless of the color of your door, the front door is the entry point where energy, abundance and opportunities may find us. That is a big responsibility to hang on a front door, and on ourselves to pick the right color to reflect our personal style and the personality of our home! Have fun and be brave!

Top 5 Reported Luxury Homes Sold in 2010

While there’s no doubt that 2010 brought economic hardships for some, there is always a demand for beautiful luxury homes. Although gorgeous property can be found in almost any area, some of the top homes sold last year are located on the east and west coasts of North America. Below are the top 5 reported sales among listings featured on LuxuryPortfolio.com.

Beginning in Greenwich, Connecticut, the lavish 21,897 square foot Dunnellen Hall holds 14 bedrooms and 13 full bathrooms. Views of astounding landscapes and architecture can be seen from all angles and include beautiful gardens, a reflecting pool and a tiered fountain. Other amenities include nine fireplaces, an indoor/outdoor pool, a full wine cellar and so much more. This extravagant 40+ acre property was listed at $55 million.

Moving to the opposite side of the country, Sonoma, California is home to the 11,605 square foot Shanel in the Wine Country, which was last listed at $35 million. Beautiful views of the country hillside are complimented by thousands of trees, flowers, shrubs and greenhouse plants and vegetables. The location of this home is perfect for outdoor amenities including, a hay barn and stables, riding arena and agriculture storage building. The 362-acre lot consists of two bedrooms, two full bathrooms and 11 total buildings.

The top third and fourth luxury properties of 2010 are both located in Honolulu, Hawaii. A Legendary 3,467 square foot Kahala estate provides unmatched views of the beach and mountains with four bedrooms, five bathrooms, a heated pool and large lawn. This is the first time the estate was up for sale since the 1930s, but that’s not the only historic value it brings – several guests were housed there including the Reagans, the Bushs, Clark Gable and many others. The estate was last listed at $24 million.

Not far from the Kahala estate, an open beachfront property was sold with a listing price of $22 million. With shopping, dining and resorts nearby, this location is perfect for building a home right on the ocean.

The fifth and final of the top 5 luxury properties of 2010 is back in Greenwich, CT, a 16,000 square foot home with a pool, tennis court and dock. Views consist of waterfront and foliage, and the property was listed for $20.75 million.

Whether you’re looking to buy or looking to look, Luxury Portfolio features luxury properties and homes throughout the world. Log on to http://www.luxuryportfolio.com and experience these gorgeous locations for yourself with the 3D mapping tool, a virtual experience that allows you to fly over a property, zoom in, review the landscape, proximity to schools, parks, nearby amenities, topography, traffic analysis and more.

Real Estate as an Investment

Investors have many choices in today’s market as to where to place their investment dollars.  Many choose the stock market, in part because it is the easiest place to get started as an investor.   However, those wanting to build significant wealth over the long term should consider real estate.  Aside from the fact that over time, as populations tend to increase, land values should naturally increase, investing in real estate has many strategic advantages not available with other investments.  Some of those strategic advantages include:

Income and Appreciation
It is very possible in today’s market to find properties that will be cash flow positive.  This means that the rents collected from the tenants will more than cover the costs (expenses and financing) associated with owning the property.  Few stocks in today’s market pay significant dividends, most are held for future appreciation.   Those stocks or bonds that are acquired for cash flow tend not to appreciate well.  With real estate, investors can have the best of both worlds: income and appreciation.   

Leveraged Appreciation
The basic idea of leverage is that an investor can acquire a very high valued asset for a much lower investment amount.  This works in the investors favor in an appreciating market, magnifying the returns on investment.  For example, an investor may purchase a million dollar property with 30% down.  If that property appreciates 10%, the return on investment is 33%.  In the same example, with 10% down, the investor can achieve a 100% return on investment.  

Although not impossible, it can be difficult to use leverage when investing in the stock market.  Using leverage to acquire stocks is referred to as “buying on margin” and at best investors may only borrow 50% of the purchase price of the stock.  Investors who choose to buy on margin are also subject to margin calls (adding more funds to the brokerage account) should the value of the stock decline significantly.  The Federal Reserve Board also regulates which stocks are marginable, so options may be limited.  

Tax Advantages
Although Wall Street can offer investors tax advantaged vehicles like the tax free municipal bond or the ability to buy and sell stocks through an IRA or 401K, the tax advantages Wall Street can offer pale in comparison to what is available with real estate.  With real estate, there are tax advantages available while both owning and selling real estate.    Let’s first discuss the advantages available during the course of real estate ownership:

Mortgage Interest Expense
The government allows all of the interest associated with the financing of the property to be written off as an expense of owning the property.  For many real estate investors, especially those with interest only loans, this expense deduction can be substantial.

Depreciation is a method for matching the costs of acquiring property over the properties estimated economic life. The IRS now requires that most properties be depreciated using the straight-line method of depreciation (27.5 years for residential properties, 39 years for commercial properties).  Depreciation will act as an intangible expense and will shelter income from taxes.  

Expense Deductions
Many of the costs associated with owning and managing a real estate investment, such as management fees and insurance premiums, are deductible.  One deductible expense worthy of note is the travel expense.  Many real estate investors acquire real estate in places they like to (or have to) visit, and each time they travel to the property, the travel costs are a deductible expense.  Not a bad deal if the property happens to be in Maui, or around the corner from a relative.  

Passive Losses
Due to depreciation and expense deductions, it is possible to own a property that is producing positive cash flow, but for tax purposes showing a loss.  These “passive losses” are subject to certain restrictions, but in many circumstances can be used to offset passive income from another investment.      

There are also specific tax breaks available when selling real estate.  The tax breaks available depend on the type of real estate sold. If a primary residence is sold, Section 121 of the Internal Revenue Code allows the seller to avoid paying capital gains taxes.  If an investment property is sold, Section 1031 of the Internal Revenue Code allows the seller to defer the payment of capital gains taxes.  Both sections of the tax code merit further discussion:

Section 121
Upon the sale of a primary residence a taxpayer can avoid paying capital gains taxes on the first $250K of gain if single, or the first $500K of gain if married.  The seller(s) must have owned and lived in the home as their primary residence for two out of the past five years.  

Section 1031
Upon the sale of an investment property a taxpayer can defer the payment of capital gains taxes.  In order for the entire tax liability to be deferred, the taxpayer will need to reinvest all of the sale proceeds and purchase a property of equal or greater value.  The new property must be acquired within 180 days.

Many investors can use both Section 121 and Section 1031 together for maximum tax advantage.  An example would be an investor who conducts a 1031 Exchange into a rental home.  After establishing the property as a rental for two years, the investor moves into the property.  Once the property is established as a primary residence, taxes can be avoided on the sale via Section 121.

Obviously investors have many choices available to them on Wall Street.  With a little education however, many investors might find that investing in Main Street, or Elm Street, might be a better long term decision.

(Source: Asset Exchange Company, Free 1031 Exchange Hotline: 877-471-103. Information intended as general information only and not intended as tax or legal advice.  Please always consult  your tax or legal advisor for any specific tax or legal matters.)