Month: July 2014

The Basics of Homeowners Associations

If you live in a newer suburban community or planned unit development—like some 63 million Americans, according to the Community Associations Institute—you are probably a member of homeowners associations, or HOAs.

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It’s also a good bet you haven’t given your HOA much thought until you have a problem. Since HOAs make and enforce the community rules, it’s smart to understand what you can do if you can’t or don’t want to follow them.

HOA Facts

Homeowners associations, volunteer groups of neighbors who manage common areas and community property, create their own own covenants, conditions, and restrictions (CC&Rs). These CC&Rs cover:

Resident behavior (no glass containers around the pool)
Architecture (no fences higher than 8 feet)
Common responsibilities (fee schedules and fines for non-compliance)
Is there value to living in an HOA? Depends on how you define “value”. A 2005 study that appeared in the Cato Institute’s “Regulation” magazine compared a group of Washington, D.C., area HOA properties with similar homes without community benefits—a total of about 12,000 homes. The HOA house values were found to be 5.4% higher. With the median home price around $190,000, that’s about $10,000.

Of course, that means you’d pay more for the HOA home than the non-HOA home. And you’d pay dues, which average $396, according to the Census Bureau. The real value is your HOA property will be well-maintained and the rules for maintenance enforced.

When You Don’t Like the Rules

Some boards can impose what some homeowners believe are invasive, silly or elitist rules. In 2014, a Myrtle Beach, SC, association decided homeowners could have only two pets. A couple who’d had three dogs for the past 14 years were threatened with a $100-a-day fine unless they got rid of one of their dogs.

And some years back, news outlets reported a story about a homeowner in an upscale gated community in Frisco, TX, who was threatened with fines for parking his new Ford F-150 series truck in his driveway overnight. The board made exceptions for several luxury brands, but his mid-range truck was ruled “not classy enough.”

Even if you disagree with the rules, keep paying your dues. HOAs have broad legal powers to collect fines and fees and regulate activities. If you don’t respond to letters from the board, property manager, or a collection agency, the HOA can and will turn to small claims court or file a lien against your property.

You can handle some issues with a phone call. For example, adding recycling to the garbage collection route is a budget, not a rules, issue. Call the board member who oversees trash collection to find out if there’s leeway in the budget. If you want to do something that’s against the rules—like flying the American flag in your yard—start by:

Making a written request for variance, using the appropriate HOA form in your CC&R documents. A variance gives you permission to be the exception to the rule. Submit your request to the board and property management company.
Seeking a compromise: That you’d like to fly the American flag, but only on national holidays.
Don’t Expect a Quick Solution

Some HOA boards meet as little as twice a year. If the board decides the issue is worth pursuing, it may require a community vote. If it passes a majority, the board will adopt it. Board members also may consult the HOA attorney to see if there’s a legal liability if they rule against you.

If you don’t get a timely response, request a hearing and resubmit your request for variance with as much support for your cause as possible.

If the board rules against you without a community vote, you can appeal the ruling with a petition signed by a majority of other homeowners.

Fine Reality

But if you fly your flag without permission, expect to get fined. Fines can range from a nominal $25 to a painful $100 or more depending on the issue. Your CC&Rs will indicate the fine schedule—per day, per incident, etc. Interest for nonpayment can accrue, and the HOA can sue you in small claims court.

If you feel the ruling or the fines are unjust, the last resort is to hire an attorney and sue the HOA, as a flag-flying couple did in 1999. They battled their HOA in court for nine years before the case was settled in their favor.

Become the Rule Maker

If you don’t like the rules, the best way to change them is to become part of the process.

1. Know your CC&Rs, annual budget, and employee contracts. Do you see areas where expenses can be cut? Are service providers doing their jobs?

2. Volunteer for a committee or task. If the board needs to enforce parking rules, for instance, you can volunteer to gather license plate numbers of residents’ vehicles. In addition, put your professional expertise to work: Assist the board with data entry, accounting or website design.

3. Stand for election to the board. When a position becomes open, the board notifies the members, and you can put your name forward. New board members are elected at the annual meeting by member majority vote. Many boards are three to nine members large, with terms of one to two years.

Involvement Drawbacks

As a board member, be prepared to spend two to four hours a month:

Reviewing property management reports
Monitoring budgets
Talking to other board members and residents
Most boards meet quarterly; small boards only meet twice a year for a couple of hours.

Accept that you might become less popular if homeowners don’t like your decisions. In the worst case, you could be sued, along with the rest of the association.

Involvement Benefits

But there are rewards. You’ll feel more in control of your community’s fate. You may find that some rules you didn’t support have merit after all. But most of all, you’ll know you’re doing all you can to protect your quality of life and your home’s value.

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6 Home-Buying Mistakes for You to Avoid

Buying a home can be exciting, but you don’t want to rush into it. Making simple errors while going about the home-buying process can cause a lot of stress—both emotional and financial—for years to come.

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So, take some time to educate yourself about the common mistakes homebuyers make and your own home-buying experience will more likely be successful and exciting:

1. Going Over Budget

Don’t borrow more than you can comfortably afford. For example, don’t get a 15-year mortgage with high monthly payments when a 30-year mortgage will give you more wiggle room. Otherwise, you’ll be strapped for money and unable to save as much as you want. A rule of thumb: Total monthly debts, including your mortgage, should not exceed 43% of your total pretax income.

To figure out if you are getting a good deal, do a comparable market analysis through a REALTOR®. Figure in other costs, such as agent costs, escrow fees, title and homeowners insurance, property taxes, legal costs, notary fees and closing costs.

2. Using the Wrong Agent

Avoid dealing with a dishonest or unqualified real estate agent by selecting an agent who is a member of the National Association of REALTORS®. They work as licensed, independent contractors through real estate firms and are governed by strict regulatory guidelines.

Interview a few REALTORS® and pick the one you feel best represents your needs.

3. Not Loan Shopping

Shop around for the best rate. Don’t go with the first one a bank offers you. A mortgage broker can help with this process, but you can also shop around on your own.

4. Banking on Pre-Approval

Just because you’ve been pre-approved doesn’t absolutely mean the mortgage is yours. If your financial situation is called into question during the underwriting process, your lender can refuse to give you the loan. That includes taking out new loans after being pre-approved or switching jobs. They will run your credit, bank and income statements again, so be prepared to answer any questions about discrepancies they might find.

5. Only Loving the House

Your new house doesn’t exist in a vacuum. If you don’t like the block or the town where the house is located, you’re asking for trouble. You won’t be happy there and you’ll have a hard time reselling the property if the neighborhood isn’t good.

Do your research by visiting the area during different times of the day and week. Observe what the neighborhood is like after dark and on weekends. Notice if your street is congested during rush hour. Are the neighbors noisy? Are these the kind of kids you want your children to befriend? Ask yourself if the standard of living most closely represents yours.

6. Ignoring Inspections

Don’t skimp on home inspections when buying a house, even if it adds to the cost. Hire a certified inspector who will thoroughly check the electrical and plumbing systems, heating and air conditioning, roof and walls, foundation and structure, drainage, garage and basement.

You should also inspect your potential property for radon, asbestos, mold, lead, insects and pests. Ask your REALTOR® if he or she can recommend a trusted inspector.

Size Matters: 10 Things to Consider When Choosing a Starter Home

House size matters, but maybe not in the way you think. Bigger isn’t always better, and if it’s too small, frustrations can add up. Choose wisely by taking stock before you bid on your first home with these 10 thought provokers.

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1. House vs. Budget

Talk to REALTORS® who know your market. Banks have tightened their lending in the past few years, so you may not really know what you can swing until you get pre-approved. If you don’t have kids but want them, expect your finances to tighten when you do. Many homeowners recommend buying less house than you can afford, to leave some budgetary breathing room.

2. Resale Value

That 1.5 bathroom place might seem like a steal, but there may be a reason—perhaps anything less than two bathrooms doesn’t sell well in your area, so you could struggle with resale value. Or maybe you’re just lucky and it’s absolutely worthwhile. Knowing what sizes hold their value can help guide your decisions. REALTORS® can help here too.

3. Hobbies

A gamer, a knitter, a woodworker, a writer … what keeps you happy? If these hobbies have the potential to bother a partner (say, a gamer who likes the action loud) then a bonus room might be a good idea.

4. Outdoor Space

A garden or lawn may be part of your dream, but be realistic about maintenance. Who will mow and trim, or can you afford a service?

5. Future Needs

Kids, an aging parent, that dog rescue you’ve always dreamed of starting…. What’s your 5-year plan? Your 10-year plan? The market vagaries of the past few years have made it harder than ever to upgrade starter homes in many markets, so it might be better to skip the “starter” part, especially if you’re focused on a specific area. With volatile markets, you may end up in your starter home longer than planned.

6. Flexibility

Right now it’s just two of you and a hobby room, but can that hobby room turn into a bedroom or playroom? Can the attic become a home office? Having some extra space, if you can afford it, gives you room to change and grow under one roof.

7. Space for All

As one North Carolina homeowner we talked to put it, “Space for me, space for you, space for ‘us’.” A home should encompass all your needs so everyone isn’t living on top of each other, all the time (with apologies to New Yorkers, of course—we feel for you).

8. Be Realistic

If you order take-out most nights, don’t pay extra for a chef’s kitchen just because it looks pretty. That’s a pretty price for looks. Conversely, if you have a king-sized bed, don’t skimp on a small master bedroom.

9. Skip Space for Space’s Sake

As humans, we tend to expand to fill our living space. If you buy huge but don’t really need that bonus square footage, you could end up living with more than you ever needed. Plus, you’ll have to furnish it all.

10. Ponder Storage

Don’t mock closet space or built-ins that will house Aunt Lil’s china. Will the home accommodate all you bring to it? If the house seems a little cramped to begin with, that feeling will probably get worse.

Expecting a Tax Refund? Invest It In Your Home

Taxes are due April 15, which means it’s time to start gathering your W2s, 1099s, child care receipts and bank statements.

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But before you sit down with your accountant, it’s important for you to know that merely owning a home could mean you qualify for tax breaks. In most cases, you need to itemize your taxes in order to take advantage of these deductions. Yes, it makes the tax-filing process seem impenetrable, but the benefits may outweigh the complications.

Here are a few of the tax breaks you’ll want to investigate:

Mortgage interest paid at settlement

Take a look at your closing statement; one item that’s generally listed there is home mortgage interest. On a mortgage of up to $1 million, you can deduct the interest that you pay at settlement if you itemize your deductions on Schedule A (Form 1040). This amount should be included in the mortgage interest statement provided by your lender.

Points

Did you pay points in order to obtain your home mortgage? These fees are included on the income tax deductions list and can be deducted as long as they are associated with the purchase of a home. If you refinanced your home, these points are still deductible, but it must be done over the life of the mortgage.

Property taxes

As long as they are based on the assessed value of the real property, you can deduct your state and local property taxes. However, if your money is being held in escrow for the purpose of paying property taxes, you cannot claim this deduction until the money is actually taken out of escrow and paid. If you do this, check your Form 1098 for the amount you may deduct. Be aware that if you receive a partial refund of your property tax, the amount of the deduction you can claim will be reduced.

Selling costs

If you sold a home in the past year, you may be able to reduce your income tax by the amount of your selling costs. These costs can include things such as repairs, title insurance, advertising expenses and broker’s fees. The IRS only allows the deduction of repair costs associated with selling if the repairs were made within 90 days of the sale. It’s also crucial that the repairs were made with the intent of improving your home’s marketability. Selling costs are deducted from your gain on the sale.

Home office

If you use a portion of your home exclusively for the purpose of an office for your small business, you may be able to claim a deduction on your taxes for costs related to insurance, repairs and depreciation. You may only claim this deduction if the space within your home is used exclusively and regularly as either your principal place of business or a place where you meet and deal with customers or patients. You may also be able to take advantage of this deduction if a portion of your home routinely is used for storing items (product samples, inventory, etc.) used in your business.

In tax year 2010 (the most recent year for which figures are available) nearly 3.4 million taxpayers claimed the home office deduction.

Mortgage insurance premiums

You may be able to deduct the premiums paid for private mortgage insurance for your principal residence and for a non-rental second home.

The deduction begins to phase out once your adjusted gross income reaches $100,000 ($50,000 for married filing separately). In general, you can deduct the premiums paid for the current tax year only. A qualified tax adviser can provide information about rules for mortgage insurance provided by the Federal Housing Administration, Department of Veterans Affairs and Rural Housing Service.

Home improvement loan interest

If you’ve taken out a loan to make improvements on your home, you may be able to deduct the interest on this loan. Qualifying loans are those taken out to add “capital improvements” to your home, meaning the improvement must increase your home’s value, adapt it to new uses or extend its life. New carpeting or painting are not considered capital improvements, while adding a garage, installing a water heater or building a deck are all examples of capital improvements.

Construction loan interest

If you take out a construction loan to build a home, you may qualify to deduct the interest. The IRS only allows a deduction for mortgage interest if the loan relates to a “qualified” home, which means it must either be your principal residence or a vacation home that you will use for personal purposes. You can only use this deduction for the first 24 months of the loan, even if the actual construction takes longer.

Tax codes can be confusing. You may want to consult the IRS website for information concerning deductions and credits. Additionally, consider meeting with a professional to ensure you’re not missing any deductions for which you’re eligible.