On Maintenance Deductibles

One of the most popular methods of controlling expenses for a rental property involves the use of a so-called “maintenance/repair deductible.” In a nutshell, a maintenance deductible requires a tenant to pay to the landlord a fixed portion of most maintenance expenses at a property. The amount of the maintenance deductible is typically defined as a whole dollar amount, and it is reflected in the lease agreement.

How does a maintenance deductible work? For example, if the tenant’s maintenance deductible is $75, and the owner’s expense for repairing a faulty A/C unit is $400, the tenant would reimburse the landlord $75 upon completion of the A/C repairs and presentation of the final invoice.

Landlords use the maintenance deductibles to prevent nuisance, nickel-and-dime expenses. The concept behind the use of a maintenance deductible assumes that if tenants only knew the pain and responsibility of ownership, they would learn to be better tenants. In addition, landlords are expected to benefit by fewer, time-consuming interactions with tenants.

But exactly why would a tenant voluntarily accept a maintenance deductible? Does the tenant’s desire for a well-functioning property outweigh a desire to control his personal expenses? Would the tenant pay a maintenance deductible to repair a leaky roof? Would the tenant be concerned about active termites?

Tenants do wish to control their expenses. Therefore, at the very least, the use of maintenance deductibles now transfers the decision-making about the repairs to the tenant.

During the lease, the tenant is in the sole and unique position of observing the performance of the property in which he resides. The daily physical changes occurring at the property accumulate over time and result in the need for periodic maintenance and repairs. Will the tenant share his observations with the landlord? Under a penalty? Not likely.

When using the deductibles in lease transactions, the unintended consequences typically surface at the end of the lease. As a first sign, the perfect tenant suddenly moves out. The forwarding address for the deposit refund is a rental property nearby.

Before placing the property on the market for rent again, the landlord faces a burden of discovering unreported maintenance. The cost of hidden maintenance increases the make-ready expenses. The realized savings quickly evaporate. Poorly completed repairs must be undone at a higher cost. The cost of vacancy adds to the landlord’s losses. In addition, the previous tenant always paid the rent on time. The risk of new tenants selection pays an unwelcome visit. Are we going to be so lucky again?

The marketing process to secure a new tenant is not off to an easy start. The landlord is faced with uncomfortable questions about lack of maintenance with previous tenants. How did that information spread so quickly? Did the landlord take care of all the repairs this time around?

New tenants may reluctantly accept the landlord’s reassurance that everything is now fine. The expectations of better service disappear, however, when the new tenants discover old maintenance issues. How could the landlord miss it? The pattern continues.

The use of maintenance deductibles is a trip to the black hole of the rental property universe. The solution to profitable ownership and effective management is a zero deductible. Zero deductible encourages the tenants to fulfill their responsibility and provide reports to the landlords about the condition of the property. No strings attached. The reward to the landlord for listening to his tenants is a pattern of lease renewals and the confidence in ownership of a well-maintained property.

Tenants liability for repairs:  If tenant or tenant guests caused the damage, the tenant will have to pay for the repair—though you should always coordinate the repair with the landlord.

Warranty of Habitability: to provide minimum habitability conditions.

A Virginia landlord must:

  • Comply with the requirements of applicable building and housing codes materially affecting health and safety
  • Make all repairs and do whatever is necessary to put and keep the premises in a fit and habitable condition
  • Maintain in good and safe working order and condition all electrical, plumbing, sanitary, heating, ventilating, air-conditioning and other facilities and appliances, including elevators, supplied or required to be supplied by him
  • Supply running water and reasonable amounts of hot water at all times and reasonable air conditioning if provided and heat in season
  • Maintain the premises in such a condition as to prevent the accumulation of moisture and the growth of mold

 

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Trulia American Dream Survey – Fall 2011

 

Bye, Bye To The American Dream? No Way!

Despite another lackluster year for real estate, 80% of homeowners still plan to buy again and 59% of renters still aspire to own their own homes. Through the American Dream survey, Trulia has tracked consumer attitudes on homeownership and homebuyer preferences since 2008. This online survey was conducted by Harris Interactive between Aug 30-Sept 1, 2011.

by the Trulia Insights Team

More details: http://insights.truliablog.com/2011/09/trulia-american-dream-survey-fall2011/

 

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Home Affordable Refinance Program (HARP) extended to June 30, 2012

The program was due to expire on June 30 but will now continue until that date in 2012.

The Home Affordable Refinance Program (HARP) has been extended for another year according to information released on Friday from the Federal Housing Finance Agency.

On March 1, 2010, the Federal Housing Finance Agency (FHFA) announced the extension of the Home Affordable Refinance Program (HARP). FHFA is the regulator and conservator of Fannie Mae and Freddie Mac. HARP is a component of the Obama Administration’s Making Home Affordable Program. Borrowers with loans guaranteed or owned by Fannie or Freddie with loan-to-value ratios between 80 percent and 125 percent may be eligible to refinance their mortgages under HARP. In 2009, there were nearly 200,000 refinancings under HARP, far short of the original goal of helping up to 5 million homeowners.

FHFA Announcement

Updated Information Released By Fannie Mae

Making Home Affordable Program Website

Am I eligible for a Home Affordable Refinance? Answer these questions

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Landlords Be Aware, IRS Reporting

There will be expanded IRS Form 1099 reporting for rental property owners starting with the year 2011. The Small Business Jobs Act of 2010 requires all individuals who own rental property to issue an IRS Form 1099 for payments relating to their rental properties.

Now, by definition, “a person receiving rental income from real estate shall be considered to be engaged in a trade or business of renting property.” A 1099-MISC form will be required if the property owner spends $600 or more per year per recipient. Examples of possible 1099-MISC recipients: gardeners, landscapers, pool cleaners, contractors and repair service providers.

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1031 Exchange Planning for 2011

The law (the amended version of H.R. 4853) that passed after agreements were reached between the President and Congress has a definite positive effect on 1031 exchanges. The major areas of concern were the capital gains tax rates, the tax-free exclusion amount for estate and gift taxes, and the stepped-up basis for inherited property.

First, the capital gain tax rates have remained as they were. For real estate this means they remain at 15% maximum. For estate and gift taxes, the exclusion will be $5 million per person, with a tax rate of 35% for amounts over $5 million. An important aspect of the estate tax agreement for taxpayers is that a property is inherited at the stepped-up basis. This means that while the decedent may have had a low tax basis as a result of purchases made years ago and/or exchanging, the property will be inherited at a stepped-up basis at the market value at the date of death. Thus, an exchanger can continue over the years to defer capital gains, including depreciation recapture, by doing an exchange, and then leave the property to heirs without any income tax on the deferred capital gain. Their exchanges over the years are, in fact, income tax free. The heirs will not have to pay any income tax on the previous gain as they will receive the property with a tax basis at its current market value. If they sell immediately, they probably will not have any capital gain. If they hold the property, then only the capital gain and depreciation taken while they owned the property would be taxed, unless they also do a 1031 exchange. Importantly, the bill gives some certainty to the exchange tax provisions that will be in effect until the end of 2012.

This is an interesting discussion by attorney Bob Klueger of some important recently enacted changes in the estate tax laws; including the use of A/B trusts.

Enjoy…
Bob Klueger talks about the new estate tax law just enacted by congress. December 20, 2010

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Market stats for Fairfax County for the month of November 2010

Market Conditions for Fairfax County, Virginia

Fairfax County is a huge geographic area with many well established neighborhoods and a desirable proximity to DC and surrounding Metro areas, and is a sought after location with it’s central access to employment, shopping, and transportation opportunities.

Here are some market stats for Fairfax County for the month of November 2010:

In November, the total number of active listings on the market in Fairfax County was 2,790. Of those active listings, the minimum list price was $40,000 while the maximum list price was $9,997,000. The average list price was $701,747. The average number for property days on the market is 126.

The number of listings under contract was 990. Of those listings under contract, the minimum list price was $39,000 while the maximum list price was $4,475,000. The average list price was $436,232. The average number for property days on the market was 65.

The number of listings that were sold & settled in November was 897. Of those listings sold, the minimum list price was $39,900 while the maximum list price was $3,925,000. The average list price was $473,553. The average number for property days on the market was 62.

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2010 – 2Q home sales — Northern Virginia

The home sales numbers are in for the second quarter of 2010 (April 1 through June 30), and the news is good, but the outlook may not be.

  • Sales are up.
  • Prices are up.
  • Pending sales were up in June.
  • Days on market are down.

The unemployment rate is slowly going down. Several major corporations will be keeping, moving, or opening facilities in the Commonwealth. But there are clouds around those silver linings: Foreclosures are up in most of the state — 14% overall from the second quarter of 2009; only Northern Virginia saw a drop from year to year, while the Southwest and Central Valley regions were hit particularly hard.

And then there’s the end of the homebuyer tax credit. This past quarter was the last in which buyers could get up to $8,000 from the government for buying a home.


2010 - 2Q home sales — Northern Virginia

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Herndon, Virginia

Herndon, Virginia is an incorporated city still sought after for suburban dwellers wishing to have easy access to Washington, DC. erndon is part of the Dulles Technology Corridor, which Fortune magazine named the “Netplex” because of the presence of the headquarters of such companies as AOL, Verizon Business and Network Solutions.

Herndon contains the Herndon Depot Museum, the site of “Mosby’s Raid on Herndon Station”. The raid was a Civil War skirmish that took place on St. Patrick’s Day in 1863. Also within the town is a golf course, community center with basketball and racquetball courts, and an aquatic center. Adjacent to the community center is Bready Park, with indoor tennis courts. Additionally, every residence within the town borders is within a mile or less of a public park.

Nearby attractions include the Steven F. Udvar-Hazy Center of the National Air and Space Museum (which houses the Enola Gay B-29 Superfortress, a Concorde supersonic passenger airplane, an SR-71A Blackbird plane and the Space Shuttle Enterprise), Frying Pan Park, Sully Plantation, Reston Town Center, Mount Vernon, Wolf Trap National Park for the Performing Arts, Colvin Run Mill, Aldie Mill, Oatlands Plantation, Manassas National Battlefield Park and the Washington and Old Dominion Trail (which runs through the town).

Location Map








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Good Faith Estimate contains some ‘quirks’

As of Jan. 1, 2010, the Department of Housing and Urban Development (HUD) required lenders to provide mortgage borrowers with a new three-page Good Faith Estimate (GFE) to protect consumers who are applying for a mortgage.

The intent of the GFE is to educate consumers about the key terms and costs of a mortgage, both at origination and ongoing. A loan originator completes the form, giving the borrower a summary of the loan particulars and information necessary to shop rates and to be sure they’re comparing like-type mortgages.

Although there’s grumbling, mostly from mortgage brokers, lenders and closing/escrow agents, the format and information included in the new GFE is a step in the right direction. There are, however, some quirks.

For example, the GFE doesn’t provide a complete and accurate account of the borrower’s costs. Page two provides an itemization of loan origination and settlement costs. The origination charge is itemized as one lump sum; it’s not broken down.

So, you don’t know how much you’re paying the appraiser for the appraisal, the loan originator for the origination fee, or other miscellaneous fees.

Another shortcoming is in the way transfer taxes are disclosed. The entire amount of any transfer taxes is entered on the GFE, even if the sellers pay part or all of it. This could inflate the buyer’s estimated settlement costs.

To get around having to generate a GFE for buyers before they have committed to a given loan originator, some mortgage originators have developed worksheet quotes for buyers to use if they want to shop rates. HUD is adamant that these worksheets can’t be used instead of a GFE. Furthermore, they provide the borrower no protection.

HOUSE HUNTING TIP: The new federally mandated GFE provides protection for borrowers against being charged extra fees at closing that weren’t disclosed on the GFE. An informal worksheet provides no such protection.

Origination and settlement fees are grouped into three different categories. The first category is fees that can’t increase between the time the GFE is issued and closing. Included in this category are the lender or mortgage broker’s origination fee, transfer taxes and adjustments to loan origination charges after the borrower locks in an interest rate.

Loan originators who miscalculate, causing fees to run higher at closing, have to make up the difference out of pocket. To cover themselves, some loan originators pad the Category one figure.

The second category of fees can increase up to 10 percent at closing and includes such things as government recording charges and title insurance — if the title insurer is identified by the lender, not by the borrower. This is done to encourage lenders to shop for the most cost-effective coverage for the consumer.

The third category of fees can change at settlement and includes homeowners insurance and title insurance coverage if the borrower, not the lender, identifies the title insurer.

The new GFE also includes a tradeoff table that shows what the interest rate would be if you paid a higher origination fee vs. a lower origination fee: the higher the fee, the lower the rate; the lower the fee, the higher the rate.

Finally, there’s a loan-shopping chart to use the mortgage information provided by one lender to compare with other lenders. There is no obligation to use a loan originator who completes a GFE for you. A loan originator can’t refuse to provide a GFE to a prospective borrower who asks for one.

As soon as a prospective borrower provides essential application information, such as Social Security number, property address, etc., the originator is to provide a GFE.

THE CLOSING: Lenders are required to provide a GFE within three days of receiving the borrower’s application.

Dian Hymer, a real estate broker with more than 30 years’ experience, is a nationally syndicated real estate columnist and author. Copyright 2010 Dian Hymer

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I saw quite a few foreclosures and was wondering how one goes about buying one on a VA loan?

Asked by Steve O
You can use a VA loan for a foreclosure which is decent condition or to be more specifically in livable condition. The biggest issue buyers have come up against is that VA does require that the electricity be turned on and I always make sure that the home has the water on as well.

VA provides one of the few 100% financing programs currently available in a declining market area. Even though the conventional VA loan limits are still set at $417,000 in today’s Northern Virginia market that limit goes much farther than it did in the past. VA does provide jumbo loans for eligible active duty and retired personnel who may be looking for something just a bit bigger.

If you want to buy a property that falls into the “wreck” category or need lots of work, then you might be better off with an FHA 203 (k) loan so you can get the money you need for repairs in your loan. You can find more details regarding FHA 203 (k) loan.

If not sure whether you are eligible for a VA loan?
VA Loan Eligibility Requirements
Need to request your VA Certificate of Eligibility?
VA Form 26-1880


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The brokerage, Realty Service LLC licensed in commonwealth of virginia (Lic # 0226023435) assumes no responsibility nor guarantees the accuracy of this information and is not engaged in the practice of law nor gives legal advice. It is strongly recommended that you seek appropriate professional counsel regarding your rights as a homeowner.

Our real estate agents are Realtors and members of the Virginia Association of Realtors, National Association of Realtors and the Northern Virginia Association of Realtors, based in Fairfax County Virginia, serving all Northern Virginia.

Most of the information above is provided is believed to be accurate, but should not be relied upon without verification.