With Terry Story, 28-year veteran Real Estate Agent with Coldwell Banker in Boca Raton, FL
Trump Signals Possible Changes To Tax Deductions For Home Owners
On today’s “Real Estate Round-Up” talk with Terry Story, topics include possible changes to mortgage tax deduction laws, saving up for a down payment on the new home you want to buy, and the limitations of online home value estimator tools. There has been rampant speculation in the real estate industry and elsewhere over comments from the Trump administration about nearly doubling the standard deduction for mortgage and interest payments (from $12,600 to $24,000) while simultaneously eliminating deductions for state and local taxes including property taxes. It’s the latter issue, canceling the ability to deduct costly state and local taxes from your federal income taxes, that is generating a lot of heat and angst. The rationale for the deduction has been that the government can’t “double tax” you on the value of your property but, evidently, that may be rolled back.
How Much Of An Incentive Are State & Local Property Tax Deductions?
The real estate industry is raising a hue and cry about this potential removal of an important incentive for home buyers, arguing that it will ultimately hurt home prices by forcing mortgage-financed buyers to look for cheaper homes. Local taxes can be quite onerous, especially for the wealthy who own high-end property, so this deduction has been a significant tax relief for them. The industry, on the whole, believes that the deduction, which has been around for decades, has been a powerful motivator for potential home buyers. Steve asks Terry what her opinion is on this issue. She replies, prefacing her comments by mentioning that she speaks for herself as a real estate agent with an opinion, not an economist, lawyer, or accountant. Cutting to the chase, she thinks that people don’t want to own homes because of the tax deduction. Certainly, it’s not a primary reason, however attractive it is an extra incentive. People want to own homes, she says, because there’s a pride in ownership, because they want a roof over their heads in a stable area, to have a stable lifestyle and stable mortgage payment, as opposed to the uncertainties that dog renters. She calls it a “forced savings account.” Put another way, homeowners see it as “building equity.” She concedes that she’d like the deduction to remain in place, but doesn’t believe it’s going to have a major impact. If the deduction is eliminated, it will have a disproportionate effect on the wealthy who own very expensive property, but Terry points out that many of these people pay cash for these properties and, furthermore, the government only allows a deduction of up to $1.1 million of home value, both of which limit any new downside for these folks who have been and will continue to pay high state and local taxes.
Saving For Down Payment: Open A New Bank Account And Start Now
Steve pulls the next topic from Terry’s Real Estate Survivor’s Guide: “Home Buyers, How to Win the Down Payment Challenge.” Terry explains that she wanted a way to address the hardest part of the home buying process for first-time buyers, namely saving enough money for a down payment. You may have a good job earning more than enough to make your monthly mortgage payment, but you’re still going to need to cough up the down payment, as well as closing costs. Terry advises people in this situation to start saving a little bit of money each month, perhaps in a separate bank account. The down payment target can be as low as 3% of the home price, but that can still add up to a hefty chunk of change – around $9-$10,000 for a $300,000 home – and with home prices rising, the down payment rises commensurately. Closing costs could be another $3,000 to $6,000 on top of that, so you’re really looking at needing $12-$15,000 to complete the transaction. If you think you’ll want to buy in a year or 1.5 years, this is your target savings amount. You can do the math from there but, in this example, if you’re starting from scratch, you’re going to need to put around $1,000 away each month. This can be a challenge while you’re still paying rent and may work out to significantly more than you’ll pay as a homeowner/ mortgage holder, but staying on track with this savings goal will certainly instill some good financial discipline.
A New Kind Of Down Payment “Loan” From Unison
As a kind of addendum to this topic, Terry mentions a new company called Unison which fronts home buyers up to half of what they need to make a 20% down payment and then takes 35% of any gains (or loss) in the home’s price whenever it’s sold. It’s an interesting, not to mention highly speculative business model. If you’re trying to be more aggressive with your down payment offer but can’t save it in time and don’t want to try to borrow from family or elsewhere, it might be worth reaching out to Unison for more info.
The Shortcomings Of Zillow And Other Home Price Estimation Tools
The final topic of Real Estate RoundUp today has to do with the online home data aggregators Zillow and its recent offer of a $1,000,000 prize to developers that can improve their home price estimation tool. Terry wishes them well, dryly noting that all realtors hear all day is “Zillow says my home is worth X, why won’t it sell for that …” The problem is not confined to Zillow, she says, it affects Redfin and all the other home pricing tools online as well. The problem, as she sees it, is that there are too many variables for an algorithm to take into account and which can only be done well, as least for the moment, by actual realtors that know neighborhoods and individual properties and some of these other factors. In some cases, the problem is that these tools don’t have enough information about “comps” in the same neighborhood, perhaps because there aren’t many neighbors. It’s also not good at understanding a home’s value when it’s adjacent to a much more expensive neighborhood than the one it’s actually part of. Zillow’s tool looks at a geographic area for signals about a home’s value and discounts the more important neighborhood-level data. She allows that the Zillow estimator is good for getting a general idea of trends in home prices by showing you info on recent home sales, but because it doesn’t know anything about the condition of the home—is it a dump, has it been renovated or “over improved”?—it still can’t tell you with any real accuracy what an individual property is worth. If it doesn’t know the condition of a home, it’s even more inadequate when it comes to taking into consideration buyers’ individual tastes. All the more reason to consult your local experts.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: It’s time for Real Estate Roundup. This is the time every single week we get together with noted real estate agent Terry Story. Terry is a 28-year veteran with Coldwell Banker, located in not-so-sunny Boca Raton, Florida these days. Hi, Terry.
Terry Story: Hey, Steve. Thanks for having me.
Steve Pomeranz: There’s a lot of political talk going on now, trying to figure out what the Republicans have in store, and one of the things that they’re talking about—even though it’s really just bullet points at this point—is a tax overhaul and some of that relates to home ownership. Tell us about that.
Terry Story: Well, Trump’s plan is to raise the standard deduction to 24,000. Right now, it’s 12,600 for a married couple filing jointly. So what would happen is only deductions for mortgages and charitable donations would be allowed. Deductions for state and local taxes, including property taxes and other write-offs, would be eliminated.
Steve Pomeranz: Yeah, so right now, you can write off your mortgage, interest …
Terry Story: Right.
Steve Pomeranz: … Up to a certain level, and you can then deduct your state and local taxes because the government’s not allowed to double tax you.
Terry Story: That’s right.
Steve Pomeranz: So, you get the deduction for that. Now, I guess, they decided they can double tax you, so they want to eliminate the deductions for state and local taxes. Well, now, some people pay an awful lot in local taxes.
Terry Story: Yes.
Steve Pomeranz: Yes.
Terry Story: Exactly, so as far as the real estate industry, this is alarming to them. They say that they would be losing what they would consider an important incentive for home buyers, the prospect of receiving a mortgage deduction on their taxes. If you speak to people in the real estate industry, that is a selling point as to why people consider taking out a home is they get this deduction.
Steve Pomeranz: Yeah. I mean, when you look at taking a mortgage out at 4% and just to round it off, you’re in a 30% tax bracket, so basically after tax, it’s 1.2% less, so you really have 2.8% as your net interest rate cost on that. So that’s part of the calculation, what is it really costing you to have this 4% mortgage.
Terry Story: Right, and honestly, this deduction has been there forever, so the real estate industry is fighting hard to see that this is protected.
Steve Pomeranz: They’re throwing up alarms saying that home prices will plummet. I mean, do you really buy that?
Terry Story: We all have our opinions. I’m not an economist, and I’m not a lawyer or an accountant. I’m just a real estate agent with an opinion.
Steve Pomeranz: Okay.
Terry Story: And my personal opinion is based on what I see and what people say to me. I don’t have buyers come racing into my office saying, “I want to buy a house because I can have a deduction.” It’s definitely a benefit. I think people buy homes for pride of ownership. They buy homes to have a roof over their head. They buy homes because they want to live in a stable area and have a stable lifestyle and not be in a rental situation where it’s more transient, and you’re constantly having to move or your rent’s constantly being raised. It’s a forced savings account.
Steve Pomeranz: Yeah, so you’re building equity.
Terry Story: You’re building equity in your home. I think those are really, from what I see, in my opinion, strong reasons for home ownership. Certainly, it’s a great incentive to have the deductions. I would love to see the deductions remain, but I don’t think it’s the end-all-be-all.
Steve Pomeranz: Yeah. I think it’s going to generally affect those with higher incomes, those who can itemize their tax deductions, and so on, so it’s probably not going to have that much effect on the …
Terry Story: On the average person.
Steve Pomeranz: … Middle class and the average person.
Terry Story: Right, and it’s really higher-end.
Steve Pomeranz: But if you live on the ocean or in a high-priced community and you’re paying a lot in taxes, yeah, it’s going to hurt you, but then you’ve got more money to pay for it, so …
Terry Story: Well, exactly, and if you’re in a multimillion-dollar home, let’s say you’re in a $20 million home on the ocean, first of all, most people pay cash for them, but secondly, the deduction right now is only, I think, up to 1.1 …
Steve Pomeranz: Yes.
Terry Story: … Million anyway …
Steve Pomeranz: Right.
Terry Story: … So that’s not much of an incentive for them.
Steve Pomeranz: Well, I think the real estate tax is, the other taxes, they’re pretty high.
Terry Story: Oh, absolutely.
Steve Pomeranz: Yeah. They pay, many people pay in real estate taxes what most people earn on an average salary.
Terry Story: That’s correct.
Steve Pomeranz: Yeah, so it’s an awful lot of money. All right, so also in your Real Estate Survival Guide, you say “Home Buyers, How to Win the Down Payment Challenge.” What are you talking about there?
Terry Story: All I’m talking about is, the hardest thing for someone to buy a home is actually acquiring the down payment. Assuming you’ve got a good job, you’ve got a good income, you can afford the mortgage payment, but you have to have that down payment, so what do you need to do to get the down payment? And depending on where you are in your life, but if you’re a renter, what you should do is start saving money, maybe open up a separate bank account and put a little bit of money each month away towards that down payment because you can actually buy a house with 3% down.
Steve Pomeranz: Wow.
Terry Story: So, it’s not a whole lot of money, but the challenge right now for a lot of people, Steve, is, we say, “Put 3% down,” but the prices of homes are rising, so …
Steve Pomeranz: Yeah.
Terry Story: …That 3% is also constantly rising.
Steve Pomeranz: So, on a $300,000 house, it’s 9 or $10,000. That’s your goal there.
Terry Story: Correct, and then you need money for your closing cost … So it’s going to be plus.
Steve Pomeranz: So, 12, or 15, right? So, that’s the number to shoot for if your desire in the next year or year and a half is to buy a home. That’s what you got to put aside.
Terry Story: Right, so start as soon as you can …
Steve Pomeranz: Yeah.
Terry Story: … Put a little bit each month, open up a separate account, factor in the closing costs. Other things that you can do—and a lot of people don’t know about this option, Steve—there’s a company that they’re like lending you the money if you will.
Steve Pomeranz: No, no, no. They’re actually not lending it … To you. They’re-
Terry Story: … Not really a … It feels … Like a loan, but it’s not.
Steve Pomeranz: Well, that’s right. You don’t have to pay interest on it. They’ll pay, they’ll give you up to half of the 20% down payment, and then in exchange, they’ll take a percentage of the profits when you sell it in the future. Did I get that right?
Terry Story: Right. They get a 35% share of the gain.
Steve Pomeranz: Or loss.
Terry Story: Or loss, right. It’s a company called Unison out of San Francisco. It’s a new program. It sounds pretty neat. I kind of want to look into it. Where they’re investing in your house, and they’re gambling that over time the home value will go up, and they’re going to get a 35% return on that gain.
Steve Pomeranz: Very, very interesting. We’re running out of time, but I want to get into this news report here that Zillow just announced a $1 million prize, a contest to developers, software developers, to improve their home estimate tool.
Terry Story: Yes, and they need to because as a realtor, all we ever hear about is, “Zillow says my home is … ”
Steve Pomeranz: Yeah. Yeah.
Terry Story: ” … Worth.” There’s a lot of mistakes in the Zillow estimate. Zillow cannot, and Redfin and anyone else who has estimate tools, can’t figure out what your home is worth. There’s too many variables involved. We talked about it earlier. For example, if you’re in an area, a neighborhood with just a few homes, it’s hard for them to come up with what your home is worth. If you’re in an area where you’re adjacent to a more expensive neighborhood, let’s say you live in a $400,000 house but you have a $2 million neighborhood, Zillow’s taking into consideration the neighboring neighborhood. It’s doing a geographic area.
Steve Pomeranz: Yeah.
Terry Story: So, there’s a lot of inaccurate information. It is a good tool to look at to see what the trends are for the area …
Steve Pomeranz: Yeah.
Terry Story: … To look at what actual sales are in the area, but at this point, these tools cannot tell you what your home …
Steve Pomeranz: It’s very important for everybody to be aware that it’s really an estimate. Depending upon the neighborhood, there’s a lot of variables, so don’t count on…
Terry Story: Condition of the house.
Steve Pomeranz: … That estimate.
Terry Story: It doesn’t know …
Steve Pomeranz: How do you know? Yeah.
Terry Story: … The difference between a dump or a …
Steve Pomeranz: That’s right.
Terry Story: … Completely renovated …
Steve Pomeranz: Exactly.
Terry Story: … Over-improved house.
Steve Pomeranz: Exactly. I’ve been saying that for years.
Terry Story: It doesn’t know.
Steve Pomeranz: It doesn’t know.
Terry Story: It doesn’t know. It can’t take into consideration other people’s tastes.
Steve Pomeranz: My guest, as always, is Terry Story. Terry is a 28-year veteran with Coldwell Banker, located in Boca Raton, Florida, and she can be found at terrystory.com. Thanks, Terry.
Terry Story: Thanks for having me, Steve.