Question: I often hear people reference the MLS or Bright when referring to properties for sale. Can you explain what these are?
Answer: If you’re buying or selling a home anywhere in the US, you may hear the term “MLS” and if you’re buying in the Mid-Atlantic “Bright” used a lot. The simplest way I describe it to people is that the MLS, short for Multiple Listing Service, is the real estate industry’s database(s) of record for property sales. There are hundreds of regional and local MLS’s across the country that act as the aggregator of properties for sale/rent.
Bright (MLS) is the name of our regional MLS and, with just over 110,000 participating agents, it is the second largest MLS in the country behind the California Regional MLS. Prior to 2017 it was called MRIS (Metropolitan Regional Information Systems), but in 2017 it was rebranded to Bright after a merger with 8 other regional MLS’s mostly from PA, NJ, and DE.
The map below shows the current Bright MLS footprint, meaning brokerages/agents in all of these areas input their listings into the same platform. It covers 40,000 square miles and 20M people.
What is the MLS (Multiple Listing Service)? The MLS is a real estate information exchange platform and database created by cooperating residential real estate brokerages to improve the efficiency of their real estate market. As a privately created and managed organization, each MLS is primarily funded through the dues of the brokerages and agents within the market it serves. There are hundreds of MLS’s across the country and each operates under its own direction and rules & regulations.
The information you find on consumer-facing websites like Zillow comes from various MLS’s and each MLS has the right to negotiate its own relationship (syndication agreements) with these sites and determine what information is made available.
Without the MLS concept, we would have an extremely fragmented industry that would make it difficult for buyers to ensure they are seeing most/all of what is for sale within their sub-market and it would be much more difficult for sellers to get top dollar because they would not have access to the entire buyer market.
What is Bright MLS? Bright is the MLS that serves the mid-atlantic region including all of, or most major markets in, Virginia, Washington DC, Maryland, Pennsylvania, New Jersey, West Virginia, and Delaware. The Executive Committee and Board of Directors is made up of representatives from the region’s major brokerages and directs the business of Bright, which has developed into a full-blown software, services, and technology company. Bright has adopted a strict set of rules & regulations to provide data uniformity and ensure fair play such as restrictions on marketing properties for sale that are not entered into the MLS, as discussed in this article.
MLS is a Net Benefit to Consumers and Agents Your interaction with Bright MLS is likely to come from listings that your real estate agent sends you directly from the system, but you are also indirectly interacting with Bright whenever you search a 3rd party real estate site like Zillow because their data is pulled from Bright (and other MLS systems across the country).
While at time frustrating for brokerages, agents, and consumers (personally, I think there’s so much more they can do with data and their consumer-facing tech), the MLS structure is a tremendous net benefit for the industry and consumers by combining home sale data into one database with a common set of requirements and rules of engagement. This allows the entire industry to function more efficiently than it did prior to the MLS concept, which has led to lower commission fees.
The biggest example for consumers (and I’d also argue to Realtors) is that since Zillow and other consumer-facing sites began aggregating listing information for public use, real estate agents are no longer the “gate-keepers” of listing information and consumers have direct access to practically everything that is on the market (entered in an MLS) in nearly real-time. If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529. Video summaries of some articles can be found on YouTube on the Eli Residential channel.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
Question: Can you provide any additional data on what the market will do for the remainder of the year? Answer: If you have enjoyed my real estate columns over the years, I would greatly appreciate your vote for Arlington Magazine’s Best Of Arlington, Real Estate Agent (in the Home section) and encourage you to support all of your favorite Arlington businesses with a meaningful vote! Last week I published an article highlighting that the second half of the year is easier on buyers than the first half. This week we can explore some other predictable market trends to help buyers and sellers anticipate the upcoming market. New Listings to Spike in Two Weeks, Then Fall SharplyThere will be a predictable spike in new listings after Labor Day, proceeded by a rapid decline through the end of the year.
Just 17% of total annual listing volume comes to market in Q4, with less than 7% of total listing volume over the last two months of the year
46% of homes are listed for sale during 1/3 of the year from early March to late June
The market goes on summer break with everybody else from late June through August
Note: this chart is for Arlington but the same trends can be applied across the region
Our Q4 Lows Will be REALLY LowBroken record time…we are experiencing historically low listing volume with sales down 25% from the historical average across the DC Metro. Total listing volume in Q2 (when we have the most inventory come to market) was on par with Q4 volume in previous years (least amount of inventory) so we will likely see just a trickle of homes hitting the market in Q4 this year.
Buyer Activity/Demand Will Also Jump Soon, Then Fall Around HolidaysAlong with a pop in listing volume after Labor Day, there’s usually a coinciding jump in buyer showing and contract activity that lasts through mid/late October before nose-diving in November.
But Sellers Will Continue to Reduce Asking PricesCourtesy of Altos Research, the chart below highlights the annual cycle of the percentage of homes reducing the asking price. The diamond and circular markers represent Aug 13 of each year and show that we are just past the halfway point of a sharply increasing number of price reductions through the end of the year as sellers fight to attract buyers before the holidays.
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com. If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.Video summaries of some articles can be found on YouTube on the Eli Residential channel. Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
Question: Do you have any recommendations for ways to reduce the burden of high interest rates?
Answer: Hearing somebody suggest an interest-only mortgage may initially sound like a gimmick and bad financial advice, but for some buyers, an interest-only mortgage might be a great option to responsibly purchase more house within budget, with more control over your payments.
I was recently discussing mortgage options for a client with Skip Clasper of Citizens Bank (Skip.Clasper@citizensbank.com) and he brought up their interest-only mortgage product so I thought I’d share it here in case it can help anybody else. Most banks attach a higher interest rate to their interest-only product, but Citizens Bank does not (currently).
Standard Mortgage vs Interest-Only
A traditional mortgage is designed so that every payment is a combination of interest and principal, so that the loan is fully paid off after 30 years if you make the same minimum monthly payment each month. In the early part of the loan, most of your payment goes towards interest.
An interest-only mortgage is a loan that does not include any payment towards principal with each minimum monthly payment and thus lowers the amount you pay each month. Any money you pay over your minimum monthly payment goes directly towards principal and you can choose when and how much to make those extra payments. Note that in a standard mortgage, you can also pay additional money towards principal at any time, but you must make the minimum payment, which includes interest and principal.
The difference in payments between the two products isn’t massive because so much of your initial payments on a traditional mortgage are interest, but you can see from the table below that the difference in payments is enough to move most buyers into a new pricing tier (better/bigger home) or to become more competitive in the price tier you’re in (better chance of offer being selected). The table below doesn’t contain a $500k loan amount because the interest rates on lower loan limits are usually too high to justify.
Who Should Consider an Interest-Only Loan
There are a handful of buyer profiles that I think should consider an interest-only mortgage to give themselves more spending power and/or more control of their loan payments:
Professionals with high bonus/commission compensation structures like attorneys, partners/executives, salespeople, and business owners. The key is making sure that you are allocating money from these windfall bonus/commission payments towards paying down your principal, but it helps keep your cashflow more manageable during the months where you have less or no income.
Homeowners who have high short/mid-term expenses like childcare. A family with two young kids in childcare may be paying $4,000+ per month and for most families, that cost will go away within a couple/few years. Once those costs drop off your budget, that money can be redirected into paying down the principal, if you haven’t yet been able to refinance into a lower interest payment.
Buyers where a new job or promotion is highly likely within a few years that will cause your income to increase enough that can start paying down the principal and make up for lower, interest-only payments early on. A good example of this is a couple where one person works and the other is in grad/medical school.
Buying a “forever home” and you’re finding yourself coming up a short on the budget you need to get into the right home and you don’t want the difficulty of managing higher payments in the first 2-3 years to prevent you from buying what you need for the next 20-30 years. There must be a reliable way for you to be able to be able to start paying down the principal (and catching yourself up) after a few years.
Waiting for Interest Rates to Drop to Refinance
A lot of buyers in today’s market are taking on higher mortgage payments than they can’t afford long-term and counting on interest rates to drop in a year or two so that they can refinance. While the odds are good that there will be a refi opportunity in the next 12-24 months, it’s far from certain and if you can’t sustain your minimum required payment on a traditional mortgage for more than 12-24 months, you’ve got a problem.
For buyers who are willing to take a gamble on a refi, an interest-only loan may be a safer way to wait for rates to drop because if it takes longer than expected, you have more control over how you pay down your mortgage prior to rates dropping enough for a refi.
Fiscal Responsibility is Key
The key to using an interest-only loan is to use it responsibly and have a solid plan in place to make payments towards principal rather than waking up 8-10 years into your loan payments with little to no dent in your loan balance (principal). If you do not trust yourself to do this, don’t even consider taking on an interest-only mortgage.
Qualifying is More Difficult
Interest-only mortgages are a riskier product for banks, so the lending standards are higher than a traditional loan. For most banks, you must qualify based on a 20yr amortization payment scheduled instead of a 30yr, meaning your debt-to-income ratio must be a lot stronger. Most banks also require you to have a significant amount of reserves after closing (retirement funds can usually be applied) and you need at least 20%-25% down.
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
Question: How was the market for single-family homes in Arlington during the first half of the year?
Answer: All it took was 7% interest rates to stabilize prices…which is exactly what the Fed’s goal was and the Arlington single-family home market is a great example of it working. Coming into the year, there were signs that prices would fall in 2023 if rates remained high, but due to a historic supply squeeze, prices remained stable despite a significant drop in demand (the drop is supply was more significant than the drop in demand).
The data below is based on sales of single-family homes in Arlington during the first six months of the past five years.
Competition Eases, Prices Stabilize
The Arlington single-family market will always be competitive, but the intensity of the last two years has softened and brought some stability to prices:
The average home price increased by 2.3% to over $1,360,000 and the median price increased by 1.7% to $1,220,000. If you remove new construction sales from the data, the average sale price actual decreased by .6% to just over $1,241,000.
Over the past five years, the average home price in Arlington has increased by nearly 27%
On average, homes are selling for just over their original asking price in 2023
14% of homes sold in the first half of 2023 sold for $2M+ and only 32% sold for $1M or less
If you remove 2020 sales numbers (COVID lockdown), there were 26% fewer sales in the first half of 2023 than the 5yr average. That is almost exclusively due to low supply, not low demand.
68% of sales in 2023 were at or above the asking price, less than 2021 and 2022 but just above 2019 and 2020
64% of homes sold within 10 days on the market, last year it was 74%
Homes that went under contract within one week on market sold for an average of 3.9% over the asking price, in 2022 the average was 6.8% and in 2019 it was 2%
Zip Code Prices All Over the Place
There was no consistency in average price change across Arlington zip codes:
Note: 22213 only has 8 sales in 2023 so the data isn’t very reliable, I considered not including it
22201 led the way with an 8.9% year-over-year increase
After massive growth in 2021 and 2022, the 22205 zip code had the worst performance, down 8.5% from last year. However, this is not a reflection of actual home values dropping in 22205 by that much, but mostly the make-up of the data set
22204, the zip code I now call home, remains the only zip code for a third year in a row with an average home price below $1M
22207, the best bellwether for Arlington single-family market conditions, continued its steady appreciation clocking in at 4.2% over 2022 to an average of $1,609,000. Without new construction sales, the average price increased by 1.8% to $1,455,000.
Looking Forward
There is no relief in sight for interest rates, with many rates returning to the 7%+ mark as of last week. Expect a noticeably less competitive, more balanced real estate market in the second half of the year. Buyers will have a better chance at finding value and sellers should level expectations.
The big question is when will rates come down (many expect to see 4-5% in the next 12-18 months) and what will that do to prices. If inventory remains low, which it’s likely to do for years to come, I think that we’ll see another surge in demand and prices when rates break through 5.5-6%. If that coincides with Q1/Q2 of 2024, expect that surge to be amplified. Until then, I expect prices to remain relatively flat with competition light to moderate, depending on the season.
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
Question: Why would anybody waste hundreds of dollars each month on condo fees?
Answer: Most people associate paying condo fees with throwing money down the drain, but the truth is that most people aren’t looking at condo fees the right way; they even offer some advantages over a single-family home or townhouse.
What Do Condo Fees Pay For?
For those who haven’t spent much time studying condo budgets, some of the main expenses in a condo budget include:
Reserves: a building’s savings account for large major repair or replacement of things like the roof, façade, elevators, etc
Property Management/Staff: contracts for a property manager, front desk, janitorial services, and engineer
Maintenance and Utilities: general upkeep of the building including lawn service, basic repairs, power washing, window cleaning, snow removal, and utilities like water, sewer, and trash (some buildings also include gas, electric, and/or tv and internet)
Master Insurance: this policy usually protects everything except your personal items and improvements within each unit
Predictable Expenses
One of the most beneficial, yet underappreciated, advantages of condo fees is that they give homeowners a very predictable, flat expense structure. Taking care of a single-family home might mean months or years with very low maintenance expenses and then a run of tens of thousands of dollars in expenses (e.g. a storm damages your deck and deck and your basement floods).
In a condo, your biggest financial exposure is usually HVAC and appliances, all of which are under $10,000 and have somewhat predictable expirations. Many of the other normal home maintenance and replacement costs tend to fall under the purview of the Association.
For younger buyers with less savings and retired homeowners on a fixed income, the benefits of stable, predictable condo expenses makes financial planning/management easier and also require less of an emergency savings fund so more cash can be deployed into investments or to enjoy.
Home Maintenance Cost > Condo Fees
When you own a condo, you’re only responsible for what’s inside the walls of your home (appliances, water heater, flooring, walls, plumbing fixtures, etc) and, if you have one, an outdoor HVAC compressor. Of course with a single-family home or townhouse, you are responsible for a lot more without anybody to share those costs with.
Over the last 12 months, the average condo fee in Arlington was $583/mon (~$7k/year) representing about 1.4% of the average condo market value. Estimates for annual (single-family) home maintenance range from about 1-2% (Wells Fargo) to 1-4% (State Farm) of your home’s value in annual maintenance expenses.
Many homeowners will spend more in the long-run maintaining a single-family home than they will on condo fees, plus condo fees include more than just maintenance and repair.
Lower Utility, Insurance Bills
Condo living will help you save money on other expenses including utilities and homeowners insurance. It’s usually much easier to keep your unit comfortably heated and cooled because you benefit from the ambient temperatures from the units and hallway around you. And because of the existing Master Insurance policy for the building, your own homeowners insurance policy tends to be less expensive than a comparable policy for a single-family home or townhouse.
Amenities
Many buildings have amenities that can either save you money (e.g. a gym that saves you from paying a separate gym membership fee or grilling area to save you on a grill and propane) or enhance your living (e.g. pool, rooftop terrace, 24hr front desk security).
Life is Easier
One of the main reasons retirees sell the home they’ve lived and invested in for decades to move into a condo is to relieve themselves of the time and hassle of maintenance and repairs. While you can debate whether you’ll pay more on maintenance in a condo vs single-family home, there’s no denying that you’ll spend a lot less TIME on maintenance in a condo, and your time is certainly worth a lot. Even if you are not doing any of the maintenance work yourself in a single-family, you will spend time contacting, meeting with, and managing contractors and vendors who do the work.
This goes for landlords/investors too – the effort of maintaining an investment property that is a condo is much lower than one that is a single-family home.
But What About Evil Condo Boards?
Another concern I hear about condos is that the evil condo boards/management will increase fees or levy special assessments (one-time fee levied against all owners, on top of their condo fee) on a whim just to screw owners over for thousands of dollars. This simply is not accurate.
First and foremost, the Board members are also owners and pay the same fee increases and special assessments as the rest of the owners so they should have a shared interest interest in keeping costs down. Second, most Boards try to limit fee increases to 2-3% annually to keep pace with inflation (yes, fee increases have been higher the last two years while we deal with high US inflation). Finally, special assessments are generally a measure of last resort and uncommon.
If you are concerned about fee increases and/or special assessments, I strongly encourage you to attend Board meetings, participate on the Financial or Building Committees, or become a Board member to personally oversee your investment.
Conclusion
Just because this column is pro-condo does not mean it is anti-single-family home/townhouse, but somebody has to stand-up to for the oft-bullied condo fee! I do hope this message reaches buyers and investors who are a good fit for condos, but hesitant to consider them because of a misunderstanding about condo fees.
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
Question: How does assuming a low interest rate VA loan work?
Answer: Thank you to all who have served and to their families who have sacrificed or lost loved ones for our freedom. I hope you and yours had a special Memorial Day weekend with friends and family to celebrate our country and those we’ve lost defending it.
The Eli Residential Group is donating to Arlington VA-based TAPS (Tragedy Assistance Program for Survivors) in honor of Memorial Day. Since 1994, TAPS has provided comfort and hope 24/7 through a national peer support network and connection to grief resources, all at no cost to surviving families and loved ones.
In keeping with the theme of Memorial Day, I will revisit a column about assuming low interest rate VA (Veteran Affairs) loans.
An assumable loan is a loan that can be transferred from a seller to a buyer, allowing the buyer to maintain the interest rate of the seller’s existing loan rather than accept a market-rate interest rate. This can be valuable in a high-interest rate environment like we’re in now when most homeowners have an interest rate well below current market rates.
To help me provide the best information about assumable VA loans, I reached out to Skip Clasper of Sandy Spring Bank (sclasper@sandyspringbank.com), who I highly recommend for a range of loan products including VA loans, construction/rehab loans, and jumbo loans.
Only Some Loans Are Assumable
VA loans (available to Veterans, service members and surviving spouses), FHA loans, and USDA loans are the only traditional loan products that are assumable. They make up a relatively small percentage of existing home loans in Arlington (likely single-digit percentage of total loans). I’m not aware of any conventional loans that can be assumed.
Key Details about Assuming a VA Loan
There are some important details and caveats to assuming a VA loan that both buyers and sellers need to understand prior to transferring a loan:
Buyers do NOT have to be a Veteran or otherwise qualify for a VA loan to assume a VA Loan
Sellers can NOT obtain a new VA loan until the previously assumed loan is paid off (or refinanced out of) unless the new buyer is a Veteran and uses their eligibility on the assumed loan
It is less expensive (closing costs) to assume a loan than to originate a new loan. The VA Funding fee is only 0.5% for assumable VA loans.
You need a down payment that covers the gap between the assumable loan balance and the purchase price. For example, if the seller’s loan balance is $200,000 and the purchase price is $500,000, the buyer is assuming $200,000 is debt and will have to cover the remaining $300,000 via down payment or alternative debt such as a second trust.
Buyers need to qualify for the loan using normal income, debt, and credit guidelines
As you can probably determine from the above details, there are only a limited number of scenarios where assuming a VA loan makes sense for both parties. The biggest hurdle to VA loan assumption is that the VA loan eligibility stays with the loan so if the buyer does not have their own VA loan eligibility, the seller must be sure they are okay giving up this very valuable benefit until the new buyer pays it off or refinances.
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
Question: Do I have to use my Property Manager if I sell my house?
Answer: This is more of a PSA post than anything else. If you’re a landlord or tenant, it’s crucial to pay attention to the fine print in agreements, especially regarding a future property sale. It’s common for Property Managers or Agents to include language that gives them the right to list your property if you choose to sell it or gives them a right to a commission in the event it sells during the rental period, to the tenant or somebody else.
Property Managers With Exclusive Right to Sell
Watch out for language granting property managers or agents exclusive rights to list your property if you decide to sell. This exclusivity restricts your options and flexibility, limiting your ability to explore alternative selling methods or use the agent of your choosing.
Required Commission Payments
Be aware of language stipulating a commission to property managers or agents if you sell your property to the tenant or another buyer during the rental period. Landlords might be obligated to pay a commission, even if they find an alternative buyer or wish to handle the sale independently. This financial burden can significantly impact both parties.
What If an Exclusivity or Commission Clause Exists?
Like most things in a contract, these clauses are negotiable. If you see something that you believe binds you to certain actions or payments in the event of a sale, ask about it and work to ensure you have the most flexibility if a sale does take place. You may not plan to sell when you sign the paperwork, but life happens and priorities change.
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @Properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
Question: Is it more effective to save for my kids’ college through a rental property investment or a more typical college savings plan like a 529?
Answer: I often hear from parents who purchase a small investment property around the birth of their child as the primary savings vehicle for college. Some people swear by it. I did it when my son was born (and will report back with results in 13 years!).
I reached out to my financial advisor, Erik Fischer CFP, RICP of Taylor Financial (erik@taylorfinancial.com, (727) 417-3400), about the topic and he offered a very detailed, thoughtful comparative breakdown of using a real estate investment as a college savings tool vs a more traditional 529. Erik is an excellent resource if you have additional questions about this topic or other financial savings topics.
With frequency, this question arises from parents who gravitate towards real estate investing. And, there is not a definitive answer. Ok – column over. Just kidding. While it’s true that there is not a definitive answer, depending on your situation the answer may be definitive for you.
Identifying the parameters:
First, establish a target – how much wealth do you want to save to pay for college?
Then, consider the following key areas when comparing the two investment vehicles
Savings strategy –how will you fund your savings vehicle
Flexibility
Level of involvement
Associated risks
Expected growth rate
Tax implications
Establish your target:
The good news here is that your target will likely be the same regardless of which approach you choose. So here is an easy-to-follow framework of how to establish your target.
Identify the amount you would like to have accumulated for each child when they reach college. You can research the “Cost of Attendance” (*important* this is your all-in cost, not just tuition) at http://www.collegeboard.org.
Use the current cost of attendance for a school and inflate that amount to future dollars using an inflation rate of 5%. Inflate this number out until your child is likely to graduate college.
Why 5%? This is somewhat arbitrary, but over the last 20 years college costs have been doubling or more the long-term average inflation rate of 2-3%. I encourage you to use a number somewhere from 5-8%.
Take the last 4 years of inflation adjusted costs and add them up. These numbers represent a ballpark of what you could expect to pay for this child. Is it perfect? Of course not, but it will give you a greater level of visibility into what you will need.
Establish your target (example):
Let’s say your child was just born, plans are to attend college in 18 years, graduate in 4 years. At UVA, in-state cost of attendance for families making over $110,000 per year is $29,877 (tuition represents roughly half of this number). If you adjust for inflation and add up 4 years of all-in cost, you arrive at an aggregate number that includes the annual timeline of cashflows. See table below:
These calculations will vary whether you plan for in-state vs out-of-state, public or private, and how much of the cost you are willing to fund. Regardless, the framework will remain the same or very similar to arrive at some accumulation target.
You have your target, now what’s the best way to get there:
Let’s compare a 529 based approach to a rental property-based approach. Of course, these are not the only two ways to save for college, but we’re focusing on these two today.
Let’s first look at the rental property approach: the high-level idea is buying a rental property when a child is born and selling it to fund college when the child is college-ready.
Because of the increased complexity of rental real estate (which is not inherently good or bad, it just is), let’s identify some of the important considerations first:
Down payment will be required
Management / execution risk
cash flow planning
property management
tenant management
increased tax planning
increased insurance planning
financing considerations (if you will require a mortgage)
a plan to sell the property (to fund college)
So, you may have picked up here another hint at what the answer might be for you depending on your situation. That is, if you do not have the cash on hand to make a reasonable down payment for the type of property you desire, the rental property might be off table for you, at which point you might lean on an annual savings approach of a 529.
Rental property example:
Rental strategies come in all shapes and sizes, but let’s say that we have $50,000 available to fund this strategy and we use that to purchase a property with the following facts:
20% down payment, leaving $10,000 left over as a sinking fund to close the deal and maintain the property.
Purchase price $200,000
Mortgage rate of 6%
Cash flow neutral over the course of the 10 years (perhaps negative in the first few years, and positive in the last few years due to rent inflation and fixed mortgage), with annual profits years 11-18 of $5,000 that you let accumulate in a bank account that generates some interest
Property appreciates at 3% annually
Sell the property in your child’s senior year of high school and pay off the remaining mortgage.
Keep the rest in cash to pay for school, or in a high yields savings or CD ladder to time payments over 4 years. The point is, you’ll have all your cash going into freshman year and you’ll keep it invested safely while they are in college.
Here is the formula with accompanying visuals below: determine growth of underlying asset, then sell after 18 years, subtract 5.5% of sale price (commissions, closing costs, etc.), eliminate the debt, add back in the cash from your rental property bank account. Once you have done all this, you are left with unencumbered cash that you can use to pay for college (pay it all to a college…lovely, right?)
$340,487 x 94.5% = $321,760
$321,760 of take-home transaction, minus the outstanding debt of $94,493 = $227,267
Plus $45,000 in cash that has accumulated in your rental property bank account = $272,267*
*The final available balance will likely be lower due to a capital gains tax, but the tax charge is highly variable based on factors like future tax code, final cost basis, tax management during property ownership, and other personal financial considerations at the time of sale.
We are now very close to our target. Also, it’s very important to identify the many factors that can be quantified with deeper analysis, but by nature are less tangible. Let’s list them:
Advantages
Tax advantages along the way with depreciation, deductible expenses, and favorable tax rates (capital gains rates) on sale
Opportunity to develop skills and expertise in real estate
Flexibility that you are not required to use the asset for college if you are able to pay for or end up choosing to pay for college in some other way – this is a big one.
Potential for upside return
Potential to be integrated with planning for your own retirement
Disadvantages
Level of management extremely cumbersome compared to a 529
Execution / management risk can significantly impact total returns.
Increased liability
Market risk
Typically, you will need a significant amount of cash upfront to make the down payment
Carefully examine these attributes, because one or some of them might be deal-makers or deal-breakers for you.
Now, let’s compare the rental property strategy to the typical/default college savings account, a 529. This is simple, add an initial lump sum, or deposit annually.
529 – Annual Deposits equaling $500 per month for 18 years
529 – Lump Sum with the same $50,000 that was used for the rental property
The tables above represent the hard numbers that move you much closer to your ideal target. Helpful. Now, there are also many factors that can be quantified with deeper analysis, but by nature are less tangible. Let’s identify them:
Advantages
Tax-free growth, and tax-free distributions if used for qualifying educational expenses.
This is the big one, it’s the main differentiator of the 529 from any other account type.
Automatic – set it and forget it
Can be transferred to other qualifying relatives if needed for their education
Potential for stock-market returns
Based on the new Secure Act 2.0 law, part of the plan may be eligible to convert to a Roth IRA for the beneficiary if certain criteria are met
Disadvantages
Tax benefits are lost if not used for qualifying educational expenses
10% penalty on earnings if not used for qualifying educational expenses
Market risk
Lack of flexibility to use the money for any other reason, due to a & b above
Lack of liquidity, use and control for any reason other than college
Cannot be integrated with planning for your own retirement
Carefully examine these attributes, because one or some of them might be deal-makers or deal-breakers for your own situation.
Comparing the two:
How do we put this all together? From a wealth accumulation perspective, in these examples, the rental property strategy wins, and it beats the lump sum deposit into a 529 by a significant amount.
However, this is only one example. If we ran 100 examples for each, we would get 100 different results for each. Yes? You could get a 10% return in the 529, or a 6% return. Your rental property could cash flow negatively in all years, or positive in all years. You could get a great deal, or a bad deal. You could refinance if interest rates lower and capture significant savings. You could have an extended vacancy. Maybe the asset only grows by 2% instead of 3%. There will be a ton of variability.
Distill the factors that will influence the results for you:
Rental strategy
Purchase price of the home
The plan to sell the home
Ability to manage the cash flow of a property, maintain it, and sell it properly / advantageously
Ability to execute proper tax planning along the way
Ability to manage tenants
529
If you deposit a lump sum, at what point in the market cycle did you get started – during a bull market? During a bear market? Unfortunately, this is somewhat out of your control, but it makes a big difference in final results
Investment selection – did you create an appropriate portfolio within the account
Behavioral finance – did you try to time the market, chase a rate of return, or avoid a market drawdown? As you can tell by the wording, none of those tend to be in your financial interests.
What’s the bottom-line(s):
Don’t just focus on the surface-level math, but dig deep into the variables that impact your personal strategy (including non-financial)
While real estate in this example, and many others, may produce a higher college savings balance, it comes with a lot more work and requires a large lump sum payment up-front
Research and seek out the expertise you need to execute both options efficiently
Thank you very much for your detailed analysis, Erik. I have benefitted from Erik’s financial guidance for many years and would encourage anybody with questions about college savings or other financial planning decisions to reach out to him at erik@taylorfinancial.com.
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
Video summaries of some articles can be found on YouTube on the Eli Residential channel. Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
Question: I’m planning to sell my home to a builder to be torn down, do you have any advice?
Answer: For many homeowners with older, smaller homes in expensive markets, selling to a builder is the easy and most profitable option when you’re ready to move. If you live in a home like this, you probably get hundreds of calls and letter from builders, investors, and real estate agents offering to buy your home as-is.
Here are six tips and ideas if you’re considering this option…
Don’t Overvalue Cash
The idea of somebody paying cash for your home sounds exciting and more reliable than somebody getting funds from a bank. “They pay cash” is one of the most common reasons I hear from homeowners explaining why they prefer selling to a builder.
The truth is that many builders don’t buy homes with a mountain of cash they have sitting around; they rely on strong banking relationships to finance their purchase with cash-like deals (the money is available quickly and easily).
The real value of cash is that a buyer can close quickly and does not require any bank approval, but a cash-like deal from a well-qualified buyer working with a great bank can often mirror this by removing any finance or appraisal contingency and closing as fast as the bank will allow (many can close in 2-3 weeks).
The contingency (or study period) structure and Earnest Money Deposit terms are more important than the funding source being a buyer’s private cash balance vs a trusted bank/lender. I would also argue that it’s more likely that an individual or builder cash-buyer will run into a cash crunch prior to closing than an established bank/lender.
Your Home May be Worth More to a Homeowner
It’s no secret how hard it is to find entry level homes these days. You may think that your current home with a small kitchen, old roof, and unfinished basement is only worth the land it sits on, but buyers are hurting for inexpensive homes, even if they need loads of improvements. Don’t assume that just because your home is small and dated that a builder is your only option.
Make sure you’re comparing builder offers to what you can get on the open market, taking into consideration other financial (e.g. differences in commission) and non-financial (e.g. timeline and showings) differences between the two routes. There may be little downside to testing the open market before committing to a builder, depending on your situation.
Your community will also appreciate your contribution to preserving the local tree canopy!
Builders Can Offer Attractive Rent-Backs
A rent-back means that you can live in your home after closing (aka after getting paid) for a specified period, usually for little or no cost, for months after a sale. For many sellers, this extra time is perfect for searching for your next home or apartment, with cash in-hand, or taking time to clear out decades of personal belongings.
A normal buyer can also offer a rent-back, and are often happy to, but if a home is being purchased using a mortgage for a primary residence, the buyer cannot offer a rent-back over two months. A builder, even if the funding comes from a bank, or cash buyer has no restriction on the length of rent-back. It’s well within reason to negotiate 3-4+ months of free or low-cost rent-back from a builder after closing.
Share in the Builder’s Profits
Jealous of the profit a builder will generate from building a new home on your lot? Rather than selling your home to a builder, consider negotiating an equity stake in the project and getting paid based on the sale of the new home. It’ll take 10-12+ months longer to be paid and there’s more risk, but you can make a lot more than you would selling your existing home.
Use Missing Middle to Upgrade, Stay Home
The new Missing Middle zoning code may be a great solution for many Arlington homeowners by allowing you to partner with a builder to build a Missing Middle product (duplex, townhouse, or small condo building), live in one, designed to your specifications, and leverage profit sharing on the others to significantly reduce the cost of your new home.
The cherry-on-top is getting to stay in the same place you have lived in for years/decades!
Realtor Representation Can Be a Net Benefit
A direct sale without agents/commissions is one of the primary selling points builders offer and it’s certainly a good one, but representation and commissions come in many shapes and sizes that sellers can benefit from when selling to a builder. Benefits range from understanding how to measure the value/risk of contract terms like a study period or deposit, knowing what to negotiate for based on your needs/preferences, or effectively soliciting more bids to ensure you’re getting the best price.
Even though working directly with a builder can be simple, it’s important to remember that a builder’s core business is acquiring lots with favorable terms/prices, which runs counter to your best interests.
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
Video summaries of some articles can be found on YouTube on the Eli Residential channel. Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @Properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
Question: What design trends are you seeing in homes these days?
Answer: Every year we cycle through new color, material, and design trends but it’s also rarely anything actually new just recycled trends from past generations (e.g. wallpaper is making a big comeback). Design isn’t exactly a strength of mine, so I defer to the experts for my annual design trends column. This year I pulled from Apartment Therapy, Architectural Digest, Forbes, National Association of Realtors, The Spruce, Veranda, Wall Street Journal for their expertise and selected trends that I’ve been seeing more of.
Moody Space: A return to rich, dramatic color palettes (purple, sand, maroon, cream, chocolate brown) swathing an entire room. These spaces will maintain their minimalistic integrity, with a focus on intimate and moody forms and textures. Painted or wallpapered walls in the same color as the ceiling, trim, shades, furnishings, and/or fabrics can be modern and cool. Moody tones make spaces feel intentional.
Organic Materials and Earth Tones: In today’s chaotic world, nature has a calming effect, because of this, organic materials and earth tones are timeless and unlikely to look dated any time soon. Expect lots of wood and colors inspired by nature such as peaceful blues and mossy greens. Nature-inspired art and live edge tables are other ways to incorporate the elements in our homes.
Art Deco: Bold patterned fabrics, rounded shapes and profiles (think round kitchen islands), and “lavishly unnecessary” nostalgic trinkets. Exploded in the United States in 1920’s and represented luxury, glamour, and exuberance.
Plush, Luxe Textiles: Expect to see more overstuffed sofas and armchairs; thick, plush area rugs; and ultra cozy bedding and bath accessories. Luxury textiles such as velvet are in high demand. Fabrics in jewel tones for an upscale look and high contrast colors in your fabrics and throws.
Accents with Personality
Wallpapered Power Rooms: This trend is going to get bigger in the new year. We can experiment in powder rooms with pattern play and colors that we may be cautious to put in our larger rooms. Lauren Robbins Interiors calls the powder room the “jewel box of the home” as they can add an element of surprise when you open the door.
The Slab Backsplash: April Gandy at Alluring Designs Chicago calls this one of her favorite design trends for 2023. “Slabs of quartz or marble are perfect for any design aesthetic and help to create a clean, seamless look in any kitchen,” Gandy says. “The lack of grout lines makes this backsplash super low maintenance and so easy to keep clean.”
Dark & Textured Countertops: With a focus on nature, leathered granite and soapstone countertops have an earthy, approachable quality and will start to appear in more new kitchens. Darker countertops will often be paired with lighter stained cabinets.
Lighting As a Mood: People are recognizing the importance of ambient lighting and the role it plays in giving a space a feeling. There is a growing interest in task lighting and layered lighting and creating different moods for different activities.
To see how these trends have shifted over the years, you can reference my 2022, 2021, 2020, 2019, and 2018 design trend articles.
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
