Life after the Federal Tax Credit

Federal Tax Credit

Life after the Federal Tax Credit

It seems like most of my career I have been selling the Federal Tax Credit for first-time homebuyers and to existing home owners that want to upgrade to a new home. I'm writing this piece just 8 days before tax credit expires... so we will see how I do.

I am currently working with 15 clients looking for homes. Of all my clients, not a single one is motivated to make an offer and have it accepted by the deadline. Part of me wants to say they're nuts... $8K is allot of money. However, I commend them for having the savvy in several ways to overlook the tax credit. First of all, I have a hard time selling a property to anyone that is settling for the property, just to get a tax credit. Especially when the tagline I have used for my real estate business is, "It's about the right home".

Here are some things to think about when accepting the tax credit. If you do not live in the home as a primary residence for 3 years, guess what happens to your tax credit? You get to write a check for $8K reimbursing the government. You cannot get a loan to make a down payment on your home, therefore the tax credit cannot be used against paying the principle in your mortgage. You can apply for down payment assistance, but this just results in a short term loan that is a second position lien on your property. Isn't that what got us in this mess in the first place?

In the last two weeks I have submitted 3 offers on properties and all have either come back as rejected, countered, or the seller has ask for highest and best offer. In other words, many of the prime properties are getting multiple offers, driving the price in some cases over the list price. For a first-time homebuyer that is using the FHA program of 3.5% down, that is typically all the money they have to put down. By uping their offer, they are strapped themselves even more to come up with the cash. So let's say they put in an offer and it is accepted two weeks before the deadline. If their inspection fails, they can withdraw their offer, get their earnest money back and still have time to make another offer before the deadline. But here's the issue. The appraisal will more then likely happen after the deadline... Hum???

Being that the appraisal is after the deadline can cause a bigger issue because if the offer was over the list price and it appraises for the list price, then what? Let me put this into simpler terms. You are under contract for $185,000, the list price was $180,000. The appraisal comes back at $180,000. That is $5,000 less then the purchase price. The bank will not loan more money then what the property is appraised.

Now what? There is a $5,000 difference that needs to be made up. Here are the options... 1) The seller lowers their price to $180,000 to get the deal done. If the other offer was for $182,000 in cash, then the seller just lost $2,000 because they could've accepted that offer not bound to an appraisal. Also, if they kill the first offer go back to the cash offer, maybe that is jeopardy because that buyer wanted to get the tax credit, but can no longer do it because although their contract was submitted before the deadline, it was not ACCEPTED before the deadline.

If the seller doesn't concede the difference, then the second option comes into play. 2) The buyer brings $5,000 more at closing. Remember, they cannot get a loan to use towards a downpayment. So now they have to beg friends and family for a gift. So now that $8,000 tax credit is now starting to look like a $3,000 tax credit and having $5,000 negative equity in their property.

Now comes the option. 3) Buyer kills the deal, since it didn't appraise, they get their earnest money back, but they will no longer be able to make an offer and get the tax credit because now the deadline has passed.

This gets even more complicated when the seller has made an offer on another home so they can take advantage of the $6,500 tax credit. My overall prediction is that we will see deals killed. It will be hard to judge how many times this will happen, but by the nature of how homes are being appraised, mainly due to HVCC, it will be likely to be an issue.

The bottom line, as sellers become desperate to close on their homes, that are under contract on another home, we may see some great deals out there in May and June. Remember if you did submit and offer and have it accepted before the deadline; and it is the righthome at the right price... You made out great during this period of incentives.




	Federal Tax Credit Life after the Federal Tax Credit It seems like most of my career I have been selling the Federal Tax Credit for first-time homebuyers and to existing home owners that want to upgrade to a new home. I'm writing this piece just 8 days before tax credit expires... so we will see how I do. I am currently working with 15 clients looking for homes. Of all my clients, not a single one is motivated to make an offer and have it accepted by the deadline. Part of me wants to say they're nuts... $8K is allot of money. However, I commend them for having the savvy in several ways to overlook the tax credit. First of all, I have a hard time selling a property to anyone that is settling for the property, just to get a tax credit. Especially when the tagline I have used for my real estate business is, "It's about the right home". Here are some things to think about when accepting the tax credit. If you do not live in the home as a primary residence for 3 years, guess what happens to your tax credit? You get to write a check for $8K reimbursing the government. You cannot get a loan to make a down payment on your home, therefore the tax credit cannot be used against paying the principle in your mortgage. You can apply for down payment assistance, but this just results in a short term loan that is a second position lien on your property. Isn't that what got us in this mess in the first place? In the last two weeks I have submitted 3 offers on properties and all have either come back as rejected, countered, or the seller has ask for highest and best offer. In other words, many of the prime properties are getting multiple offers, driving the price in some cases over the list price. For a first-time homebuyer that is using the FHA program of 3.5% down, that is typically all the money they have to put down. By uping their offer, they are strapped themselves even more to come up with the cash. So let's say they put in an offer and it is accepted two weeks before the deadline. If their inspection fails, they can withdraw their offer, get their earnest money back and still have time to make another offer before the deadline. But here's the issue. The appraisal will more then likely happen after the deadline... Hum??? Being that the appraisal is after the deadline can cause a bigger issue because if the offer was over the list price and it appraises for the list price, then what? Let me put this into simpler terms. You are under contract for $185,000, the list price was $180,000. The appraisal comes back at $180,000. That is $5,000 less then the purchase price. The bank will not loan more money then what the property is appraised. Now what? There is a $5,000 difference that needs to be made up. Here are the options... 1) The seller lowers their price to $180,000 to get the deal done. If the other offer was for $182,000 in cash, then the seller just lost $2,000 because they could've accepted that offer not bound to an appraisal. Also, if they kill the first offer go back to the cash offer, maybe that is jeopardy because that buyer wanted to get the tax credit, but can no longer do it because although their contract was submitted before the deadline, it was not ACCEPTED before the deadline. If the seller doesn't concede the difference, then the second option comes into play. 2) The buyer brings $5,000 more at closing. Remember, they cannot get a loan to use towards a downpayment. So now they have to beg friends and family for a gift. So now that $8,000 tax credit is now starting to look like a $3,000 tax credit and having $5,000 negative equity in their property. Now comes the option. 3) Buyer kills the deal, since it didn't appraise, they get their earnest money back, but they will no longer be able to make an offer and get the tax credit because now the deadline has passed. This gets even more complicated when the seller has made an offer on another home so they can take advantage of the $6,500 tax credit. My overall prediction is that we will see deals killed. It will be hard to judge how many times this will happen, but by the nature of how homes are being appraised, mainly due to HVCC, it will be likely to be an issue. The bottom line, as sellers become desperate to close on their homes, that are under contract on another home, we may see some great deals out there in May and June. Remember if you did submit and offer and have it accepted before the deadline; and it is the righthome at the right price... You made out great during this period of incentives.