Making Your Home Equity Work for You

If you were a home owner in the DFW area, 2013 and 2014 have been very good for you.   A happy home owner is often pleased to just set on his assets and rejoice that things are going well.  This blog is addressed to you homeowners who are in the age range of 20 to 60 plus.  Older homeowners may be very hesitant to take any risk at all, and are by definition excluded from the discussion herein.

For reference, let’s assume that you own a home in Collin County.  Used homes are presently appreciating in value at the rate of about 10% per year.  Because of supply and demand, new homes are appreciating at an amazing rate of about 20% per year.  (Many of our buyers have contracted to have a new home builder construct their new home over a five to six month period, and have enjoyed an increase in value of their home appreciate by   $30,000 to $ 40,000 during the time it was being built.

We further assume that you own a home in Collin County that is six years old, and has a current market value of $ 250,000 (net of costs of sale).  We further assume that your mortgage has a net pay off balance of 200,000, and thus you presently have a net realizable equity of $ 50,000.   We assume that your monthly mortgage payment, including principal, interest, tax escrow and insurance escrow is $ 1,850 per month.    The rental market is hot, and your home can be leased for $ 1,850 per month, which covers your costs.

With our hot seller market, your home’s equity may increase each year for the coming four years, as follows.

Year                 Net Market Value           Mortgage Balance           Your Net Equity

Now                       $250,000                         $200,000                          $50,000

EOY 1                     $275,000                         $197,000                          $78,000

EOY 2                     $302,500                         $193,000                          $109,599

EOY 3                      $332,750                         $190,000                          $142,750

EOY 4                      $366,025                         $186,000                          $180,025

Sounds wonderful, and I truly believe that our residential market is that strong.  We have thousands of people moving to Collin County every year to get a new job, and our market will almost certainly continue strong for the next four years.

Because of our fantastic sellers’ market, our seller in the above example will probably see his net equity increase from 50,000 today to as much as $ 180,000 in the coming four years.  With a little courage, this same owner can dramatically improve his financial outlook over the same four year period.  How?

By leasing out his property for enough to pay for his monthly payments and by buying a second home (now) for about $250,000.  His new second property will require an FHA down payment of 3.5% or $ 8,750.  By being selective in the choice of your home builder, this homeowner may be able to have the builder pay all or most of his closing costs.

We are in the market every day and believe that this investor owner will see his second home appreciate by $ 20% during the first year alone.  We will base his wealth building plan on an average appreciation rate of 10% per year for years, 2, 3 and 4.  Look at his appreciating equity over the four year holding period.

Time                 Net Market Value of              Mortgage Balance              Net Equity                                                                    Home No. 2                             Home No. 2                     Home No. 2

Now                          $250,000                                 $241,250                                   $8,750

EOY 1                        $300,000                                 $240,000                                   $60,000

EOY 2                        $330,000                                 $237,000                                   $93.000

EOY 3                        $363,000                                 $234,000                                   $129,000

EOY 4                        $399,000                                 $230,000                                   $169,000

Note carefully, this $ 169,000 can and will belong to our home owner at the end of the fourth year.  The same homeowner will enjoy the equity increase in his first home, he just does not live in the first home.  The key to understanding how the home owner can accumulate an extra $ 169,000 is that with the first home leased with sufficient monthly income to pay the total mortgage cost the owner may just qualify to buy a second home and enjoy fabulous appreciation on both homes.  Obviously, the owner’s financial status, and credit status will play an important role in pulling this investment together.

Did you notice that the two homes together might help our example homeowner accumulate a net worth of about $ 358,000 four years from now.

Here’s the bottom line:

Each of us must live within our own comfort range.  If your situation is similar to the above home owner, and you have a home in Collin County, you have several options relative to the fantastic real estate market in which we live.

  1. You, as an owner, may simply do nothing.  You can enjoy your present home and enjoy a rapidly appreciating market.  You can continue to pay on your home mortgage for another 25 years.
  2. You could follow my suggestion, lease your present home and purchase a second home with a minimum FHA down payment.  This decision can reward you tremendously.  You might keep both homes indefinitely.  You might sell your second home in about four years and use the sales proceeds to pay off the mortgage on your first home, thus owning the first home free and clear.
  3. If you like being a rental property owner, at the end of four years, you might choose to keep both properties and buy a third property.

Real Estate Knowledge is Power

In the Real Estate world, knowledge is power
For example; we often hear some knowledgeable owners say:

1)      “I believe interest rates will go up very soon because they have been low for such a long time”
2)      “I think I’ll lease for a year to get a handle on the real estate market in the McKinney/Allen area. Then I want to buy.”
3)      “I want to buy a home in McKinney, but right now prices are so high. I will wait a year until prices come down to more realistic levels.”

From our point of view, being a part of the real estate market every day, we see the fallacy of these statements. This blog includes a number of critical financial graphs related to the Collin County, Dallas County, and Denton county markets that help bring truth to a market filled with chaos. These graphs were presented to a number of highly successful real estate professionals by Mr. Britt Fair of Hexter Fair Title Co.

Several extremely important economic factors dominate the current and future real estate market trends for Collin, Dallas and Denton Counties. These are:

1)      The Dallas Ft. Worth metroplex is blessed with an abundance of jobs. For the year ending 7/31/14 we had 120,800 new jobs in the DFW area. This one factor has an enormous impact on our local real estate market as people from all other states move here seeking a job. This higher demand results in lower inventory of homes available for purchase and higher prices for both pre-owned homes and newly constructed homes. What about the near term future, say the next two years? In all likelihood we will continue having an enormous inventory of new jobs and the demand for homes for those moving here will continue resulting in higher home prices. My own prediction is that for the coming two years, prices of preowned homes in the McKinney, Dallas and Denton counties will increase by 8% per year. This is phenomenal and unprecedented for our area. The impact can be seen by considering a preowned home with 3200 sq. ft. in McKinney.

Date                           Market Value

July 2013                   $290,000
July 2014                   $320,000
July 2015                   $345,000
July 2016                   $373,250

The home owner owning this property could easily experience an increase in market value of $83,250 over the above 3 year period. It is hard to imagine the home owner earning that much profit from other investment opportunities over the same time period.

2)      Concerning the rumor of higher interest rates, worldwide the economy of most countries is stagnate. Today, for example, Germany’s 10 year treasury bonds yield about 1% per year. While comparable US 10 year treasury bonds are yielding only about 2.5% per year.

As long as the economies of the world market remain sluggish and internationally, treasury bonds are yielding such low interest rates. There is little possibility that home mortgage rates in the US will increase appreciably.

We are blessed to be in the right place at the right time. Jobs are plentiful. Unemployment is very low compared to the national level. Home prices are affordable and they are increasing rapidly. A knowledgeable DFW resident, will probably not want to live anywhere else.

Joe. C. Neel

GDP Growth: Slow, but Steady

GDP Growth: Slow, but Steady

Source: Commerce Department, The Wall Street Journal

US Unemployment Rate Trend

US Unemployment Rate Trend

Source: US Bureau of Labor Statistics

US “Labor Force Participation Rate” Falling

US “Labor Force Participation Rate” Falling

Source: US Bureau of Labor Statistics

German 10-Year Bond Rates

German 10-Year Bond Rates

Treasury Rates Still Extremely Low

Treasury Rates Still Extremely Low

Stock market wealth effect: Recovery has helped rich feel richer

Stock market wealth effect:Recovery has helped rich feel richer

Source: BigCharts,

Metro Areas With Largest Employment Growth

New York                       155,400

Dallas/Fort Worth      120,800

Houston                         112,200

Los Angeles                     91,700

Miami                                 76,900

San Francisco                 59,100

Atlanta                               63,900

Source: US Bureau of Labor Statistics

Employment Change (7/13-7/14) 12 Largest US Metro Areas

Employment Change (7/13-7/14)12 Largest US Metro Areas

Source: US Bureau of Labor Statistics

NTREIS Dollar Volume Since 2007

NTREIS Dollar Volume Since 2007

Case-Shiller Index: Prices Rising

Case-Shiller Index: Prices Rising

Source: S&P / Case-Shiller

Case-Shiller Index: Prices Rising

Source: S&P / Case-Shiller

Today’s Buyer or Seller of a Home in Collin County, Texas

We are every day experiencing an extreme sellers’ market, never before seen in the Dallas area.  This market creates some unusual opportunities for buyers and for sellers and this article is written to help you take advantage of this unusual market.

For Sellers:  It may be that you can sell your home for a significantly higher price than ever before.  If you have been seriously considering selling, right now is probably the most opportune time for you in the past 10 years.  I want to address my comments t

Moving out sellers
Moving up sellers
Moving down sellers

Moving Out Sellers:  Those who are looking to sell their Collin County home and relocate to New Mexico or Virginia or Florida.  Just know that you can sell your home right now at a higher price than at any time in the past 10 years.  Part of your selling strategy will be to carefully study past sales of homes in your subdivision and then set an asking price significantly higher than you would have estimated.  The market has so strongly shifted in favor of the seller that you might get a price 10 to 12% higher than one year ago.  This is indeed good for you as a seller who is moving out of the Collin County area.  You may expect a very high sales price; that’s wonderful, you will need every dollar when buying your new home in a distant location.  One word of caution, is, don’t mess with rookie real estate agents who do not really know and understand the current market.  It could cost you thousands of dollars to deal with a rookie real estate agent who does not understand today’s fast moving intense sellers’ market.

Moving Up Sellers: If you are considering selling your current home and moving to a significantly larger and more expensive home, we have some extreme maneuvering opportunities and recommendations for you.

To help you focus, consider two absolute facts that can help you increase your personal wealth by tens of thousands of dollars.

Fact 1    Pre-owned homes (5 years old or more) are increasing in value by about 1% per month (about 12% per year).

Fact 2    New homes in key locations within Collin County are increasing in value by about 2% per month.

Here is an extreme plan that will make you big bucks.  Let’s say your current pre-owned home now some 8 to 12 years old is valued today at about $220,000.  Go and select your new $310,000 home in a well planned community of homes.  Sign a sales contract to build your dream home, and negotiate the best possible price for a home to be completed and ready for occupancy in six months.  Your presently owned home may be worth another $13,000 by the time the new home has been completed.  Your new $310,000 home could easily be worth $40,000 more in six months when it has been completed.  You are enjoying the best of all market opportunities and you stand in a position where you may enjoy a $53,000 profit in 6 months.  The initial deposit to place a new home under contract will be no more than $3,000 to $5,000, to control the new home and to enjoy the fantastic appreciation in value that is happening now.

Use an experienced real estate agent to help you with every step of this investment decision.  Let your realtor represent you with the new home acquisition.  Don’t kid yourself, the sales representative at the builder’s office is there to represent his company, not you.  You need representation.

Moving Down Sellers:   Let’s consider that you are new empty nesters, or that you are experiencing some significant declining health issues, and for these reasons you are considering downsizing to a smaller less expensive home.  You will face two market realities which you must deal with in order to take advantage of today’s market.

First you will be able to sell your current home for a price significantly larger than you ever imagined.  (In our immediate neighborhood, homes are selling for prices about $60,000 higher than three years ago.)  Your equity may have increased dramatically in the past two or three years.

Second the smaller less expensive home that you have considered as an alternative to your present home, has also appreciated dramatically in the past three years.  It may have appreciated by $25,000 since you first considered it two or three years ago.  Your immediate concern might be:  Well, I did want to move to a less expensive home, but I can hardly believe that the home I wanted to move down to has gone up so much in value.

A rising tide floats all ships.  A rapidly appreciating market affects everyone.  Be happy, don’t lose sight of your goals.  You and your family want to move to a smaller, less expensive home – where utility costs, maintenance costs will all be lower, and you can settle into a different life style and possibly live with no mortgage or a very small mortgage.

For any of the above buyers, the above described selling strategies will work.  You can take advantage of the market opportunities that exist.  You need an expert real estate professional to help you.  Make an appointment with us today, or with one of our team members to set your dreams into motion and to make the best move possible for you and your family.

For Buyers          Step #1 is to recognize that you are not in control of the market.  A home that is in good condition, well located, and reasonably priced, may bring 4 to 6 written offers within the first 72 hours after hitting MLS.  Don’t play mindless games by preparing an offer of 90 to 95% of the asking price (unless the home is priced well above today’s market value).  You may painfully learn that besides your written offer there may be five other written offers, all structured at least $5,000 or more above the asking price.  Remember that the third place bidder gets absolutely nothing from this bidding experience.  Three years ago we had a five month supply of homes available in Collin County.  Today we have a one month supply of homes available in Collin County.

Recently, we have become aware of prospective buyers who are making written offers on two or three homes at the same time, hoping to get one home that suits their needs.  It might be said that when bidding on a home of your choice, you have one chance in five of being the successful bidder.

Here’s another suggestion, if you know the market well, and have lost in a competitive bid to acquire your dream home, be prepared along with your real estate agent, to take off from work in a 30 minute notice, to see a new home that just came on the market.  If you wait, foolishly thinking that you can see the home on Saturday, four days later, that particular dream home may already be under contract.

Be prepared to move fast, bid high and to close with no contingencies.  Have your mortgage loan already worked out – preapproved, subject only to locating the right home.

See why you need a full time experienced professional real estate agent working for you.  You earn nothing winning the third highest bid on a home that perfectly meets your needs.  Sorry, but this is not the time to work with your cousin who just got their real estate license.  You need an expert to help you accomplish your goals.

Best Time to Buy/Best Time to Sell

Best Time to Buy in Past 5 Years

Best Time to Sell in Past 5 Years

Sort of sounds like I am not truly clued into the market place?

Best time to buy.    Any of our prospects who buy right now, have the awareness that pre-owned homes in Collin County are appreciating at a rate of approximately 12% per year.  (That means that a pre-owned property, purchased at a price of $200,000 could increase in value by $24,000 over the coming one year term.)  By comparison, new homes sold in Collin County are appreciating at a rate of about 20% per year or greater.  A new home purchased in Collin County at a price of $200,000 may be worth $250,000 – at the end of one year from contract date.  If you are considering the purchase of a home today, know that we have not seen such appreciation in value at any time during the past 5 years.

Best time to sell.    Home values are up from 12% to 20% over their values one year ago.  This means that thousands of Collin County owners have a net equity in their home today, where they had zero net equity one year ago.  An example of a home owner with a market value of their home (March 2013) of $200,000 – with a mortgage balance of $185,000 would have realized zero from a sale, after real estate commission and seller closing costs.

But today, with an appreciated value of $230,000 a sale of such owner’s property might provide such owner with a net equity of $25,000 or more.

Now is the time to buy.  We can help you with choosing just the right home to purchase.

Now is time to sell.  We can get you a higher price than at any time during the past 5 years.

Joe C. Neel         Keller Williams        214-773-2246