Tuesday, July 29, 2014

Why are my Property Taxes so low?

I had a wonderful thing happen this past year with a client.  He found out that a home in Colorado was going to cost him much less than he expected.

We were talking about property taxes.  Moving from New Jersey, where property taxes are very high, he wanted to know what the cost was going to be when he bought a home here.  It’s always nice to know what you’ll pay for a property before you sign the documents.

The price point he was looking at was around $500,000 and he was ready to pay all cash.  The monthly costs of owning a home outside of paying a mortgage was concerning him.  After all, he would still pay for homeowner’s insurance, HOA fees, upkeep and property taxes.

I looked up a number of homes in the areas he was looking and showed him on my computer that the taxes would be about $4000, maybe $4500, depending on exactly which community he was buying. 

“So about $50K a year,” he said.  “That’s higher than I thought, but I guess it is what it is.”

I had the pleasure of telling him that he misunderstood.  The $4500 tax amount I gave him was for the year, not one month.  You should have seen his face.  I could sell that picture on eBay.

His taxes on his $350,000 home in Jew Jersey were $28,000 a year.

Property taxes in Colorado are lower than many places in the country for a reason.  It all goes back to 1982 with the passing of the Gallagher Amendment to the State Constitution.

Combined with the Tabor Amendment, here’s how it all works today.

Governments have to budget.  They need a certain amount of money to do what governments do.  If there isn’t enough money, they have to cut costs, because the public has to approve new expenditures.  It’s  why we vote during the election cycles to increase the number of mils for education, capital expenditures like building new buildings, etc., fire department expenses, transportation issues and road maintenance costs.  Cities get some money, counties get some money, and the list goes on.

Property taxes in great part pay for those costs.  If you didn’t pay property taxes, firemen and teachers wouldn’t get paid.  New schools would never get built.  It’s important, and we all want them to have money.  Just not unlimited amounts of money.  We as citizens can support the bonds that raise that money -- which we have to pay back over time -- or vote them down.

The County Assessor is tasked with deciding the market value of the real property in the county according to the rules set down by Gallagher.  The market value may be determined in a limited number of ways, again only according to the rules in Gallagher.  Each property of the same zoning designation is assessed by the same rules, with the goal of determining the fair market value.  Those values are then handed off to the County Treasurer.

At this point, the county is divided into three separate worlds – residential, agricultural and commercial.  Residential is where people live.  Commercial covers retail stores, industrial and office properties.  Every property is zoned in one of the three.  Agriculture is mostly the rural areas of actively producing farm properties.  Most important are the former two.   I’ll ignore ag for now.

The intent of Gallagher was to maintain and eventually reduce the tax burden of residential property owners.  Following is the tax collection structure that was created.

Commercial property is taxed on 28% of the actual property value.  If a building is assessed at $1,000,000, the owner is taxed on $280,000 of that value.  Multiply the number of mils that the voters have approved, and you have the yearly taxes that will be billed the property owner by the Treasurer.

Residential simply pays for the remainder of what’s needed to meet the budgets.  If 1/3 of the tax monies are covered by commercial, residential needs only cover the remaining 2/3.  Whatever commercial covers, residential must cover the remainder.

What’s happened in Colorado since 1982?  Cities have grown in numbers not seen in our history.  There are so many, many more homes out there now that all together help share the burden of that remainder, that the obligation of each homeowner has been reduced significantly.

The result today is that a $1,000,000 home is taxed on only about $75,000 of its market value.

True.  The owner of that $1,000,000 office building pays taxes on $280,000 of its value.  An owner of a $1,000,000 apartment building next door pays taxes only on $75,000 of its value.

As you drive around town through the commercial areas, you might think to quietly thank the owners of those buildings.  They’re tax bills are almost four times what you pay on your home, dollar for dollar in value.  Thanks to Gallagher, that’s tax money you as a homeowner don’t have to pay.

Call me as you need.  I’m always here for you.

Enjoy the day,
303.541.1920 office

Thursday, July 17, 2014

Compounding Interest -- Not a Bad Idea

Simple question:  Why is it that I make my mortgage payments for months and years, and my balance only decreases a very little bit?

You could as simply ask why banks consistently make so much money.

One correct answer is that they’re the ones who are willing to give you hundreds of thousands of dollars on the hope that you’ll make your payments over 30 years on time.  Not only do they have the money to give you, they’re taking the big time risk in giving it to you so that you can buy a home or investment.  Fact is, they deserve to make a profit.

Another very good answer is that they’re on the right side of a very simple arithmetic formula.  Some good news.  When you understand this and are willing to pull out a calculator and make some numbers happen, you can save thousands upon thousands of dollars very easily by doing one or a few very simple things.  I’ll get to that in a moment.

First, let’s look at an average mortgage.  Let’s say that you borrow $300,000 to buy a home.  Doesn’t matter how much you put down, or what your property taxes are.  Let’s just look at the monthly payment of principal and interest.  The principal part of your payment is the money that goes to reduce your balance.  The interest is the bank’s pay check.

If your interest rate is 4.50% (pretty easy to find as I write this), and you are paying your mortgage over 30 years (most people have a 30 year amortization), your monthly payment will be $1520.06.  That means that if you make 360 payments (that’s 30 years), your loan of $300,000 will be paid off, and assuming you don’t have any other mortgages on your home, you will own it free and clear.  What a wonderful feeling.

But do the math.  360 payments x $1520.06 per payment = $547,221.60.  You borrowed $300,000 and you paid the bank back $ $247,221.60 more.  That’s a good pay check for the bank.  It’s almost like buying two properties instead of the one.

So let’s go back to the original question.  Why does my mortgage balance decrease so slowly?

More arithmetic.  If you know that you are paying the bank 4.50% interest per anum (that means per year), you can calculate out how much comes off your balance every month.  At the very beginning with your very first payment, you owe $300,000.  Multiply that times the interest rate (4.50% or 0.045), and you get $13,500.00.  Remember that that’s the bank’s pay check, but on a yearly basis, so divide by the 12 months of the year.  Your first month’s interest charge is $1125.00.

So after paying your first payment of $1520.06, and subtracting out the bank’s profit of $1125.00, you figured out that you reduced your mortgage balance $395.06.  Congratulations.  You have moved the proverbial ball down the field.

You’ll continue to make the same monthly payment of $1520.06, but not as much goes to the bank.  The reason is that you no longer owe the bank $300,000.  After making your first payment, you now only owe it $299,604.94.   To calculate your balance after making your second payment, you multiply the 0.045 interest times the new lower balance.  When you do that, and divide that number again by 12 because of the 12 months of the year, you come up with an interest charge of a bit less at $1123.52.

OK, that’s not much less, but I’d take it if I were you, because if you keep doing that month after month, you eventually end up paying about half to interest and half to principal balance reduction.   At that point, you’re really cutting down your loan balance significantly.

Problem is that, because of the arithmetic reality of compounding interest, which is what we’re talking about here, it will take you until payment #164 (that’s the 8th payment in the 14th year) before you are paying as much principal each month as interest for the bank.  At that time, your loan balance will be $201,772.72.  You will not have paid even 1/3 of your mortgage.

To reach the point where you have paid ½ of your mortgage, you will have to have made payment #225 (9th month of your 19th year).

So other than being kind of depressing, how can this information help you?

Use the formula to work for you rather than against you.  Put time on your side.

Think about it. If so little principal balance comes off your mortgage in the first months of the loan, it’s very, very easy to make lots of extra principal payments.  Remember our calculations from before.  Your first payment only reduces your mortgage $395.06.  If you pay double that first $1520.06 payment, all of that second payment money goes to reduce your principal balance.  You will pay not only payment #1, but in addition the principal portion of almost four more.  The next payment then will be calculated off the balance that would have been payment #6.

In the practical world, by doubling that one payment, you just saved the interest off almost four payments.  That’s thousands of dollars.  And you’ll not be paying interest over the coming 29 years and 11 months on that principal reduction.  Furthermore, you can do it again next payment, or whenever you want.  I so love a good calculator.

Now you know what to do with that holiday bonus. 

Call me as you need.  I’m always here for you.

Enjoy the day,
303.541.1920 office
303.859.4467 mobile

Monday, July 14, 2014

My commitment to you

A receptionist at the office many years ago asked for a favor.  One of her professors at CU had told her that her generation was the most ignorant when it came to general knowledge, and she was mad about it.  She asked me to ask her a question every day when I came in, so that over an extended period of time, she’d know more than others in her age group.

All of our receptionists took advantage of our exercise and had some fun with it.  I was quite surprised when not one of them could name all four Beatles (first and last names), and disturbed when half couldn’t name the last two vice presidents of the United States.

Fact is, knowledge is a good thing.  Everyone should have the basics.  You can get by without knowing who is in what rock group, but the VP of the US is actually important.

More important, though, is what affects you directly in our culture.  Is the value of your home increasing, decreasing or not moving at all?  What affects that value?  What’s happening in your neighborhood that might affect that value?  If I add a family room to my home, will I get my money back when I sell?  How about a pool?  Where are interest rates today, and why is that important?  Are insurance costs stable?  Will my lender suddenly require flood insurance for my neighborhood?  What’s a FICO score, and what happens to it if I buy a car?  How did that huge recession mess happen back in 2008?  Why is it true that lower income people actually pay more (quite a lot more) for goods and services in this country than their wealthier neighbors for the same stuff?

I asked someone recently how much additional money someone would have to make to pay off a $30,000 debt in one year.  The answer is not $30,000.  It’s not even $30,000 plus the interest you have to pay for that year.  It’s much higher.  Because we pay income taxes (both federal and state income taxes in most states), you actually have to make enough to pay all of the taxes on that additional income first, and have the $30,000 plus interest left over.  Unless all of that debt and interest is tax deductible, you have to budget a much higher income – somewhere in the $35,000 to $40,000 range for most people -- in order to have enough.

Money is important.  We need it to buy homes and everything else, and how you manage your money matters.  General knowledge about money is Step One.  So I’m making a commitment to you.

In the coming weeks and months, I’m going to send you tidbits of information – important information -- about money, business, your home, and a host of things that will directly affect you.  No Beatles questions.  I’ll even skip the one about the VP.  Only the actually important ones.

I’ll also give you the answers.

I used to be certified as a CFP (Certified Financial Planner).  I know the difference between a stock and a bond, and what makes them increase or decrease in value.  Academically, it fascinates me.  But practically, I benefit from it all.  As a REALTOR, I know that you will benefit also from the common sense common knowledge that I’ll give you in the business world.  Nothing confusing or complicated.   Entertainingly written.   Just the facts.  I’ll have a graph or two.  Nothing political for one side or the other.

And if you’re planning a move in the coming year, we should talk.   If you know people planning to move in the coming year, I’d love to talk to them as well.

Call me as you need.  I’m always here for you.

Enjoy the day,

303.541.1920 office
303.859.4467 mobile


Friday, July 11, 2014

Colorado's Economy outpacing the Nation

This is not a surprise to the people -- and especially the business people -- of Colorado.  Some things you can just feel in your bones.

Our pocketbooks are showing it also.

This article in the Boulder Daily Camera details the outlook from one of the most respected economic minds in the state.  Richard Wobbekind does his research, and is one of the best big picture guys in the business.

Have a wonderful read.

Economy remains ‘shining star’ - Boulder Daily Camera

Call me as you need.  I'm always here for you.

Enjoy the day,

Mike Moger

Wright Kingdom Real Estate

303.541.1920 office



Thursday, July 10, 2014

Notary Public -- Know your stuff

A client asked me this week why we need notary public signatures on real estate documents.  She considered it a bother that she couldn’t sign anything until this extra person was available.

If you’re expecting a simple two line answer, sit down.  The world is so much more complicated than that.  And entertaining.  Furthermore, if you know some simple absolute facts, you can potentially save a tremendous amount of anguish and stress when buying or selling a property.

Firstly, we don’t need notaries at all on almost anything we sign in a transaction until the very end.  Lenders and title officers generally enter the paperwork phase of the deal at the end, at the closing table.  That’s when you sign the most important documents, and where notaries enter the picture.

It’s also the time and place beyond which we can’t back it all up and start over.  There’s a good reason we call it a closing.

A notary public is a person who initially doesn’t know with whom she is dealing.  She’s an independent third party who will not benefit at all whether or not you buy or sell the home.  Her job is simple:  verify that this really is the person he says he is.  Show her your ID.  Pull out your Driver’s License or Passport, or any other official acceptable photo ID.  Show her the photo and some document that gives her your name.  No, a credit card won’t work.  Your Elks membership card won’t either.  When you can do that, you can sign the paperwork, and she’ll sign under you, telling the world that she checked you out, and she’s convinced by your documents that you’re not committing a fraud, or at least not a fraud involving your identity.

Think about it.  The lender is about to give a Buyer hundreds of thousands of dollars, if not more.  In return, that borrower will sign a document that says that he promises that he’ll pay it all back.  It will take him fifteen or thirty years, but he’ll pay it all back.

The Seller on the other hand is about to deed over a parcel of real property worth a bundle.  He says he owns it and has the right to do it.  When he does it, he potentially relieves himself of a great deal of debt.  If not, he gets a whole lot of money, with which he leaves the table and may never be seen again.

Surely, it’s reasonable that these people prove to the world that they are who they say they are.  When you look at the ramifications of finding out otherwise, it seems ridiculous that we wouldn’t do it.

So the first thing that happens when you sit at the closing table is universal.  The closer asks the Buyers and Sellers for their ID’s.  Rule #1:  No ID’s, no closing.

Other rules may seem silly and overbearing, but believe me, you won’t close if you violate them.

A past client was traveling in China when the closing of the sale of his home was scheduled.  He thought we could overnight the documents to him, and he could take them to a local bank, sign them in front of a notary, and send them back.  That seemed to him very reasonable.

We made the arrangements and let him know to find the nearest American Consulate or Embassy.  We would send the documents there for his signatures.  The reason is simple.  A notary signature is only valid if signed on American soil.  You can’t notarize something in a bank in China.  The land under a Consulate building or Embassy is considered American soil.  The land under that bank is not.

When he complained that the nearest Consulate was 200 miles away, we gave him another option.  He could sign it on a US naval vessel.  He chose the Consulate and made plans accordingly.

Again, hundreds of thousands of dollars.  Lenders and title insurers are not going to rely on a notary whom they don’t know is real.  If something goes wrong, even finding the person who signed as notary may be difficult.  If that person is on American soil, the chances improve dramatically.

One more detail.  Watch the dates.  Most important documents are dated, and the signatures are dated.  The notary signature of acknowledgement is also dated, as is the expiration of the notary’s commission and rights to sign as a notary.  Be sure on every document that the dates line up.  If the notary’s expiration was last week or last year, the document, and your having signed it, is not valid.  If the document or any signature is found to be post dated, you may have a problem.

Details.  Details.  I’ve always said, “Don’t get bogged down in the details, or you’ll never get anything done.”  Certainly in real estate matters, I’m kidding.

Call me as you need.  I’m always here for you.

Enjoy the day,

303.541.1920 office
303.859.4467 mobile

Tuesday, July 1, 2014

Your Choice of Lenders

People buy homes and real estate investments through me all the time, and a bit more than 80% of my clients need or choose to secure mortgages.  When they’re looking to spend hundreds of thousands of dollars (and at times even more), it’s hard for most people to find that kind of whoop-out money to pay cash.

That means that most buyers are in the position to have to ask someone to give them a lot of money.  We don’t think of it that way, but that’s what it is.  You walk up to a stranger and you ask for a great deal of money so that you can buy something you don’t right now have the money to buy.  In that situation, choosing that person carefully is very important.

So who lends that kind of money?  You have at least two sources, maybe three.

Firstly, the family or very good friend option.   You may have a rich Uncle Jim.  If you do, that’s wonderful, I hope.  Understand, of course, that I’m going to need to talk with him to set this whole thing up, because the real estate broker representing the seller of your next home will want to know that this guy is real.  If he is, we can make this happen.  No rules.  The money is either there or not.  He’s either willing to give it to you or not.  You either agree to repay him or not, and on what terms is for you guys to discuss.  I’m happy to talk everyone through it.

If you don’t have that option, you have two others -- mortgage brokers and mortgage bankers.  There’s a difference.  In one way.  Then again maybe the difference isn’t so important.

Mortgage bankers work for the lender – not for you.  The lender may be a huge bank, but as easily a smaller local credit union.  The point is, that person behind the desk is not working for you, but for the company that hired him.  He’s an employee.  He gets paid by the company for improving its bottom line by selling you a mortgage.

That sounds bad, but keep in mind that that person’s paycheck doesn’t land on that desk until you buy that loan.  That person has a real interest in doing right by you, by finding the right loan in the right amount, and on terms that make sense for your financial situation.  If he’s a good person who’s good at his job, you’ll get a good mortgage.

Some of those banks are able to offer wonderful opportunities for specific groups of people.  Some have very beneficial features in loans to military people, or union members, or first-time buyers.  The rates are competitive, and they get the job done.  It’s well worth the look.

A mortgage broker on the other hand does not work for the lender.  She works for you, and has a fiduciary duty to represent you in the greater marketplace.  She’s like me in that I don’t own all the properties I show you.  I’m brokering the sale for you in a transaction with a person who does own that home.   The mortgage broker and her company don’t have a vault full of all that money to lend you, but negotiate with the financial institution that does have it.  She has the ability to negotiate with any number of lenders in the marketplace, and is tasked with finding and negotiating for you the best mortgage out there.

That sounds wonderful.  Why would you not want someone working specifically for you?

Answer:  If your neighbor’s kid just graduated from somewhere and became a mortgage broker, would you run in to see him about negotiating your next multi-hundreds of thousands of dollars of debt?

The point is that these two options (I’m passing on Uncle Jim for now) are significantly structurally different, but not that much different in a very practical way.  Most important is that you always hire the best person.  Always work with the person who honestly and ethically wants you to come out strong and secure.  Always the person who has the experience to make it happen for you, who knows what challenges need be addressed and how to deal with them.  Always the person who can meet the goal.

The good news is that I know many of them.  I’ve worked with them on transactions with other buyers and sellers.  I know who has performed, and who hasn’t.  I’ve seen the mortgages they’ve negotiated or provided.  I can pass those names and all of that information on to you.

And in the alternative, you can always ask your relatives if there’s a rich Uncle Jim in the family.

Call me as you need.  I’m always here for you.

Enjoy the day,

303.541.1920 office
303.859.4467 mobile