Improving Real Estate
Are there government programs for rehabilitation?
The U.S. Department of Housing and Urban Development's Section 203 (K) rehabilitation loan program is designed to
facilitate major structural rehabilitation of houses with one to four units that are more than one year old. Condominiums
are not eligible.
The 203(K) loan is usually done as a combination loan to purchase a fixer-upper property "as is" and rehabilitate it, or to
refinance a temporary loan to buy the property and do the rehabilitation. It can also be done as a rehabilitation-only loan.
Plans and specifications for the proposed work must be submitted for architectural review and cost estimation. Mortgage
proceeds are advanced periodically during the rehabilitation period to finance the construction costs.
For a list of participating lenders, call HUD at (202) 708-2720.
If you are a veteran, loans from the U.S. Department of Veterans Affairs also can be used to buy a home, build a home,
and improve a home or to refinance an existing loan. VA loans frequently offer lower interest rates than ordinarily available
with other kinds of loans. To qualify for a loan, the first step is to apply for a Certificate of Eligibility.
Another program is the Federal Housing Administration's Title 1 FHA loan program.
How much can I expect to spend on maintenance?
Experts generally agree that you can plan on annually spending 1 percent of the purchase price of your house on
repairing gutters, caulking windows, sealing your driveway and the myriad other maintenance chores that come with the
privilege of homeownership. Newer homes will cost less to maintain than older homes. It also depends on how well the
house has been maintained over the years.
What repairs should I make before putting a home on the market?
If you want to get top dollar for your property, you probably need to make all minor repairs and selected major repairs
before going on the market. Nearly all purchase contracts include an inspection clause, a buyer contingency that allows a
buyer to back out if numerous defects are found or negotiate their repair.
The trick is not to overspend on pre-sale repairs, especially if there are few houses on the market but many buyers willing
to buy at almost any price. On the other hand, making such repairs may be the only way to sell your house in a down
Can neighbor problems de-value the property?
While it may not reduce the actual value, a cluttered landscape next door can detract from the positive aspects of your
home. Review your local laws, which should be on file at the public library, county law library or City Hall.
A typical "junk vehicle" ordinance, for example, requires any disabled car to either be enclosed or placed behind a fence.
And most cities prohibit parking any vehicle on a city street too long.
It also may be worthwhile to check into local zoning ordinances. An operator of a home-based business usually is required
to obtain a variance or permanent zoning change in residential areas.
In addition, if a neighbor's repair work produces loud noises, he may be breaking local noise-control ordinances, which are
enforced by the police department.
Before bringing in the authorities, you may want to make a copy of the pertinent ordinance and give it to your neighbor to
give them a chance to correct the problem.
Home Price Appreciation
How can I improve the value of my property?
Outside of a home owner's control, the biggest factor is market conditions. Other important issues are:
condition of the property
specific home improvements
neighborhood stability and safety
The greatest rise in home prices occurs when the economy is strong and the number of home sales is increasing. Specific
home improvements can increase the value above the cost of the improvements.
remodeled bathroom returns, 81 percent to the owner
bathroom addition, 89 percent
master bedroom suite, 82 percent
Remember, quality pays. Well-planned and well-executed remodeling jobs are a good investment while bad work seldom
enhances value or livability.
The safety and security of a neighborhood can affect property values, too. If you live in a high-crime area, an organized
community watch program not only will lower the crime rate but give home values a boost, too.
How can I increase the value of my property?
Specific home improvements can increase your property value above the cost of the improvements themselves, such as
remodeling a kitchen, adding a bathroom, finishing a basement or upgrading landscaping. Just be sure that quality pays
with remodeling. A bad remodeling job will do little to boost your property value.
If you live in a high-crime area, an organized community watch program not only will lower the crime rate but can enhance
property values, too. It also helps to live in an area where other homeowners are upgrading their homes, which can help
pull up your property value, too.
The bottom line is to measure the cost of any improvements you want to make against the overall values in your
neighborhood. If you over improve for the neighborhood, you may not necessarily recover your costs or boost your
property value significantly.
Will buying a bigger home increase my profit?
Consider these questions before making a choice between adding on to an existing home or moving up in the market to a
How much money is available, either from cash reserves or through a home improvement loan, to remodel the
•How much additional space is required? Would the foundation support a second floor or does the lot have room to
expand on the ground level?
What do local zoning and building ordinances permit?
How much equity already exists in the property?
Are there affordable properties for sale that would satisfy housing needs?
Ultimately, the decision should be based on individual needs, the extent of work involved and what will add the most
How do I find out how much my home is worth?
A comparative market analysis and an appraisal are the standard methods for determining a home's value.
Your real estate agent will be able to provide a comparative market analysis, an informal estimate of value based on
comparable sales in the neighborhood. Be sure you get listing prices of current homes on the market as well as those that
have sold. You also can research this yourself by checking on recent sales in public records. Be sure that you are
researching properties that are similar in size, construction and location. This information is not only available at your local
recorder's or assessor's office but also through private companies and on the Internet.
An appraisal, which generally costs $200 to $300 to perform, is a certified appraiser's opinion of the value of a home at
any given time. Appraisers review numerous factors including recent comparable sales, location, square footage and
What are the differences between market value and appraised value?
The appraised value of a house is a certified appraiser's opinion of the worth of a home at a given point in time. Lenders
require appraisals as part of the loan application process; fees range from $200 to $300.
Market value is what price the house will bring at a given point in time. A comparative market analysis is an informal
estimate of market value, based on sales of comparable properties, performed by a real estate agent or broker. Either an
appraisal or a comparative market analysis is the most accurate way to determine what your home is worth.
What kind of insurance do I need?
A standard homeowners policy protects against fire, lightning, wind, storms, hail, explosions, riots, aircraft wrecks, vehicle
crashes, smoke, vandalism, theft, breaking glass, falling objects, weight of snow or sleet, collapsing buildings, freezing of
plumbing fixtures, electrical damage and water damage from plumbing, heating or air conditioning systems, according to
the Insurance Information Institute, a Washington, D.C.-based nonprofit group for the insurance industry.
Such policies are "all-risk" policies, which cover everything except earthquakes, floods, war and nuclear accidents.
A basic policy can be expanded to include additional coverage, such as for floods and earthquakes and even workers'
compensation for servants or contractors. Home-based business-coverage, an increasingly popular rider, does not cover
liability associated with the business.
Insurance experts recommend that homeowners obtain insurance equal to the full replacement value of the home. On a
2,000-square-foot home, for example, if the replacement cost is $80 per square foot, the house should be insured for at
For personal items, homeowners can increase their coverage beyond the depreciated value of items such as televisions
or furniture by purchasing a "replacement-cost endorsement" on personal property.
Some experts recommend an inflation rider, which increases coverage as the home increases in value.
What is guaranteed replacement cost insurance?
Guaranteed replacement insurance is a more comprehensive policy. It tends to cost more, but it promises to cover the
complete costs less deductible of replacing a destroyed house. With these sorts of policies, limits on the policies are not
as common, because complete coverage is more explicit.
Can property taxes be deducted?
Property taxes on all real estate, including those levied by state and local governments and school districts, are fully
deductible against current income taxes.
Mortgage interest and property taxes are deductible on a second home if you itemize. Check with your accountant or tax
adviser for specifics.
How are property taxes configured?
Property taxes are what most homeowners in the United States pay for the privilege of owning a piece of real estate, on
average 1.5 percent of the property's current market value. These annual local assessments by county or local authorities
help pay for public services and are calculated using a variety of formulas.
How does home mortgage tax deductions work?
The mortgage interest deduction entitles you to completely deduct the interest on your home loan for the year in which
you paid it. Mortgage interest is not a dollar-for-dollar tax cut; it reduces taxable income. You must itemize deductions in
order to do this, which means your total deductions must exceed the IRS's standard deduction.
Another point to remember is that the amount of interest on your loan goes down each year you pay on your mortgage (all
standard home-loan formulas pay off interest first before significantly paying into principal). That's why paying extra on
your principal every year can help you pay off your loan early.
What is an impound account?
An impound account is a trust account established by the lender to hold money to pay for real estate taxes, and mortgage
and homeowners insurance premiums as they are received each month.
Are points deductible?
If you are a buyer, and you or the seller pays points, they are deductible for the year in which they are paid only. You also
can deduct any points you pay when you refinance your home, but you must do so ratably over the life of the loan.
Consult your tax or financial advisor.
Are there tax breaks for first-time buyers?
Many city and county governments offer Mortgage Credit Certificate programs, which allow first-time homebuyers to take
advantage of a special federal income tax write-off, which makes qualifying for a mortgage loan easier.
Requirements vary from program to program. People wanting to apply should contact their local housing or community
Some things to keep in mind:
Some credit may be claimed only on your owner-occupied principal residence.
There are maximum income limits, which vary by locality and family size.
You must be a first-time home buyer, which means you must not have had any kind of ownership interest in a principal
residence during the past three years. This restriction may be waived, however, if you are buying property within certain
Allocations must be available. A local MCC program may have to decline new applications when it runs out of funds.
Are home improvements deductible?
What you spend on permanent home improvements, such as new windows, can be added into your home's cost basis, or
amount of money invested in a home, which reduces capital gains when it comes time to sell. Capital gains are
determined by the difference in price from the time a home is purchased and the time it is sold, minus the cost of any
However, the 1997 tax changes virtually eliminate the capital gains tax for most homeowners (the exemption is $250,000
for single homeowners and $500,000 for married homeowners.
Still, it is worthwhile to save all receipts for permanent home improvements just in case. They also can be useful
documentation when it comes to marketing your home when you sell.
When is the best time to refinance?
It depends on how long you plan to hold on to your house and if you have to pay anything to refinance. In addition, it also
depends on how far along you are in paying off your current mortgage.
If you are going to be selling your house shortly, you probably will not recoup any costs you incur to refinance your
mortgage. If you are more than halfway through paying your current mortgage, you probably will gain little by refinancing.
However, if you are going to own your home for at least five years, that's probably long enough to recoup any refinancing
costs you incur and to realize real savings on lowering your monthly payment. If it is going to cost you nothing to
refinance, you can gain even more.
Many lenders will allow you to roll the costs of the refinancing into the new note and still reduce the amount of the monthly
payment. Also, there are no-cost refinancing deals available. In any case, it pays to consult your lender or financial
advisor, or run the numbers yourself, before you refinance.
What are the advantages/disadvantages of no-cost loans?
In many states, real estate regulatory agencies are cracking down on such advertising. The very term, "no-cost" loan, is
misleading because borrowers are actually paying a higher interest rate in exchange for not having to pay fees or closing
costs up front when the loan is secured.
A "no-points" loan is one for which the lender does not charge points (one point is equal to 1 percent of the loan amount).
But there are other fees involved in no-point loans, as with most loans.
How does bankruptcy affect my refinancing?
Refinancing may be prudent but could be difficult after a bankruptcy. If you're considering bankruptcy, you may want to go
to your current lender first and explain the situation. If you have been current on your payments, the lender may be
accommodating and refinance your loan, easing your financial situation.
What are the rules on Capital Gains?
When children inherit a home, the Internal Revenue Service determines their basis in the property on the date of the
owner's death. The cost basis is not the amount the owner originally paid for the house, but the property's fair-market
value on the date of the parent's death.
Cost basis is a tax term for the dollar amount assigned to a property at the time it is acquired, for the purpose of
determining gain or loss when it is sold. For example, one of the three siblings sold his or her share of a property to be
divided equally, he or she must pay capital gains tax for whatever profit made over one-third of the new basis.
Other tax consequences include estate taxes. However, the estate must total $675,000 or more for tax year 2000 before
tax issues become a concern. The IRS allows residents to pass on property, cash and other assets worth up to a total of
$675,000 for tax year 2000 before charging the heirs any taxes. This figure will rise each year for the next several years.
Regarding the transfer of ownership, quit-claim deeds often are used between family members in situations such as this
when an heir is buying out the other. All parties must be agreeable to dropping a name from the title. For more
information, consult the IRS's Publication 448, "Federal Estate and Gift Taxes." Order by calling 1-800-TAX-FORM.
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