Understanding DC Property Taxes & Closing Costs

Before purchasing a house in DC it is important to know that you don’t just pay the price you settle on you also pay additional fees known as closing costs.  It doesn’t stop there! Once you own the property you will also pay property tax!

CLOSING COSTS: Transfer / Recordation Taxes

In DC closing costs typically average 3% of the total transaction price.  If you are purchasing a $500,000 home you will pay close to $15,000 in closing costs.   Closing costs  break down into a variety of items but on of the biggest ticket items is the DC Transfer / Recordation tax.  Typically the buyer payers the recordation tax and the seller pays the transfer tax.    In some instances the buyer will be required to pay for both which is RIDICULOUS! Below is a quick break down of how much these taxes will run you at closing

* Transactions $399,999 and under are taxed at the rate of 1.1% of the purchase price. Example: $300,000 x 1.1% = $3,300. So the buyer and seller would each pay $3,300 for a total of $6,600 paid to DC.
* Transactions $400,000 and above are taxed at the rate of 1.45% of the purchase price. Example: $500,000 x 1.45% = $7,250. So the buyer and seller would each pay $7,250 for a total of $14,500 paid to DC.

Its important to recognize the difference in rate especially when a house is listed at $400,000 or slightly above. It benefits both parties for that price to be at $399,999.  Oh by the way…..if you think this is high you are correct. DC has some of the highest transfer taxes in the metro area, but we also have the lowest property tax rate.  If you plan to stay in the same DC home for a long time you will definitely save!

PROPERTY TAXES

Yes, they suck.  I get it!!!  But this is the only way the city can continue to improve and BTW we have the lowest rate in the area!  This is a pretty easy thing to explain so here we go:

Taxes, just like mortgages, are paid in arrears. Taxes are also paid semi-annually in DC.   So when you are paying your March tax bill you are really paying for the period of October to March.

* Taxes due on 3/31 for the period of 10/1 – 3/31.
* Taxes due on 9/30 for the period of 4/1 – 9/30.

The tax rate in DC is $.85 per $100 of assessed value.  If your property is assessed at $500,000 then your annual tax bill will cost $4,250 or two payments of $2,125.  If you are not currently receiving the HOMESTEAD DEDUCTION then make sure you get on that right away! It reduces your assessment by $67,500. So the $4,250 tax bill was just reduced to $3,676.25.   To learn more about the Homestead Deduction click here. To see if your property is currently receiving the credit you can click here and search for your address.

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Choosing the Right Lender….Or Else!

Wow it has been a long time since we spoke! Sorry for the delay people…that is if you are still out there listening. I promise to get better with my communication.  On that note lets talk about lenders!  So you found a house, your contract is accepted, your inspection is a success…..now what?!?!? I often tell my buyers that the inspection is the toughest part but given the week I have had I am going to go out on a limb and say that lenders are now the toughest part of the negotiation.

IMPORTANCE OF CHOOSING THE RIGHT LENDER

The lender you choose is in my opinion one of the single most important pieces of the deal.  Without an adequate lender you might as well throw the deal away from the start.   Each contract in the DC area has whats known as a financing contingency and appraisal contingency.  The financing contingency essentially states that on X day after mutual acceptance the buyer will deliver to the seller a letter from the lender stating that the loan is approved.  The appraisal contingency is similar but you are delivering notice that the appraisal has been completed and the purchase price is approved by the lenders underwriting department.   If you fail to deliver the financing contingency the seller could deliver a notice in which you have three days to respond. If you are unable to respond or produce a commitment letter from your lender then your contract  becomes void.  If your contract because void because of this notice then your earnest money deposit is NOT at risk. HOWEVER if you release the financing contingency and later on in the transaction your deal falls apart because of financing your earnest money deposit is then at risk….yeah, that sucks!   With regards to the appraisal, once the seller delivers notice you have three days to produce the appraisal and remove the contingency. If you fail to do so the appraisal contingency is lifted and the contract moves forward.  What really sucks is if you lender misses this deadline and then you find out 10 days later that the appraisal came in lower than anticipated and you now have to make up the difference or risk losing your earnest money deposit.  Bottom line is that your lender needs to have their shit together or your get screwed. Scared yet? Check out some helpful pointers below:

WHAT TO LOOK FOR IN A LENDER

If the first part of their name starts with Bank and ends with America STAY FAR AWAY.  That is my first tip.  I have worked with this bank many times and every single time they let my clients down.  The bitch of this is that the clients end up paying this bank $400-$500 for an appraisal which is non-refundable! So….what to lookout for:

1) You are trusting this person with your future…30 years of your future to be exact so before you start searching for homes start with a search for lenders.  Be sure to interview them thoroughly and see what services and commitments their bank offers. Aside from rate (which isn’t the most important thing) what else do they offer? How can they be held accountable if they fail to meet deadlines? Afterall…..if you don’t meet your deadline you can lose your EMD so why shouldn’t they lose something besides your business?
2) Direct and local are always best.  Stay away from the big chain banks like Bank of America and Wells Fargo.  These banks are too big and have way to many layers.
3) Credit Unions and USAA generally can’t compete.  Yes Hill staffers, that means you don’t belong using your Congressional Credit Union account when you are ready to take the plunge and buy.  Credit unions often have very lengthy approval processes and cannot offer competitive time frames with regards to the financing and appraisal contingencies. Also if you are in a competitive situation and the seller is looking for a quick settlement, that’s not going to happen with a credit union. Sorry!
4) Underwriting should be in-house. When this happens it means your loan officer has quick access to the person in control of seeing the loan through and when deadlines creep up they can act quick and deliver.
5) If you have to call a 1-800 number every time for an update that’s probably not a good lender!
6) Rates aren’t everything. How much do they require you put down?  What options do they give you if any? Some lenders now do 5% and 10% down loans with no PMI!
7) If you don’t understand what you’re doing ASK QUESTIONS!!!! I hate it when buyers get to the closing table and have no clue what they signed up for.

DO REALTORS GET A KICKBACK FROM LENDERS THEY RECOMMEND

So you are hesitant to accept my recommendation of a lender because you probably think I get some sort of kickback or incentive? WRONG!!!!!! In DC, MD and VA it is illegal to accept any sort of financial incentive or kickback from lenders, title companies or any other parties to the transaction.  That doesn’t mean it doesn’t happen but for the most part it doesn’t.  Realtors recommend people because these are typically people we have good working relationships with and we know they are going to get the job done.   Plain and simple.

Well, that’s if for now! Stay tuned for more.

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Be Careful of Meth Houses…….Really

Wow! I never thought I would be posting an article about this but I guess this is a product of the world we live in.  While browsing CNN.com I learned of a couple that recently purchased a home and quickly learned the home used to be a meth lab.   This was discovered by way of serious health issues the couple experienced shortly after moving in.   The most frustrating part of this story is that it was well known that this home was a former meth lab and state law did not require that this be disclosed prior to the house being sold.  The couple is now stuck with a home that is uninhabitable and if they desire to live there again they will need to shell out $61,000 to rid the home of contaminants.   I am so angry that our system would allow this to happen to somebody! Buying a home is supposed to be a joyful experience and for these people it has been everything but.

The reason I am sharing this story and posting a link to their blog is because this is a serious issue that can impact thousands of home buyers.  While performing your search be sure to look for key things that may indicate whether or not the home was a former meth lab.  Rather then telling you what to look out for, I encourage you to visit OUR METH HOUSE which is a blog created by the devastated couple.  They share pointers on how to spot a former meth house.  I think this is something valuable to store in the back of you head as you go out and see homes.

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Could Convention Center Boom?

By now you had to hear the news that they broke ground on the new Marriott Marquis next to the convention center.  This is a great project and one can only hope that now it will help fill all of the vacant spaces in and around the DC Convention Center.   What could this mean for the real estate market though?  I doubt it will do too much because prices west of 8th have already inflated but for the areas east of 8th who knows.  This has been a very troubled area for some time so I am optimistic that a big project like this might bring some needed energy to the area.  Lets talk again in 2014 when this project is scheduled to be completed.

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Foreclosures – Patience is a Virtue…..Now More Than Ever

So unless you live under a rock you probably heard about the recent foreclosure nightmare.   Long story short we are facing another situation where a couple of idiots and banks screwed up a system of kicking people out of their homes.  If you want read more about the situation email Sarah Palin, I hear she can recommend some great media resources.

Anyway what does this mess mean for our immediate area? Basically a painful process just got more painful!  When dealing with foreclosures the first thing you need to realize is that the buyer has no control.  The seller (bank) drives this transaction and if you are not willing to play by their rules then start looking at traditional home sales.

The sale of foreclosures has not been completely halted but several banks have begun to review properties they foreclosed on to make sure they are in compliance.  This is great because the banks are finally doing their job but its bad for the buyer.  In a lot of instances it means the buyer might not find out until a day or two before closing that there is a problem.  There is a light at the end of the tunnel though.   In most of these instances the property is not closing on its scheduled settlement day but typically these properties are closing a week or two later. It is in everyone’s best interest to make sure the closing ultimately happens.

There are a lot of entities that are impacted by this mess.  To name a few:

Agents – There are a small number of agents that strictly handle the sale of foreclosures.  Just like buyers agents they do not get paid until the property settles.

Title Companies – There are a lot of title companies where their main source of income is derived from foreclosures.  In a lost if instances certain title companies might have a relationship with a particular lender IE Bank of America.  If BOA puts a complete halt on foreclosures business at certain title companies might dip by 50-100%.

The Foreclosing Lender – Yes thats right! They hurt too.   The longer the property sits vacant, the longer they are out funds whether it be from utilities or taxes.

Foreclosures are not a losing proposition. They just need to be treated like a marathon and not a sprint. If you have some extra time on your hands then these are still the ideal property for you.

 

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DC Market Update…BTW Do You Want to Buy a Palace?

Well summer is halfway over….somewhat.  Ever since the first time home buyer credit expired in April the market has been VERY slow.  It has definitely picked up a bit and I am anxious to see numbers for this summer compared to last summer but I still think we are down and things are still fragile.

My biggest concern at this point is lack of inventory which definitely seems to be driving price up due to the principles of supply and demand.   Inventory has been stale for a while now but it seems to have really hit bottom recently.   Yes new properties come up all the time but in my opinion not enough to meet the current demand.  This ends up causing a very difficult situation where if a property is priced right it could cause a bidding war and thus go above its original list price. We are seeing this a lot! So lesson to be learned: If you love a house and its only been on the market for a few days, don’t hesitate.  Write an offer quickly and submit it quickly! Also offer list price or risk losing the property in a bidding war. Don’t get pissed at your agent if you miss out on the property.  There are a ton of disappointed buyers out there because of the current market conditions.  If you put your best foot forward on an off then it is what it is!

Then again…..if you have 9 million to spare and don’t mind moving outside of DC, the biggest house in Montgomery County just came on the market.  It is being marketed as a palace and wow is it incredible.   Over 200 windows alone in this house! Its insane.  Check it out by clicking here.

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Reducing Your Agents Commission and Saving Money Whether you Buy or Sell!

An article posted in the Washington Post today discussed the potential collapse of the real estate market, yet again. It went on to further describe the expired $8,000 rebate program as a mere band aide that has since been ripped off of an unhealed wound.   This is probably the most accurate description yet.  The market is stale and things are turning south quickly.   I don’t mean to paint a dark picture but we need to be realistic.  The government as much as it thinks it helped us, disrupted a cyclical pattern and prolonged the inevitable.   Prices rise and sink and that is the nature of a free market system that is based in supply and demand.  I am not an economist but this is just simple logic.

With all of the above being said I think it’s important that we delve deeper into the problem and look for a long term solution that could really place the real estate market back in full swing.  Most realtors aren’t going to like this suggestion but the truth often hurts.

For too long real estate agents and their brokers have been enjoying ridiculously high commissions.  These commissions range from 5% to 6%, at least in the DC area.   That means every time a seller goes to list their property they are faced with a 6% hit right from the beginning.   Imagine that you go to sell a home in DC where the average home is $500,000.  That means as a seller you are faced with an upfront cost of approximately $30,000 assuming you paid a 6% commission!  That is just ridiculous.   Yes real estate agents work hard but not $30,000 worth…..especially if the home sells in a matter of weeks.

In good markets where homes are selling well above list and sellers are seeing a higher return on investment this 5 or 6 percent payout doesn’t seem bad but what about when markets hit bottom, like they have across this country?  Yes the market in DC is rebounding but people that purchased 5 years ago still are not seeing an adequate return on investment and therefore those homes are not coming on the market.  In this city in particular we had a lot of 1 and 2 bedroom condos swallowed up during the boom but these were never long term homes for most.  Most got in with the notion they would sell in a few years and at the very least break even.  That is not the case.  Instead some owners are being forced to sell at a price much less than what they paid a few years back and when you add an additional 5 or 6 percent deduction on that number, the seller is in pain and is often forced to rent.  This idea of renting versus selling is, in my opinion, what has really destroyed the market and inventory in DC.

So I have gone and given and argument but I have not proposed any sort of solution.  Well buckle-up because here it is.    This is by no means the ultimate fix-all but I think it’s a crucial step in the right direction. Agents need to cut their commissions and offer rebates!  Wow I have probably just turned every agent against me.  How dare I disrupt a business practice that has worked for decades?  Agents, swallow your egos and listen.   If we reduce our commissions and offer rebates this simple step may allow more people to list on the market. At the same time it might allow more buyers to enter was well and not be as pushy with the seller because they are getting a rebate back from their agent.   Phew!

A few companies are offering rebates today and I think they have seen a significant boost in sales because of this.   Unfortunately I have mentioned these companies before because they also have AWESOME websites….drumroll……..Zip Realty and Redfin.  Zip boasts that it offers up to 20% of their commission back and can save sellers as much as 25%.  Redfin has a far superior deal because assuming the company makes their minimum of $5500 buyers can expect a rebate of 50% of the commission.  On the sales side Redfin only charges 1.5% commission and goes the extra mile by hiring a professional photograph for all listings.

If any readers are aware of there agents or brokers that offer rebates please feel free to share in the comments section.

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