Are you looking to build a new home for your family? Or build a home as an investment project? If so, it’s important to be aware of your financing options for construction.

Construction mortgages work on a progress advance basis. The approved loan amount to complete the construction is released to you in stages, known as “draws”, as the project reaches various levels of completion. If you currently own a property and plan to build, the funds would be issued in three stages; lock up, drywall and completion. If you do not own the property and must acquire it prior to building, the bank would provide an initial land draw to purchase the land.

Once you are ready to build you must use your own funds to reach stage one. The bank will only release the first draw upon confirmation by an appraiser that the project has reached the first stage. This often comes as a surprise to borrowers, as they feel annoyed they must use their own funds and complete work before receiving funds from their loan. Banks can only lend on a value where work has reached a certain stage. They are constantly looking at every mortgage from a worst case scenario; what if the borrower stops paying. They must then take action to recover their funds, typically through foreclosure. A partially complete project can be very difficult to liquidate and the banks have no interest in getting involved to finish a project. This is why they are very particular about not advancing funds until work is complete.

Some key points you must know before entering into a construction project:

• To acquire the land or property, banks will typically lend 65% of the purchase price (75% in some cases).
• On the overall project, the bank will then lend you 65% to 75% of the appraised value as if complete (based on your plan and budget/cost estimates from your builder).
• The total amount of project financing, less the amount loaned to acquire the land, is then issued to the borrower in stages, referred to as “draws”.
• First Draw (Lock Up) – around 50% complete, windows and doors installed and house can be “locked up”.
• Second Draw (Drywall) – around 75% complete, drywall installed and ready to paint, heating system installed and ready for final installation of plumbing and electrical.
• Final Draw (Completion) – house is finished and ready to move in, occupancy permits have been issued.

To summarize, building a home requires a significant amount of capital up front. You must have 25 to 35% for down payment to acquire the land and at least 50% of the total construction budget available to get things started.

A good mortgage planner will walk you through the construction financing process, ensure you are fully qualified and also review many other important steps, such as choosing an architect, builder and preparing the right paperwork (budget, plans etc).Talk to you mortgage planner today and develop a Smart Mortgage Plan to be sure you are fully prepared to take on this exciting new venture.

E&OE
(Copyright Dara Fahy. All rights reserved.)

The post Construction Mortgages – Smart Mortgage Planning for Project Financing appeared first on Dara Fahy.

Please be aware that, as with all tax-planning strategies, there is always the possibility that the rules will change, possibly rendering a particular tax-reduction strategy less effective, or even worthless.

I have written before on the issues concerning converting your principal residence into a rental property. I have pointed out that in one case Revenue Canada ruled against an Ontario couple whom they deemed to be guilty of tax avoidance in using such a manoeuvre.

In essence there are three issues concerning the reduction of tax:

1. Tax Reduction (allowable)
2. Tax Avoidance (questionable at best)
3. Tax Evasion (illegal)

The issue here is the intended, or actual, use of funds derived from a mortgage on your principal residence.

I know of several people who have bought a property, paying in full, and subsequently obtained a mortgage. This may have been to start a business or for investment in equities.

This is fine, and in such cases the interest on the mortgage is tax deductible, but…. here’s the potential problem:

It would be very easy to assume that the same rules would apply if the mortgage funds were used to buy another property.

But Revenue Canada says not so!

The tax deductible opportunity does not apply to capital gains.

Please see Canada Revenue Agency’s “Interpretation Bulletin, IT-533 Interest Deductibility and Related Issues” for the full story. It provides an interpretation of the deductibility of interest as covered by different sections of the Income Tax Act and several related judgments and court decisions.

There is some confusion as to whether the mortgage funds must be applied directly to the purchase or investment opportunity. And while the courts have stated that indirect use is acceptable it is always possible that a ruling in this situation could go against you.

The onus is on you to keep meticulous records showing the use of the funds in question.

The bottom line is that interest paid on debt incurred to purchase a principal residence is not deductible for income tax purposes.

So if you borrow against a rental property and invest in a principal residence you will end up with be taxable rental income and non-deductible interest expense.

Remember, the key point here is the “use” of the borrowed funds, not where they came from.

A number of solutions have been documented in an effort to address a solution. Having reviewed them, I have to say that while the use of these methods may be legal per se, none of them can prevent Revenue Canada from deciding that what you have done was simply to avoid paying taxes.

One last time…. You must get competent, independent, professional advice in these matters.

E&OE
(Copyright Dara Fahy. All rights reserved.)

The post appeared first on Dara Fahy.

Actually we have a significant number in Canada, but that information has not become a mainstream news item. Mortgages north and south of the border are very different, as is the foreclosure process.

There are two main differences, which mean that:

1. Buying a foreclosure property in Canada is not easy.
2. Special financing arrangements are required (details of which I can provide).

The idea of obtaining a foreclosure property for a song in Canada is a myth and nothing like the way it works south of the border.

1. U.S. mortgages have traditionally been “without recourse.” Thus a U.S. home owner could walk into his or her bank, hand them the keys to their home and walk away.

You can do the same in Canada, but if the bank cannot secure the amount of the mortgage funds advanced against the property, you still owe the bank the difference.

(The bank will also add-on any costs associated with the foreclosure and sale of the property, including all expenses incurred, together with appraisal fees, realtor sales commissions, administration fees, interest on the unpaid amount, legal fees, and court costs).

In the U.S. the banks will foreclose and dispose of a property by any means to get as much as they can. It doesn’t matter to them how this is done; they simply want to get what they can, as fast as they can, and put the money to work again in other ways.

2. By contrast, the Canadian Securities Act requires that the bank, or other lender, protect the homeowner’s equity to the degree that it’s possible. Therefore, the lender must attempt to obtain fair market value for the property upon disposal.

The important thing is that this condition applies no matter how much is owed on the property, or the method used to sell it, and may have to be proven to the satisfaction of the courts.

So picking up a “bargain” from the bank is not as likely to happen in Canada as it does in the U.S.

We have all seen the TV images of the sheriff’s deputies showing up at the door of a home in the U.S. and telling the owners they are in default and must get out.

The Canadian process can take up to a year or more depending on a number of factors. This is an involved process with many variables and I will not go into it further since a number of recent articles have been written on the topic, including an excellent one in the May issue of Canadian Real Estate magazine.

If you wish to pursue foreclosure properties, the easiest way is to simply contact a local realtor in the area you are interested in, since invariably, the sale of these properties will be handled by a realtor whether authorized by the bank or the homeowner directly. And, she or he will also be familiar with the process in that particular province.

So…. please be aware that due to the differences, between the U.S. and Canada outlined above, buying a foreclosure in Canada is not easy; special financing arrangements are required; and the idea of obtaining a foreclosure property for a song in Canada is a myth and nothing like the way it works in the U.S.

Here’s a link to a very scary view of U.S. foreclosures, shown as a satellite tour…
(I am not sure how long this link will remain valid.)

E&OE
(Copyright Dara Fahy. All rights reserved.)

The post Canadian Foreclosures appeared first on Dara Fahy.

THE SMALL PRINT

The ‘small print’ on my website applies to this article in no small measure due to the fact that, in essence, we are talking about buying property in a foreign country.

Because of the nature of the internet as a medium, and the fact that a lot of the information is from third-party sites such as the federal and provincial governments, it is inherently limited in scope and is subject to change without notice.

Witness the fact that as I write this, the U.S. credit rating has just been downgraded by Standard & Poor’s, for the first time ever.

The sources used for the development of various articles are believed to be reliable, and are checked, where possible, by a professional researcher; however it is entirely possible that errors or omissions can be reproduced unknowingly.

CONTENTS

• Preamble
• Introduction
• U.S. Property Status
• Bargains, Risks and Hidden Costs
• Words of Advice
• Some Key Information
• Mortgages for U.S. Properties
• Obtaining a Mortgage in the U.S.
• U.S. Real Estate Recovery

PREAMBLE

This article was written as a primer, intended for the use of my clients who continue to ask me on a regular basis about purchasing property in the U.S. It should be considered as a starting point for investigation only.

The article is drawn from a number of articles I have written on the topic, all of which remain in their original form on this website,

It is important to note that I am a mortgage specialist and planner operating in B.C. I am not a realtor. I don’t do U.S. property mortgages, and I am not an expert on the topic of U.S. property purchase.

page 2: INTRODUCTION

The following is a primer on a seemingly simple but considerably complicated topic.

I use these words advisedly because, yes, it is very easy indeed for Canadians to purchase property in the United States, but the potential pitfalls and hazards are daunting to say the least, for those who venture forward unprepared, or ill-advised.

Michael Campbell, journalist, TV and radio commentator and economist, predicted recently that the Canadian dollar could well rise to $1.20 US or more within the coming few years.

Warren Buffet has also issued a similar prediction, in a just published article called: “U.S. Dollar to Lose Value in the Long Run.”

This may or may not happen, but if it does, then notwithstanding other factors, the US property market will become even more attractive to Canadians, 1 of 5 of whom according to a recent Leger Poll, are interested in, or actively involved in, purchasing in the U.S.

I addition, the U.S. credit rating has been downgraded as of August 5, by Standard and Poor’s from AAA to AA+.

The Associated Press reported on August 5, that:

“The agency added a negative outlook, warning there was a chance the rating could be downgraded further within two years if progress is not made in cutting the huge government budget gap.

S&P said late Friday the “political brinksmanship” of recent months shows that governance in the country is becoming “less stable, less effective, and less predictable,” raising the risks that one day it might not honor its debt.

And that: Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising US public debt burden in a manner consistent with a ‘AAA’ rating.

S&P is considered the most influential of the three major rating agencies ahead of Moody’s and Fitch; both of which say they continue to review the country’s deficit reduction plan for possible downgrades.”

There has also been a recent call for the removal of the mortgage tax deductibility that Americans now enjoy.

An article on that topic appeared in the Financial Post and the Vancouver Sun on April 4th and said that U.S. realtors are concerned that if mortgage industry rules were changed at this point, it would destroy any hopes of recovery in the sector.

“It is the worst possible time to discuss it because of the fragility of housing,” said Lawrence Yun, chief economist and director of research with the National Association of Realtors.

What is interesting is that no mention of the capital gains side of the equation is being discussed.

Now, in fairness to the experts, it’s really hard to hit a moving target with so many variables at play. However, it’s the overly simplistic answers that worry me.

page 3: U.S. PROPERTY STATUS

I have written a fair bit about U.S. property purchase, and continue to be amazed at the interest in buying property in the United States, and I get at least one question a week on the topic.

I may be very wrong on this one, and it would not be the first time, but I’m not buying into all the hype.

(Now if you want to buy a vacation property, that’s a whole different kettle of fish!)

Home sales in the U.S. have just plummeted, again, but, as usual, we have the “experts” telling us how things are going to pick up in the next 12 to 18 months:

“Things may have bottomed out…”

“We expect….”

“All indicators suggest…”

“We know from past experience…”

“Etc…”

All of this reminds me of a comment by Richard Nixon, who, when continually being given various analyses by his economists and financial advisors, with caveats such as “On the other hand,” he finally got mad and declared….

“Find me a one-handed economist!”

According to the U.S. Census Bureau, new home sales in the U.S. in February fell by just over 16%. This represents around 225,000 on an annual basis, and is the slowest rate recorded by the Bureau since they began tracking figures in 1963. (That’s a 48-year period!)

They also reported that the median sale price fell 14% from the previous month to $200,000, the lowest value since December 2003.

(Remember that, as always with U.S. figures, different agencies report using very different calculations.

This slide in prices is hurting the economy severely, and while the early stages of 2010 brought some optimism, it that did not last long.

This optimism again resurfaced in early 2011, so we saw a corresponding rise in mortgage rates. However, while raising rates a modest amount and spreading around the feel-good factor, tighter borrowing standards and the continuing, or even worsening lack of jobs, again affected housing demand negatively…. And so, we were back on the merry-go-round again.

Most current sales are of existing homes, and those tend to be mainly (but not all), in distressed areas. New home construction has already fallen dramatically, so much so that without an improvement there will not be sufficient units or homes available in the coming few years.

Now upon reading this you might be forgiven for saying: “Well there is proof that we should buy now.” Well, it would if we knew what was going to happen with the economy, and we don’t, and no one does!

So, consider that Florida alone has well over a million vacant homes, and maybe closer to two million and you begin to see the size of the problem in the U.S. Almost half of Florida mortgage holders are “under water” – a situation in which they cannot recoup the value of their mortgages.

The key is employment and the economy and not housing or housing prices per se.

Of note here is that on the eve of the recent G20, China has begun making pretty serious noises about the U.S. dollar and that there should be other reserve currencies.

This represents their feeling on a reform of the global monetary system and could be considered as the “first round’ in China’s long-awaited view that we must move away from a U.S. dollar-centered global economy. We’ve seen this coming for some time now.

These are sobering thoughts indeed, and I offer them for your consideration if you are thinking of a foray into the U.S. market.

page 4: BARGAINS, RISKS, AND HIDDEN COSTS

Veteran realtors are reminding prospective purchasers never to make a decision based on low price alone.

Buyers should take at least two trips to an area of interest to be able to spot troubled homes and get a feel for the neighbourhood’s schools, beaches, marinas and golf clubs, advises Phil Soper, chief executive of Royal LePage.

That having been said, there may be no better time to go cross-border shopping. Consumer unease over Standard & Poor’s potential downgrading of the AAA credit rating because of rising debt will likely contribute to holding home prices down, says Soper, chief executive of Royal LePage, even as prices fell to new lows in 11 U. S. cities this winter, including overbuilt areas of Florida and Arizona, according to the S&P/Case-Shiller Home Price Index.

Washington, D.C., was the only market where prices rose in January, according to the widely followed index. And market researcher Metrostudy reported the median home price in Florida alone was $121,900 in February, down 53 per cent from June 2006.

Auctions are a popular way for the banks and other creditors to dispose of properties on their books. But auctions aren’t for novice foreign buyers unless they have an experienced local real estate agent working for them. Pre-sale inspections are not allowed.

Soper recommends steering clear of speculative properties. He advises zeroing in on a “living, vibrant, quality community” with lower rates of crime and foreclosure – property that delivers an emotional connection, not necessarily income potential.

By and large a detached and semi-detached home is a safer investment than a condo. Annual condo dues where dues and fees can quickly nullify the rent, and there’s nothing preventing the condo board from levying unforeseen, hefty charges for big-ticket maintenance, such as hurricane upgrades or roof replacement.

A condo’s value can also nosedive as the foreclosure rate for the building edges up, and if there too many foreclosures in a complex it’s difficult for new buyers to even arrange financing.

WORDS OF ADVICE

• American banks generally won’t grant a traditional mortgage unless the buyer has excellent credit and at least a 25-per-cent down-payment. Cash purchases are common for Canadians buying in the U.S. You could also dip into your first home’s value with a home equity line of credit (HELOC) arranged through a Canadian financial institution or mortgage broker.
• Expect to pay a risk premium on home insurance for property that sits empty part of the year. You’ll also pay more for auto and health insurance once you arrive at a holiday home, if you intend to stay long.
• At tax time, Canadians need an individual taxpayer identification number (ITIN) issued by the IRS for property purchases. If you’re planning to rent to holidaymakers or become an absentee landlord, you’ll need to file U.S. income tax, and therefore might benefit from legal advice to explain any beneficial deductions; if you’re buying a house to flip it, there may be ways to maximize credits to reduce capital gains tax. A realtor can inform you of property tax laws, which differ by state and municipality.
• Buying a condo to rent? Make sure board regulations allow this. And be aware that annual property tax and condo fees are typically two per cent of the purchase price.
• Above all, find an experienced U.S. real estate agent either by word-of-mouth or via referral from the U.S. relocation coordinators of national firms such as Re/Max, Century 21 or Royal LePage.
• It is important that she or he have experience in dealing with Canadian purchasers.

page 5: SOME KEY INFORMATION

There is so much information (so called) out there that is just not correct. At the very least, it is not complete.

As mentioned earlier, I am not a realtor, I don’t do U.S. property mortgages, and I am not an expert on the topic of U.S. property purchase.

But I do have a duty of care to my clients.

I have talked to a variety of people, clients and others who have gone through the process.

Most are happy with what they’ve accomplished. However, when I have asked a few simple questions, the response has invariably been: “What? I didn’t know about that. Why was I not given this information?” Etc., etc.

The answer is pretty straight forward . . . Either the persons whom they believe should have offered this information were not aware of it, or perhaps it did not fall within their particular area of expertise.

Once again, competent, professional advice is critical.

It is critical that you obtain this advice before proceeding. And, if it’s free, it’s probably worth exactly what you are paying for it. True independent advice does not come as part of the package from a mortgage broker, bank, or realtor. If it does, take it with a few grains of salt.

There are many factors to consider, including, but not limited to, the following:

• The purpose of the purchase (vacation residence, rental property, long-term investment, etc.)
• Estate tax (U.S. and Canadian)
• Property tax
• Capital gains tax
• Mortgage availability and terms
• How the property is purchased (sole ownership, joint tenancy, corporate purchase, partnership purchase, tenancy in common, Canadian trust purchase)
• The age of the purchasers, (Yes, it’s important), Etc.

Also, please be aware that advisors in the U.S. will almost certainly not be up to date on the Canadian side of the equation. (i.e. How does this purchase affect my Canadian income tax, estate tax, etc?)

The issues you need to discuss with a qualified advisor include:

• Obtaining a Mortgage
• Property Taxes
• Property Rental (Lots of red flags here!)
• Border Crossing
• Estate Tax
• Qualified Domestic Trust (QDOT)
• Canadian Trust
• Joint Tenancy
• Tenancy in Common (TIC)
• Corporate Ownership

A consideration of the above may well deter prospective Canadian purchasers of U.S. property. However, for those who wish to do so, and are willing to carry out careful due diligence, seeking qualified, competent, independent, legal, tax, financial and real estate advice (preferably in Canada), the opportunity to own property in the United States can provide many wonderful benefits.

page 6: MORTAGES FOR U.S. PROPERTIES

As I pointed out earlier, I do not arrange mortgages for property in the Unites States, but, if you wish, I would be pleased to refer you to a number of competent brokers. Brokers an either side of the border will offer referrals when they are confident of the individual or company to whom they provide a referral. This is simply professional courtesy, and I do not receive a referral fee.

While the process of acquiring property in the United States is, in itself, relatively straight forward, there are many things to consider before doing so, and it concerns me greatly to see Canadians rushing into US property purchase, without careful due diligence, just because prices may be low.

Also, please be aware that advisors in the US will almost certainly not be up to date on the Canadian side of the equation.

With respect to all tax and legal issues pertaining to US property purchase by Canadian residents, please be aware that changes in tax laws, court rulings or interpretation, government policy (state and/or federal) or other factors, could alter the information contained in this brief overview.

Such changes have the potential to affect you with respect to future property and tax matters, and possibly on a retroactive basis.

And, if you decide to proceed with financing in the United States I strongly recommend dealing with a mortgage broker who is thoroughly familiar with the process required for obtaining mortgages for Canadian residents, and has done so on numerous occasions.

One of the keys is advice on tax matters which are quite complex, and it would be preferable to seek this advice in Canada.

That having been said, here’s a brief overview distilled from a number of sources including a number of well respected US-based mortgage brokers, lawyers and realtors.

page 7: OBTAINING A MORTGAGE IN THE U.S.

Despite what you may have heard to the contrary, it is possible for Canadian residents to obtain a mortgage in the United States. (Although the financing situation is in a state of flux, and as one US realtor pointed out, they have to deal with changes in the conditions and rules almost monthly.

For a vacation home you will probably need a 30% deposit plus proof of 3 to 6 month’s liquid reserves. You will also need to show a number of previous month’s bank statements, and the lender will contact your Canadian bank to verify all of this.

If the property is being purchased as an investment, you will probably be required to put more than 30% down and show up to 12 month’s reserves.

One viable option is to find a seller who will do the financing, or you may want to consider obtaining a bank loan in Canada, or a second mortgage on your Canadian property.

Property Taxes

These can be higher because you are non-resident, Florida is a good example. Also, as a non-resident, you will not qualify for various state exemptions.

Property Rental

You can rent the property, but it is important to be aware of state laws with respect to your responsibilities as a landlord. You will need a property manager, and, most importantly, you cannot do any work on the property yourself. That would be considered the same as working in the United States without the appropriate visa. (You can paint and clean your own property, or unit in a building you own, only if it is never rented, or intended to be rented.)

The penalties for breaking the law on this are very severe. Please read the last sentence again.

Border Crossing

As a visitor, you can only stay in the United States for six months (183 days) in any calendar year. When you cross the border and say you’ve got property there, make sure you can present concrete evidence that you do not live there other than on a temporary basis for a vacation.

Estate Tax

This is perhaps the most complex area in US property purchase. The tax is calculated on the fair market value of the property, and not on the capital gain accrued.

However, any such tax paid may entitle the taxpayer to a foreign tax credit for Canadian tax purposes. US estate tax can be substantial, especially if it not offset by strong capital gains when the property is sold.

For 2009, US estate tax is applicable to Canadian residents with worldwide assets in excess of US$3.5 million. It has been announced that this will change to US$1.0 million in 2011. However, as with all tax issues, this is subject to change before implementation.

An estate tax credit is allowed, and this is doubled if the property is willed to a Canadian resident

page 8: Estate Tax – continued

There are several methods for limiting or deferring US estate tax, the details and implications of which are well beyond the intent of providing basic information and guidelines here. Methods include:

In Summary

A consideration of the above may well deter prospective Canadian purchasers of US property. However, for those who wish to do so, and are willing to carry out careful due diligence, seeking qualified, independent, legal, tax, financial and real estate advice, the opportunity to own property in the United States can provide many benefits.

page 9: U.S. PRICES COMPARED to OTHER COUNTRIES

The subject of house prices is one that I confront every week in relation to mortgage planning.

There are so many variables to consider when choosing a mortgage. Mostly its interest rates and where they are headed, so that an informed decision can be made as to the type of mortgage.

But, in many situations, the direction of house prices over a certain period of time is a major factor.

Problem is that I can’t find my crystal ball. I had it last week but I don’t know where it’s gone!

Who was it that said an economist is a person who comes on TV this week to explain why the predictions he or she made last week were not correct?

To step back for a minute and try to get a handle on the future of house prices requires a solid understanding of the economy. You can go to school for four to six years to learn this, but as we have seen with the recent housing / mortgage debacle, particularly in the United States and in many (most) other countries, the best minds got it wrong.

(We didn’t foresee that…. We didn’t expect…. No one could have foreseen that….. Etc.)

For me to comment seems trite at best, so I look to “trusted” sources for my information and always add a liberal amount of salt.

The Economist is one of my favourite sources, particularly because everything they do is done “on the ground” with correspondents in every corner of the globe.

Their recent take on house prices over the past year is interesting. As always, they take a global view considering twenty-one countries in a recent article.

page 10: PRICES – SOME SPECIFIC FIGURES

Here’s a quick summary then, with some extra comments by me:

• Of the 21 markets covered, 17 show an increase
• Asia’s prices show the most growth with Singapore, Hong Kong and Australia on top
• Canada is roughly in the middle of the group
• Ireland is at the bottom

Here are a few of the numbers for comparison purposes indicating the % change over the last 12 months, over the last 13 years, and the under/overvalued amounts today:

What do these numbers say about the value of Canadian houses?

Bearing in mind that prices have come down somewhat of late, the figures suggest that our market is overvalued by 23.9%. They also show an increase of 4.5% over the last year, and an overall gain of 70% from 1997 to 2010.

So, how should this information affect your buying or selling decision? Crystal ball please…. This brings us back to a discussion of the numerous variables at play here.

The classic answer for awhile now has been that yes, the market may be overvalued and prices may come down (they are), but interest rates are going up (they are), so you should not hold off on buying. There seems to be 100% agreement that rates will continue to rise.

Not included in the chart above is the familiar split between the core countries and peripheral ones of Europe, with Ireland, Spain and Italy continuing to show declines, while Germany and France show strong gains in value over the past year, and England is still overvalued.

One can argue with a good degree of confidence, that contradictory figures notwithstanding, the United States is more or less fairly valued right now.

However, I would be very wary of purchasing in the U.S. without a considerable degree of due diligence as to the possibilities for the future.

Finally, look at the figures for Switzerland. Modest growth with a slight undervaluation. How is it that the Swiss seem to get it right so often?

* Valuation determined by a comparison of the current ratio of house prices to rents against its long-run average.

** You can argue the case for the US either way because of the way the figures are reported.

One index, that of the Federal Housing Finance Agency,, the regulator and conservator of 12 Federal Home Loan Banks, excludes houses financed with large mortgages; while the Standard & Poor’s, Case-Shiller index reports on a variety of markets within the country including, composite, 10-city, 20-city, and individual metro areas.

Put all of these together and the figures are close to being a wash. Or, you can pick an index to support a particular view. (Showing that once again, you can prove anything with statistics!)

page 11: U.S. REAL ESTATE RECOVERY?

(back to page 1)

The following is taken from a newsletter written for by Chris Butterworth in Phoenix, Arizona. Chris granted his permission for the use of the article. You can contact Chris and Heather Barr at Thompson’s Realty where they cover the Greater Phoenix area.

Their excellent newsletter is available at: http://ThePhoenixAgents.com.

Some Background

Let’s look at supply and demand, and compare where we are today with where we’ve been over the last decade. How long do homes stay on the market before they sell?

If we disregard the short-time highs in 2005, and lows of 2007-2008, and compare today with 2001 and 2002 (back when things were “normal”), we find that we’re at about 90 days on the market, compared with 50-60 days earlier in the decade. That’s 50%-80% worse than “normal”, which means we still have a long way to go.

The interesting thing is the pattern looks exactly the same across all price ranges. A review of each price range (less than $150,000 to over $600,000) shows significantly longer marketing times. The only way this will change is if we have a smaller supply, fewer foreclosures or, a larger demand.

Supply Side

Distressed listings have contributed greatly to the current supply. These include any type of bank-involvement, including short sales, pre-foreclosures and REOs, (Real Estate Owned – property that has not sold at a foreclosure auction, and now owned by a bank or other lender).

Short sales are where proceeds fall short of the balance owed on the property’s loan. It often occurs when a borrower cannot pay the mortgage on the property, but the lender decides that selling the property at a moderate loss is better than pressing the debtor.

Both parties consent to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and a poorer credit report for the borrower.

Pre-foreclosures are properties available in the period between the mortgage lender’s notice to the borrowers of their default on the mortgage payments, and the auction sale event that finalizes the transfer of title to the property to the lender.

REO (Real Estate Owned). A bank will typically set the opening bid at a foreclosure auction for at least the outstanding loan amount. If there are no bidders the bank will legally repossess the property. It is then listed on their books as REO – Real Estate Owned – and is categorized as a non-performing asset. These REO listings make up about 40%-50% of the total number of distressed properties.

It can be over a year from the time a home owner first explores a short sale until the bank completes the foreclosure process and gets the home on the market as bank-owned.

We also know that very few of the short sale listings actually get sold and closed before going into foreclosure.

This means that about half of the distressed listings will hit the market again sometime in the next year or so as a bank-owned REO listing. So even if the economy in general, and the employment numbers in specific, gets back on track, we’ve still got a pipeline full of foreclosures heading our way.

This tells us there will not be a dramatic reduction in the supply side.

Demand Side

There is no reason to expect demand from first-time buyers will increase anytime soon. At best it will bump along at a similar rate. At worst it will fall sharply.

The same holds true for investors; those who wanted (and were able) to take advantage of lower prices have already done so. Some are being more cautious, waiting to see how the pending problems in commercial real estate will impact the residential market.

There will still be good deals in the coming few years and there will still be investors buying homes. But it would be difficult to support the argument that investors are going to drive demand enough to drastically change the supply and demand balance.

In Summary

“The market starts recovering in earnest when bank-owned REOs stop hitting in waves. This will happen about a year after employment stabilizes.”

***********************************************

Finally, please see also my March 18, 2011 article for a broader perspective on the future of property values in general at: The Future of Property Values.

Golf or tennis in Arizona in the middle of winter anyone?

Above all, enjoy your U.S. purchase adventure!

E&OE
(Copyright Dara Fahy. All rights reserved.)

The post US Property Purchase for Canadians – A Primer appeared first on Dara Fahy.

I have a received a lot of calls lately regarding mortgage rates. There is a lot of attention in the media being given to the recent special offers, particularly 2.99% from BMO and I wanted to provide some clarification on the subject.

Fixed mortgage rates have come down slightly and are around the 3.15% to 3.35% mark for 5 year terms. The BMO offer at 2.99% is the most aggressive out there; however, it comes with a lot of fine print. The maximum amortization is 25 years and it’s for owner occupied properties only (no rentals). You are limited to 10% pre-payment per year and there is NO option to refinance during the 5 year term. You are stuck with it and the only out is by sale of the property. This is a great rate but not for everyone so please contact me if you’d like further info.

Typically, mortgage penalties are set up as the greater of 3 months interest or IRD – interest rate differential (the difference between your contract rate and the current rate). This is in place to avoid us constantly breaking contracts to go to a better rate and this IRD typically will negate any savings from doing so. However, there are instances where the timing is right and we can refinance your mortgage and save money. Please contact me if you’re interested in looking at this option.

As for variable rates, we expect them to remain at current levels throughout 2012 and possibly well into 2013. This can change depending on global economic events and info so if you’re on a variable rate, we will continue to update you with any developments and provide recommendations. The current discount being offered on variable rates is no longer as attractive as banks profits are being squeezed. If you are a current variable rate holder, this will not affect your rate, only those entering into a new variable term. With the reduced discounts, the fixed rate is currently a lot more attractive from a risk reward standpoint, in my opinion.

I hope this information is useful. Please do not hesitate to contact me with any questions or concerns.

Best Regards.

E&OE
(This article copyright Dara Fahy. All rights reserved.)

The post What’s happening with Mortgage Rates? (archives 2012) appeared first on Dara Fahy.

Dara Fahy A.M.P.
Mortgage Planner

January 27, 2012

Greetings,

I have a received a lot of calls lately regarding mortgage rates. There is a lot of attention in the media being given to the recent special offers, particularly 2.99% from BMO and I wanted to provide some clarification on the subject.

Fixed mortgage rates have come down slightly and are around the 3.15% to 3.35% mark for 5 year terms. The BMO offer at 2.99% is the most aggressive out there; however, it comes with a lot of fine print. The maximum amortization is 25 years and it’s for owner occupied properties only (no rentals). You are limited to 10% pre-payment per year and there is NO option to refinance during the 5 year term. You are stuck with it and the only out is by sale of the property. This is a great rate but not for everyone so please contact me if you’d like further info.

Typically, mortgage penalties are set up as the greater of 3 months interest or IRD – interest rate differential (the difference between your contract rate and the current rate). This is in place to avoid us constantly breaking contracts to go to a better rate and this IRD typically will negate any savings from doing so. However, there are instances where the timing is right and we can refinance your mortgage and save money. Please contact me if you’re interested in looking at this option.

As for variable rates, we expect them to remain at current levels throughout 2012 and possibly well into 2013. This can change depending on global economic events and info so if you’re on a variable rate, we will continue to update you with any developments and provide recommendations. The current discount being offered on variable rates is no longer as attractive as banks profits are being squeezed. If you are a current variable rate holder, this will not affect your rate, only those entering into a new variable term. With the reduced discounts, the fixed rate is currently a lot more attractive from a risk reward standpoint, in my opinion.

I hope this information is useful. Please do not hesitate to contact me with any questions or concerns.

Best Regards.

E&OE
(This article copyright Dara Fahy. All rights reserved.)

The post Coming Mortgage Rule Changes (archives 2012) appeared first on Dara Fahy.

However, if your lender or bank is collecting the annual amount for taxes with each mortgage payment, you must still sign the tax notice from the City or District and send it back without payment.

This is particularly important if the property in question is your home, as you are likely entitled to the BC Home Owners Grant of $570+, or even more if you’re a senior.

• You must claim your Home Owner grant to avoid a penalty of 5%!
• Also, the senior’s grant is applicable in the year in which you turn 65. Thus if you are 65 in December 2011, your grant will still apply in July 2011.
• This is very easy to miss!

To claim your grant, just select the appropriate grant option that applies to you, sign the form and return to the City or District. Do not include payment as the bank will do it for you.

If your bank is not collecting your tax, be sure to include your cheque for the net amount due.

For those not having the bank collect, your City or District will set up a pre-authorized Tax Installment Plan for you if you wish.

If you require assistance with this in any way, don’t hesitate to contact me.

E&OE
(Copyright Dara Fahy. All rights reserved.)

The post Property Taxes – what to do if the bank is collecting yours (2011 archives) appeared first on Dara Fahy.

No doubt you have heard there is a strong possibility of interest rate hikes towards the end of 2011.

Do you feel prepared?

The turmoil in Japan and the Middle East has perhaps reduced the threat of an immediate hike, however, an increase in October or November seems likely.

What does this mean for you? What are your options? Are you concerned that rising rates will affect your financial security?

Today, April 21, 2011, I am introducing a mortgage approach, aptly named the Inflation Hedge Mortgage Strategy that will ensure you feel no future payment shock through rate increases.

My promise to you is to ensure you have a viable plan to make certain you will the lowest total cost of home ownership.

Isn’t that what we all want?

A proper plan in place that combines a Variable Rate Mortgage with our Inflation Hedge Add-on and corresponding service commitment can out-perform fixed rate mortgages over the next five years.

Most importantly, it will not cost you anything.

It can also ensure you save thousands of dollars long-term, as well as reducing the number of years to become mortgage free.

With variable rates currently sitting as low as 2.25%, I invite you to see how much money you could save by adjusting your mortgage for inflation.

Please call or email me anytime to discuss this approach in detail. We can determine if this strategy is a good fit for you and how much you can potentially save.

I look forward to hearing from you.

E&OE
(Copyright Dara Fahy. All rights reserved.)

The post Inflation Hedge Mortgage Strategy (2011 archives) appeared first on Dara Fahy.

Believe me, it’s not! I have always been somewhat contrarian, especially so when I see or hear the “experts” trying to explain on TV or radio, why what they said would happen last week, did not in fact happen.

It’s like the weather forecast, you’ll always get it right some of the time, but you may get it wrong more often than not. In fairness, to the experts, it’s really hard to hit a moving target with so many variables at play. It’s the overly simplistic answers that worry me though.

I have written a fair bit about U.S. property purchase, and this is really an update. I continue to be amazed at the interest in buying property in the United States. I get at least one question a week on this topic. My answer, just so you can quit reading now, is “I would not do it!”

Have you seen any recent reports on Warren Buffet (regarded as one of the greatest of the world’s investors), buying homes in the U.S.?

Exactly!
(In fact he has just published a new article called: “U.S. Dollar to Lose Value in the Long Run.”

So why would you consider doing so?
(Now if you want to buy a vacation property, that’s a whole different kettle of fish!)

I may be very wrong on this one, and it would not be the first time, but I’m not buying into all the hype. Home sales in the U.S. have just plummeted, again. So you should rush in now and buy, right!? Excuse me! I don’t think so…. And I can give you any number of reasons why I would not do it.

As usual, we have the “experts” telling us how things are going to pick up in the next 12 to 18 months. Why?

Oh, because:

• “Things may have bottomed out…”
• “We expect….”
• “All indicators suggest…”
• “We know from past experience…”
• “Etc…”
• “Etc…”

Those of you who have some of my previous articles may remember the one on the request from Richard Nixon for a One-Handed Economist.

According to the U.S. Census Bureau, new home sales in the U.S. in February fell by just over 16%. This represents around 225,000 on an annual basis, and is the slowest rate recorded by the Bureau since they began tracking figures in 1963. (That’s a 48-year period!) They also reported that the median sale price fell 14% from the previous month to $200,000, the lowest value since December 2003. (Remember that as always with U.S. figures, different agencies report using different calculations.)

This is hurting the economy severely, and while the early stages of 2010 brought some optimism, it that did not last long.

This optimism again resurfaced in early 2011, so we saw a corresponding rise in mortgage rates. This left us again with the chicken-and-the-egg situation.

While raising rates a modest amount and spreading around the feel-good factor, tighter borrowing standards and the continuing, or even worsening lack of jobs, again affected housing demand negatively…. And so, we were back on the merry-go-round again.

Most current sales are of existing homes, and those tend to be mainly (but not all), in distressed areas. New home construction has already fallen dramatically, so much so that without an improvement there will not be sufficient units or homes available in the coming few years.

Now upon reading this you might be forgiven for saying: “Well there is proof that we should buy now.” Well, it would if we knew what was going to happen with the economy, and we don’t, and no one does!

Consider that Florida alone has well over a million vacant homes, and maybe closer to two million and you begin to see the size of the problem in the U.S. Almost half of Florida mortgage holders are “under water” – a situation in which they cannot recoup the value of their mortgages. The key is the economy and not housing or housing prices per se.

Of note here is that on the eve of the G20 meeting last week, China has begun making pretty serious noises about the U.S. dollar and that there should be other reserve currencies.

This represents their feeling on a reform of the global monetary system and could be considered as the “first round’ in China’s long-awaited view that we must move away from a dollar-centered global economy.

We’ve seen this coming for some time now.

These are sobering thoughts indeed, and I offer them for your consideration if you are thinking of a foray into the U.S. market.

Please see also my March 18, 2011 article for a broader perspective on the future of property values at: The Future of Property Values.

E&OE
(Copyright Dara Fahy. All rights reserved.)

The post So You Want to Buy Property in the United States? (2011 archives) appeared first on Dara Fahy.

I wrote an article on this topic in August, 2010. However, I listed the article under the heading “Mortgages for Entrepreneurs.”

While the contents of the article per se are valid, the subject of “Cash Damming” perhaps deserves mention as a separate topic.

I say this because it has come to my attention rather often quite recently in conversations with entrepreneurs.

So… Following is a portion of the article on Cash Damming, with the full text available here:

You may also be interested in “Self Employed and Seeking a Mortgage”.

Cash Damming

If you operate an unincorporated business, a “multi-component” mortgage can convert your personal debt into tax-deductible business debt.

The strategy is called “cash damming” and is fully approved by the Canada Revenue Agency (CRA). The tax-saving benefits are substantial, and it’s easy to implement.

Essentially, you convert your personal debt into business debt in order to benefit from tax-deductible interest.

This is done by using the gross revenue from your business to pay off your personal debts and then using a separate line of credit or loan facility (used exclusively for your business), to pay your business expenses.

You can use cash damming if you:

1. Operate a professional practice or business that is not incorporated
2. Generate income from the operation of your business
3. Incur expenses in order to generate your income
4. Have personal debt.

An unincorporated business is essentially any activity that earns revenue and does not generate a T4 as a statement of income.

The business can be large or small, home-based or not.

Incorporated Businesses

The application of this practice to an incorporated entity is entirely different, as a corporation per se, is treated differently under the tax laws.

A corporation is subject to restrictions on paying off personal debt. This area is beyond the scope of this article, and any discussion on the benefits of lending to your own company will require tax advice from a competent, experienced tax lawyer of financial advisor.

E&OE
(Copyright Dara Fahy. All rights reserved.)

The post Cash Damming as a Mortgage Reduction, Tax Planning and Tax Deductibility Tool (2011 archives) appeared first on Dara Fahy.