Is There A Difference Between a Credit Report and Credit Score?

The short answer is...YES.

I'll explain now. There are three major credit reporting agencies: Equifax; Experian; and Trans Union. Each of these agencies compiles their own information separately. Banks, credit card companies and insurance companies (among others) use the information contained in files of the credit reporting agency. If all three agencies are consulted, the report is called a tri-merge.

A credit score is a three-digit number ranging between 500-800 which quantifies your risk factor (of repaying the loan). The higher the score, the better the risk and the lower the interest you will be charged to borrow money.

By law, each of us can request one free copy of our credit report from each agency once per calendar year. Call 877-322-8228 or click here for the website. Note: the credit report does not include your credit score. In order to receive your credit score, you must contact any one of the credit reporting agencies but there is a charge.

Occupying a 1031 Tax-deferred Property As Your Principle Residence

In a previous post I mentioned that owners could occupy and then sell a 1031-acquired property without incurring capital gains. I just heard the IRS (possibly through a case settled by the Tax Court) issued a ruling addressing this situation.

Basically, owners may occupy a 1031-acquired property after it has been rented for three consecutive years. At that point, the owners could live in the property as their principle residence for two years (day-for-day) then sell the property and take whatever tax advantages exist concerning the payment/avoidance of long-term capital gains tax. However, the owners would still be liable to repay the recapture tax (no greater than 25 percent) for any depreciation taken using a 27.5 year schedule.

Hope this clarifies the situation.

Appraisal Less Than Sales Price...Oh oh!

Every once in awhile an appraisal will be valued at less than the contracted sales price of a residential property. What happens then?

If the buyer is planning to apply for a mortgage to purchase property, then the lender will require an appraisal since the property is collateral for the mortgage loan. However, if the appraisal is less than the agreed-upon sales price, one of three situations will occur:

• The seller reduces the sales price to the appraised value.
• The buyer pays the difference between the appraised value and sales price in cash at closing.
• Both the buyer and seller agree to the concession.

No one knows at which price a property will sell so I always ask my sellers if they would consider having their home appraised before listing it for sale. That way, we don't waste time, we reduce stress and we have leverage for a full price offer before we enter into an unknown situation.

This is what the Smart Move program does for my clients.

Helping Homeowners in Kitsap County Avoid Foreclosure

The Homeownership Preservation Foundation, a Minneapolis-based nonprofit organization dedicated to homeownership preservation and foreclosure prevention, has launched a toll-free, confidential hotline to help homeowners avoid foreclosure.

By calling 1-888-995-4673 you will be instantly connected to experts who work for counseling agencies certified ty the U.S. Department of Housing and Urban Development (HUD). The goal is to help you resolve financial concerns, discuss available options based on your financial circumstances and establish a dialogue between you and your mortgage company.

Over the past five years nearly 2.9 million households in the United States have foreclosed according to the Mortgage Bankers Association.

For more information, call the hotline at 1-888-995-HOPE or click here for the Homeownership Preservation Foundation's website.

Give Your Children/Grandchildren a Chance

Those of us with children have been and will continue to ponder the question of paying for college education.

Probably the most talked-about programs are Coverdell accounts and 529 college-savings plans. But there is a third option: what about purchasing an investment property on a 15 year mortgage and then "tapping" the equity when the child/grandchild enters college.

As I've said before, life's all about choices and diversifying into real estate does allow one to take advantage of leverage using other people's money (i.e., rent). Contact me if you need more information.

When Does It Make Sense to Employ the 1031 Tax-deferred Exchange

Section 1031 of the U.S. Tax Code enables sellers to exchange an existing property (relinquished property) for a different property (replacement property), without incurring a "taxable event."

The first rule is that you must exchange "like-kind" properties, i.e., investment property for investment property (includes raw land) but you cannot exchange your principle residence for a new principle residence using 1031 provisions.

Second, once the relinquished property is sold (title changes hands), the replacement property must be identified within 45 calendar days (no exceptions) and the replacement property must be purchased within 180 calendar days (again no exceptions).

Third, the value, equity position and debt of the replacement property must be equal to or greater than the replenishment property.

Fourth, the sellers must employ a "qualified intermediary" to complete a 1031 transaction because sellers may not directly receive any proceeds of this transaction until it is completed.

Although sellers cannot enchange principle residences outright, they may occupy a replacement property as their principle residence after two years. After meeting the principle residency rules, the property could be sold, eliminating capital gains up to the limits and sellers would only pay the recapture tax (25 percent rate maximum) on any depreciation taken.

Any violation of these rules would result in a taxable event for sellers involving capital gains as well as recapture. So, you should consult with your accountant and an intermediary before proceeding.

Flood Insurance Program Update

In a previous post, I addressed the topic of flood insurance. Here is some additional information I "picked up" from a recent article in The Wall Street Journal that may be helpful.

Coverage is obtained from the National Flood Insurance Program (NFIP) through the Federal Emergency Management Agency (FEMA). However, this policy provides maximum coverages of $250,000 for the structure and $100,000 for the home's contents. If you have waterfront property, these limits may not provide adequate replacement protection. Claims payments are for depreciated value, not replacement-cost and the coverage doesn't take effect for 30 days after policy issue.

Several private insurers have entered this market, among them: Fireman's Fund Insurance; American Insurance Group; and Chubb Group of Insurance Companies.

But is my property in a flood plain? If you're uncertain click here but you should also verify this with the Department of Community Development (360-337-7181).

House Pets May Pose a Problem When Trying to Sell Your Home in Kitsap County

This is an abbreviated version of an article that appeared in the May 2006 edition of REALTOR Magazine, the National Association of REALTORS business tool for real estate professionals.

Stories abound of buyers (or their REALTOR agent) who have been accosted or intimidated by household pets while they were viewing a property that was on the market for sale.

I understand that pets are family members (our family had dogs when I grew up and at one time or another my kids have had mice, rats, cats, dogs, a leopard gecko, a green iguana and miscellaneous snakes, turtles, frogs and fish) . However, if you will be selling your home I would recommend that you either:

• Take a break, leave your home and take your pet(s) with you when a showing is scheduled for potential buyers.
• As difficult as it may be, board your pet(s) for the day or longer as the situation warrants.
• Make arrangements with friends or family members to keep your pet(s) until your home has sold.

There are some folks who are just plain scared of animals, period. And those buyers are looking to purchase your home, not your pet(s)!