Energy Mortgage Stretches Buying Power

Cooling temperatures around Capitol Hill make me think of ways to get the old home place ready for the winter months in the fickle Mid-Atlantic area and that usually means spending some money on insulation, caulking and the usual home maintenance that keeps the cold air out and warm air in.

There's a mortgage on the market that could be worth a look to help either buy an energy efficient house (or make the one you want to purchase into an energy efficient home). The energy efficient mortgage (EEM) was designed by the U.S. Housing and Urban Development and can also be used to remodel a house into a more energy efficient unit, saving you monthly payments to the power company.

The Residential Energy Services Network (RESN), created by the National Association of State Energy Officials and Energy Rated Homes of America, was established to develop a national market for home energy rating systems and energy efficient mortgages. RESN notes EEM's benefit borrowers in several ways:


The estimated energy savings are added to the borrower's income, allowing him or her to qualify for a higher mortgage amount.

With more borrowing power, the EEM then allows borrowers to roll over the costs of energy improvements into the borrowed amount. All the costs of the energy improvements (up to 15 percent of the value of the home), is allowed to be financed, thus reserving a borrower's cash for more immediate, move-in costs.

The value of the home is adjusted by the value of the energy efficient improvements.
If the house is already energy efficient, then the borrower can use the program to stretch his buying power. Under an EEM, the traditional debt-to-income qualifying ratios are expanded. The idea being that if you're paying less for monthly energy costs, you can afford more for your mortgage payment.

The Federal Citizen Information Center (FCIC), which is the information/publishing arm of the U.S. General Services Administration, has a great online guide about how the program works.

For instance, borrowers with a monthly income of $5,000 could increase their buying power by nearly $16,000 using an EEM (based on a 30-year fixed rate mortgage at 7.5 percent interest rate).

The group lays out a step-by-step guide to acquiring an EEM:


Find the target house, then inform your lender that you want an Energy Efficient Mortgage.

Have a Home Energy Rating Systems review done on the property.
A HERS rating is conducted by a trained energy rater with a cost between $100 to $300 (which can be negotiated between the buyer and seller or financed with the mortgage). The rating ranges from 1 to 100. The higher the score the more energy efficient the house. The score rates the following:


Recommended cost-effective energy upgrades.

Estimates of the cost, annual savings, and useful life of upgrades.

Improved Rating Score after the installation of recommended upgrades.

Estimated annual total energy cost for the existing home before and after upgrades.

The HERS rating is sent to the lender.

The lender evaluates the rating
At this point, one of two things can happen.

The home can qualify for energy improvements, thus the lender puts the extra funds into escrow for the improvements, you close on the house, move in, and then the improvements are completed, paid for out of the escrow.

Or if the house already qualifies as an energy efficient home, then your debt-to-income rations can be stretched if needed, you close on the house and move in.

There are several versions of the EEM, some even allowing 100 percent loan to value financing (i.e., zero down payment financing). Check with your loan professional for a list of programs that meet the EEM criteria.

Published: November 4, 2005

Radon Gas Still Invades U.S. Homes

It seemed about 10 years ago you couldn't open a real estate section in a newspaper without seeing an article about radon -- a colorless, odorless, radioactive gas -- that is the second leading cause of lung cancer in the United States. Radon dissipates to harmless levels once outside, however, it can cause life-threatening vapors when locked in your basement. The gas can enter through underground areas, such as crawl spaces, gaps between basement floors and walls, sump pumps, and the water supply.

The Environmental Protection Agency has recognized the public's lackadaisical approach to radon, which has spurred the agency to launch a new National Radon Strategy on the heels of a National Radon Health Advisory issued by U.S. Surgeon General Richard Carmona. The Chief Physician pointed out on the group's website that "radon gas in the indoor air of America's homes poses a serious health risk. More than 20,000 Americans die of radon-related lung cancer every year. Millions of homes have an elevated radon level."

EPA's Strategy carries the header "Reinvigorating National Attention and Action on RADON," and points out several national action steps, including the testing of all 100 million homes throughout the country. Nearly 20 percent of the dwellings have been tested already.

As you consider testing your own house for this silent killer gas, the National Environmental Health Association provides several questions to ask a potential vendor interviewing companies:


Will the contractor provide references or photographs, as well as test results of 'before' and 'after' radon levels of past radon reduction work?

Can the contractor explain what the work will involve, how long it will take to complete, and exactly how the radon reduction system will work?

Does the contractor charge a fee for any diagnostic tests? Although many contractors give free estimates, they may charge for diagnostic tests. These tests help determine what type of radon reduction system should be used and in some cases are necessary, especially if the contractor is unfamiliar with the type of house structure or the anticipated degree of difficulty

Did the contractor inspect your home's structure before giving you an estimate?

Did the contractor review the quality of your radon measurement results and determine if appropriate testing procedures were followed?
Compare the contractors' proposed costs and consider what you will get for your money, taking into account: (1) a less expensive system may cost more to operate and maintain; (2) a less expensive system may have less aesthetic appeal; (3) a more expensive system may be best for your house; and, (4) the quality of the building material will affect how long the system lasts.

Keep in mind there are certifications radon testers can attain which provides a basis level of education protection for the consumer. With that in mind, the Association recommends that the proposal and estimate include the following:


Proof of state certification and/or professional proficiency or certification credentials.

Proof of liability insurance and being bonded, and having all necessary licenses to satisfy local requirements.

Diagnostic testing prior to design and installation of a radon reduction system.

Installation of a warning device to caution you if the radon reduction system is not working correctly.

Testing after installation to make sure the radon reduction system works well.

A guarantee to reduce radon levels to acceptable levels or below, and if so, for how long.
The National Radon Safety Board operates an online service provider database that makes the search for a radon testing/mitigation company an easier task. Consumers can search for certain professional designations, such as Measurement Specialist (RMS), Measurement Technician (RMT), and Mitigation Specialist (RRS).

For more information on radon gas and its effects on your health and home, visit the following websites:

Environmental Protection Agency

Centers for Disease Control

National Environmental Health Association

National Radon Safety Board

Published: October 28, 2005

Real Estate Bubble: A Self-Fulfilling Prophecy?

There are plenty of naysayers about the real estate market and its unprecedented growth. Las Vegas-based ReviewJournal.com, for instance, has given cyber-print on a report by Doug Fabian, president of Fabian Wealth Strategies and Josh Lewis, first vice president at Santa Ana, Calif.-based Stearns Lending. The report, "Boom to Bust," says the following issues about current homeownership points to a possible bubble:


Non-owner occupants are now buying more than 25 percent of all homes.

Households are allocating a greater percentage of income to housing than ever before.

More houses are being purchased with no down payment. People are buying primarily because of the expectation of appreciation.

The majority of today's loans involve some combination of adjustable-rate mortgages, interest only or negative amortization.
The report states, "This layered risk will result in a major increase in foreclosures, which will bring the total housing market down in value." Unfortunately, this report brings up nothing new: people have been buying real estate for decades in anticipation of appreciation; also, during those years, households have been allocating a greater percentage of income to housing; and zero percent down payment mortgages have been around for just as long -- all of these factors have been true for the last 20 years.

Now take this report and compare it to the 2nd Quarter 2005 report issued by the U.S. Department of Housing and Urban Development on U.S. Housing Market Conditions and you see a different picture:


The housing sector continued to be a major contributor to the U.S. economy during the second quarter of 2005.

New records were set for single-family permits, new home sales, and existing home sales.

Interest rates remained at less than 6 percent, but the challenge to affordability for new homebuyers grew.

Compared to the most recent quarter, the median sales price of an existing home rose by 10.3 percent, and was 13.7 percent higher than a year earlier.

Compared to the second quarter of 2004, permits for new homes were up 2.1 percent;

Construction starts were up 4.6 percent; and

New housing completions increased by 4.7 percent.

Sales of existing homes and new single-family units rose, by 4.6 percent and 10.2 percent, respectively.

Permits and new starts for multi-family units slowed after the first quarter of 2005, but remained stronger than in the second quarter of 2004.
So why all this good news on the housing front -- basically, the economy is growing. And that, my friends, is why you have to second guess the concept of a bubble in the real estate market.

We've become accustom to the use of "bubble" because of the drop in the stock market of 2001, following unprecedented growth in several exchanges. The difference is that the stocks that inflated the bubble on the stock market were based on the founding of companies on investment money in hopes of finding the next internet-based fortune not on the actual production and profit-making of consumer products.

The inflation we are seeing in the housing market is because of economic growth, more jobs, population growth and the local jurisdictions not providing enough housing for this growth. It's pretty simple -- if you grow the economy, you must grow the housing base. However, in the last five years, metropolitan regions have taken the slow growth or limited growth approach to providing housing instead of pushing for more affordable housing in high density projects.

When the economy slows in any given jurisdiction is when you'll see trouble in your real estate market. For instance, in the Washington, D.C. area, home to the hottest employment growth in the country, the region is projected to create more than 82,000 jobs in 2005, according to the Center for Regional Analysis at George Mason University. However, the Center points out local builders are only allowed to put up about 35,000 houses per year.

If you're bringing in 50,000-plus new jobs into an area every year, but only build 30,000 houses -- is that a bubble or a true reflection of the supply and demand of housing? You be the judge.

Published: October 21, 2005

One-Stop Shopping Serves Consumers and Real Estate Companies

Gone are the days of single-product real estate companies. The company that offers only sales support and consulting for consumers is a company that will have a difficult time competing in the future real estate industry, according to a study from Clareity Consulting in Scottsdale, Ariz.

"With margins becoming tighter in the real estate brokerage community, the revenue and consequent profitability derived from the brokerage fee alone will be insufficient to remain in business," states Clareity's report titled "Broker's Survival Guide: Building Ancillary Relationships."

Clareity provides a wide variety of services to multiple listing services, real estate associations, brokers, franchises, and software and service companies that serve the residential real estate market. The company has been in business since 1996, when MLS-executive Gregg Larson co-founded the company after working with some of the country's largest MLS providers.

The Broker's Survival Guide, one of several reports the group has written in the last 12 months, says volumes about the evolution of the American real estate brokerage firm. "Brokers' overarching strategy must include driving revenue from the attendant ancillary business, inclusive of: mortgage, title, home protection, etc.," the report says. "Creating partnerships, joint ventures, and/or marketing agreements with select service providers, supported by the resources of the brokerage company, will prove to be evermore imperative to retain profitability margins, business growth, and even survival."

Fortunately for real estate companies, the harried pace of life makes the above services shift desirable to consumers. The National Association of Realtors released a study years ago that stated a majority of consumers would actually pay more for services provided by one source because of the convenience it provides.

In support of its supposition, Clareity quoted a recent poll, conducted by Harris Interactive, that asked the question: "If a company offered to set up a simplified, one stop shopping process for you in which they provided all required services, how strongly would you consider this process?"

The majority surveyed said they would strongly or somewhat consider a one-stop shopping company:


47 percent would consider strongly

36 percent would consider somewhat
Only a mere 3 percent said they would not consider at all.

Broker Survival quotes Steve Murray, co-editor of industry newsletter RealTrends as saying, "Without ancillary businesses like mortgage and title, many big companies would shut their doors." According to Mr. Murray's group, "The majority of the time, when an agent makes a recommendation on which vendor to use, the consumer will follow that recommendation."

The one-stop shopping concept isn't limited to real estate, of course, just take a look at the local grocery store. All in one stop, you will find groceries, of course, but also photography, pharmaceutical and now banking services.

Online, the concept is even used in greater regularity -- large retailers join forces to sell services and/or products created by other companies. For instance, Swedish furniture manufacturer Ikea makes affordable furniture -- not kitchen appliances. On their website, you can not only purchase and order installation of their kitchen cabinets, you can also purchase kitchen appliances from another company -- all delivered by yet a third company.

Travel sites regularly tout airline, train, cruise line, auto and hotel accommodations in the same location, sitting in the same chair, clicking on the same mouse. For the busy consumer, seeking a good deal and saving of time, the era of one-stop shopping in real estate is also making it easier for the consumer to get through the transaction.

Not only are you now able to get a house through your local Realtor -- but also access to mortgage, title insurance, home warranties and a plethora of other services that the consumer used to have to shop several companies to acquire. While it's a selected few who offer these services, it appears that in the near future only the ones who do will actually be in business.

Mr. Carr has covered real estate since 1989. He is the author of "Real Estate Investing Made Simple." Got a personal real estate issue? Questions can be posted at Anthony's blog.

Published: October 14, 2005

Real Estate Careers Cost More Than You Think

The real estate sales industry has seen an amazing amount of growth over the last several years as it has morphed into a multiple services industry, rather than simply a sales services business.

Any time an industry experiences amazing growth, you'll find a lot of people move to it to get into the flow of money. The mortgage industry underwent this type of amazing growth in the 1990s and into the 2000s when interest rates dropped into the 5's and 6's from the low teens in the 1980s.

When you can drop your interest rate from 12 to 6 percent, everyone is going to get in line to refinance, which is what happened ferociously during the last 15 years. Mortgage companies hired like crazy. Top loan officers even left their current companies and launched their own companies. Fortunes were made. When everyone refinanced, guess what -- some of those fortunes went stale. The need for more loan officers dissipated and online transactions removed the need for as many mortgage professionals.

The same happened to the real estate industry through the 1980s. The membership rose to nearly 1 million nationwide. Then the early 90's hit, the recession and the drop off began -- down to about 600,000 Realtors in 1995 -- then it turned yet again. Now, 10 years later, the National Association of Realtors has the highest number of members it's ever had.

Real estate is the industry today (even in the face of leveling markets across the country).

So what does it take to really carry on a successful real estate business? It depends. Getting started is the easiest item to calculate. In the Washington, D.C. area, it's about the same for most agents to get into the business. Recruiters here include a sheet with the projected costs of getting started. Albeit, a couple of thousand dollars, it doesn't all have to be paid right up front. Thus if you're wanting to stay in business and hold on to your day job, you can stagger when you pay out the start up costs.

The investment of conducting business, however, depends on your level of commitment to the endeavor. Those who try their hand at a part-time career end up paying out a couple thousand dollars per year, hoping to net enough to pay their expenses and have some profit at the end of the year.

For top producers, it reaches into the tens of thousands of dollars per year just in office and marketing expenses, not including staff and a buyer agent team. Other expenses include insurance coverage in your state, the local and state association charges, and what you determine you're going to spend on business setup.

Below are a few of the charges you can expect if you want to start your career. While the pricing may differ a tad from state to state and jurisdiction to jurisdiction, the categories will generally remain the same. What I've done is provided a range of costs for several items below.

Start Up

School & test: $330
Each state requires a license and you must attend a certified school to attain this. The charges will differ per school.

Business cards: $25
These are for basic cards. Color with your photo may cost more. If you don't order these, you're not really serious.

Training: $100 - $200
Some companies offer in-house training for free, others for a small fee, still others rely on the local association to provide training for your. There's usually a small fee for this service to cover materials.

Trade Association, lockbox services: $400 - $1,000
This also differs according to your local association charges. Your association services will reflect the cost of membership.

Errors & Omissions insurance: $500 - $700
This is a policy you'll pay for every year you're in business. It's a policy to protect you from making, well, errors and omissions in your business when dealing with the public. Be careful about the deductible and ask to read the fine print. Some have no deductible (and cost a bit more each year) while other policies are cheaper up front, but leave the agent responsible for the first $5,000 or $10,000 in damages.

MLS application fees and charges: $400
There are set up charges, then either a monthly or quarterly fee to help maintain this co-op program.

Miscellaneous business set up expenses: $500 - $1,000
This is determined by your own personal plan. Do you need new clothes, PDA, calendar, computer, office supplies, etc.? If you're counting on the office to supply some of these items, be ready to talk to your manager first. Some offices supplies this for agents, others don't.

Total: $2,255 - $3,655

Once you're up and going, then you have regularly scheduled expenses you'll have to pay. When you're running your own business, keep in mind that what the company used to pay for in an employer-employee situation, you now must cover month in and month out as an independent contractor (self-employed).

Ongoing (annual expense):

Monthly mailings: $2,400
This is referred to as "farming" and quite frankly, not all agents carry this out. It's amazing to me how many agents are just waiting for business to ring in on the phone. If you want to build a business, you have to let people know you're in business. The above cost is minimal. Top producers mail to tens of thousands of prospects each year and invest even more.

Networking memberships & events (chamber, network groups, etc.): $500
Again, this is the cost of letting other business people know you're in business. Most of the cost above is for the networking events -- breakfasts, mixers, trade shows, etc.

Cell phone (2,500 minutes, minimum): $1,800 - $2,400
The front-line weapon of today's real estate agent. You're going to need the best plan you can afford.

Website: $500 - $1,000
Some companies offer some sort of web presence (a page, etc.) and it can be free. For a bona fide website, include the above as a minimal expense.

Errors & Omissions insurance: $500 - $700
The policy is usually negotiated through your company. You may be able to get a policy discount through your trade association.

Trade Association memberships: $400 - $1000
For the trade association near you, visit www.Realtor.com and click the link at the bottom of the page.

Office expenses: $3,000
This will be a personal choice, depending on your use of technology and mailings, etc. However, you still need to feed paper into the printer, use paper clips, ink pens, etc., along with various other marketing materials, such as open house brochures, property packets, etc.

Car expenses: $4800
This could be reflected in either a lease, payment or upkeep (tires aren't cheap); and you will be living in this vehicle with your clients.

Gas: $3,000 (based on $3 per gallon; 1,000 gallons)

Total: $16,900 - $18,800

This is a base line of expenses that you'll need to maintain just to be in a full time business. Your expenses will fluctuate according to how much you want to market yourself. Thus, if you want to make $50,000 in this industry, you'll actually need to make about $20,000 more than that to just cover your business investment each year. The industry suggestion is 15 to 25 percent of your income should be used to market you and your business.

One final note, the above numbers don't include your tax expenses and any services you may hire out (assistants, clerical work, etc.). Also, for the self-employed, you must pay for both sides of the Social Security tax, which doubles your rate from 7.5 to 15 percent right off the top. (In an employee environment, the employer pays half of this tax.)

Published: October 7, 2005