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When electricity prices were low, it was unnecessary to justify the upfront expense of cash required to install photovoltaic equipment, solar water heaters and similar equipment. The reason was simple to understand - it would simply take too long to recoup the cost of the equipment in the form of lower energy bills.

But that was then. As energy prices continue to go up, the amount of time required to recoup the upfront cost goes down. In addition, a number of state and local tax incentives make it even easier for homeowners to go solar and save money right away.

Photovoltaic systems have also come a long way. The costs of installing solar panels is still high, with a typical two kilowatt installation of solar panels from OVR Solar costing about £10,000 / ($20, 000) in most cases, but special tax incentives and long term energy savings can help homeowners recoup those upfront costs faster than ever before.

Encouragement for our governments is now forthcoming. This tax savings can help eligible homeowners recoup some of the costs of installing solar panels and solar water heating systems up front, in addition to the energy savings they will enjoy down the road.

Any homeowner considering the installation of a solar system should be sure to check with his or her state and city to determine what types of tax breaks are available. It’s sensible to look into what help your local authorities are willing to provide. Just Google it to find out what help is available to you.

The amount of time required to recoup the entire cost of a solar panel roof installation will vary according to a number of factors, including the cost of the materials and installation, the availability of tax rebates, tax breaks and other incentives, and of course the price of traditional forms of energy.. However, as the prices for heating oil, gas and other forms of traditional energy continue to soar, so will demand for alternatives

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Adjustable rate mortgages can be very different than fixed rate mortgages.
Sometimes people can use these terms interchangeably in casual conversation.
A loan that is “fixed” for 5 years and then becomes adjustable after that can be called:

-a 5 year ARM (adjustable rate mortgage)

-or a “5 year fixed” by someone else

The traditional mortgage loan was the 30 year fixed loan. The rate on the loan did not change at all over the course of its 30 year term. The interest rate on day 1 was the same as the interest rate on the last day.

This kind of loan gives you the security of a predictable payment.

There are traditionally two drawbacks to a fixed rate loan: higher rates and the fact that people move.
A 30 year fixed loan generally has a higher rate than a 1 year fixed loan. The longer a loan is fixed for, in general the higher the interest rate. In recent years the difference between these rates has narrowed a lot to where they aren’t that different at all.

The second drawback is that people with a 30 year fixed are unlikely to live in the same property for 30 years. When they move they will need a new mortgage, and they will have to get what the prevailing mortgage rates are when they apply. It is usually not possible to have a mortgage that is portable and can be moved from one property to another. So when you get a 30 year fixed, remember that unless you stay put in that property for 30 years you will likely have another mortgage in the future at a different rate.

Adjustable Rate Mortgages Explained

An adjustable rate mortgage generally behaves in the following way:

-it is fixed for some initial period (it can be for 1 month, 5 years, etc.)
 -after the rate stops being fixed the loan then becomes "adjustable"
 -it usually adjusts according to an "index" which is published by a third party, such as the LIBOR index
 -the rate is usually the index plus a "margin" which is the lender's profit
 -as the index rises, your rates will rise with it
 -as the index lowers, your rates should fall with it
 -the interest rate can change at a timed interval - it can change once a month, once every 3 months, once a year, etc.
 -each time the loan changes there can be a "cap" that defines the maximum change allowed each time the interest rate changes
 -there usually is also a lifetime cap to protect you from spikes in interest rates - this is a form of protection

Why People Use Adjustable Rate Mortgages

Adjustable rate mortgages are usually used by people for the following reasons:

-the mortgage rates are generally lower for adjustable rate mortgages than for fixed rate loans

-people who expect to be in a property for a relatively short time frame - if you’re going to live somewhere for 2 years, than a loan that is fixed only for 5 years may work for you

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When shopping for a mortgage loan, every lender will have different rates, fees and points for each loan program. When shopping for a mortgage loan, it is important to understand the three components of a Rate and Fee Quote: (1) Premium Rates (2) Lender Fees and (3) Discount Points.

A Premium Rate offer is any interest rate above the market rate (referred to as the “Par Rate”). While the Par Rate changes constantly during the day, most lenders will commit to a specific Par Rate early in the day. If the Par Rate is 6.00%, the lender will only earn revenue if they offer you a rate above Par (for example, 6.25%).

Lender fees are charged for services performed directly by the lender, which may include Processing Fees, Underwriting Fees, Origination Fees, etc. These fees are charged to offset the cost of processing, closing, and funding your mortgage loan.

Discount Points often represent the largest fees associated with your mortgage loan as one point equals 1% of your loan amount. If you are applying for a loan amount of $350,000 and pay 2 Discount Points, the Discount Point Fee would be $7,000. Borrowers may use Discount Points to obtain rates below the Par Rate. For example, if the Par Rate is 6.00%, a 5.75% rate would indicate that the Borrower will have to pay Discount Points.

Factors to Consider
Every lender provides multiple combinations of Rates, Fees, and Points across a variety of different programs. All of these choices can become overwhelming when trying to decide between different programs, rates, and fee packages. To limit the possibilities, it is often helpful to answer a few key questions:

• How long do you expect to have this loan? Consider the probability of relocation, moving, or refinancing when determining your timeframe. Think in terms of 5 and 10 years.
• Do you have the available cash to pay additional fees now to lower the interest charges later? Be sure that paying upfront fees is the best use of your money. For example, paying higher fees or points for a lower rate may not be a good use of cash while carrying high credit card balances.

If you expect to have the mortgage a long time, paying points to reduce the rate makes economic sense because you are going to enjoy the lower rate for a long time. If your time horizon is short, avoid points and pay the higher rate because you won’t be paying it for long.

If you plan to have your loan for 5 years, paying 1 Discount Point on a $350,000 loan will cost you $3,500 upfront while saving you $88 a month. After 40 months of savings, you have recovered your upfront cost and will benefit from the lower rate. If you stay in the loan for 10 years, you will have created an additional $7,060 in interest savings over the life of your loan. Just like interest, points are 100% tax deductible in the year you pay them.

The second factor is your opportunity cost. What could you do with the money if you didn’t use it to pay points? Even if you expect to be in your house a long time, there could be other uses for your money that take precedence over the long-run savings from a lower interest rate. A useful way to pull these factors together is to look at the payment of points as an investment that yields a return that rises the longer you stay in your house.

Check out Greenwood Capital
For specific analysis of available interest rates, discount points, and fee packages, you can visit our website at GreenwoodLoans.com. Or select “Interest Rates” on the top navigation toolbar to view our current interest rates which are updated daily. Request a custom Rate and Fee Quote to have a Mortgage Loan Consultant provide a ‘lock-able’ interest rate with associated lender fees and closing costs for your review via email.

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The popularity of “exotic mortgages” has the media in a feeding frenzy that the lenders are creating the much bemoaned real estate bubble.

If there is a bubble, it has less to do with financing than with stories of fast riches in hot real estate markets. Yes, the easy money loans have helped some borrowers buy beyond their means. And yes, the exotic loans can act as timebombs when rates spike higher. But the loans are no more the cause of a speculative real estate bubble than a better golf club helps Tiger break par. They are simply tools.

I beleive the exotic loans are good tools for borrowers who know how to use them. Interest only payments allow a borrower to pay a smaller payment when cash flow is low, and pay down principal in better times. These loans actually reduce the risk of loan default, because default only happens when a borrower can’t make their monthly payment.

Therefore any loan that allow this kind of payment flexibility should be seen as a positive for loan quality and stability, not riskier?

Along this same line of reason, an Option ARM - or the extra hybrid, negative amortizing, low payment loan is even more secure. Option ARMs allow a borrower to pay even less than the interest accrual on the loan, with the difference being added to the princiapl. Paying these uber-low rates is even easier on the borrowers monthly cash flow, so the default risk is further reduced. If interest rates spike, the payment does not change, a minimum payment is locked in for several years.

The experts and the media are having a field day with these loans, and few industry insiders have been defending the popularity of the products.

The consumer clearly understands the value to interest only and exotic payment mortgages, this is why they have become the most popular loan options. But few consumers are being interviewed to defend why they choose these loans. Why the media witch hunt?

Simple, the headlines of a real estate bubble is much more exciting than writing about how new innovations in lending are helping Americans afford the Dream better.

Bob Waun , Founder & CEO

bwaun@vacation-finance.com

As a VP at Paramount Bank, and while at Wells Fargo, Bob innovated lending for Condo Hotel projects. He holds a Master’s degree in finance/economics and BBA in finance from Walsh College and a MI Real Estate Broker’s License. He has personally lent over $750+ million in residential loans, and over seen operations lending $1+billion. He has been a professional guest speaker and taught numerous courses/seminars on real estate finance.

He managed controlled business relationships for a national real estate brokerage in MI and OH, held top sales honors for Wells Fargo in 7 states. Bob has a 17 year track record of cutting-edge innovation in the mortgage finance.

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Given the current interest (dare I say hysteria) associated with investing in dirt and buildings, I thought it might be interesting for our readers to have a quick, dirty manual on real estate valuation. My perspective comes from years in the industry as well as some time learning at the knee of some of the better real estate minds in academia.

I will separate (to some degree) investing in one’s residence, for consumption, from investing in real estate for fun and profit. The reason for this separation is that much of the utility or value of one’s home is locked in the pleasure one gets from living in it, or consuming it. Although there are certain ego strokes to owning large buildings, an edifice complex - if you will, the value associated with land, apartments, office buildings and warehouses is locked in the cash flow they provide or will provide. [That edifice complex comes in to play with large, trophy assets - I wouldn’t expect any of our readers to be buying the TransAmerica Pyramid or the Sears Tower, but there is an interesting argument as to why those buildings deserve premiums over their nearby competitors - that discussion will have to take place at another time.]

The first basic principle to understand is that any asset is only valuable to the degree to which it will provide cash flow to its owner. It is important to see office buildings, not as office buildings, but as rent creation machines. One should see land, not as dirt, but as an option to build and rent out or sell - and thus, create cash flow.

‘But, JS, how can I decide what to pay for those cash flows?’ And ‘JS, what if the cash flows are unpredictable or are hard to estimate?’ I hear your questions, and they are good ones. And that is why there are different ways to assess the value of real assets.

There are four basic ways to approximate the value of a building or piece of land. There is the Discounted Cash Flow method, or DCF, there is the Cap Rate method, there is the Replacement Cost method and there is the Comparable method. Each one has its own advantages and disadvantages.

DCF

Discounted Cash Flow analysis or DCF analysis is not unique to real estate; in fact, it works with most any capital asset. DCF is the process of forecasting cash flows forward for some realistic period of time (any investment banking analyst will have done so many 10-year DCFs that he or she will be seeing them in their sleep) usually five or ten years and then discounting those cash flows back to the present to find the current value of the building. I am not going to get in to the ins and outs of choosing the appropriate discount rate (but maybe one of my fellow columnists will) but suffice it to say that the appropriate discount rate should take in to account the relative surety of the future cash flows (or more precisely, the risk associated with the cash flows specific to this asset). The cash flows include the rents or the cash that will be spit out as well as the terminal value (or the value that the building will fetch at a sale (less transaction costs) at the end of the analysis). Below is an example of a DCF analysis. Notice how one might value the building very differently depending on one’s discount rate. Assume that the asking price for the building is $150 - perhaps this wouldn’t be such a great investment. Building a simple model on excel and fiddling with rent flows and terminal values will show how sensitive these analyses are to even small changes.

The advantages to this type of valuation are that if you are relatively sure about the future cash flows and understand the true cost of your capital as well as the correct discount rate for this type of asset, then one can get a good idea of what to bid or what you’d be willing to pay for an asset. Of course, the disadvantages are that if someone can accurately predict anything for the next ten years, I want to meet them and buy them anything they want - they are worth my weight in gold (no small number I assure you). Also, choosing the right discount rate is an art and not a science, as such, it is not only difficult, but it is also prone to be tinkered with. Or in other words, many of my colleagues (and JS is not to be held out as better than anyone else) as well as myself have worked backward to get to the asking price. Or we have done the model and then chosen the discount rate in order to arrive at a value that will in fact make the building trade.

In general, I don’t favor this type of valuation. It is too sensitive to judgment / errors and doesn’t take in to account the vagaries of the market. Additionally, this method doesn’t work well with land, vacant buildings, redevelopment opportunities or any type of asset that has no cash flow or extremely difficult to predict cash flows.

Cap Rate

The Capitalization method or cap rate method is similar to the DCF method. In fact, it is really just a shortcut for the DCF method. The following equation explains what a cap rate is:

First Year NOI Building Purchase Price = Cap Rate

NOI is Net Operating Income. NOI is basically cash flow from a building, excluding debt service and income taxes (not real estate taxes). As an example, if we take the building from the above DCF Analysis and we assume a purchase price of $100 and an NOI of $10, the cap rate is 10%. [$10 / $100 = .10 or 10%]. In order to use the cap rate method to find out what to pay for a building, one only needs to understand two things, the expected NOI for the year after purchase and the cap rate for similar assets (and this usually means tenants) in the market. If you deconstruct this method it begins to look like a DCF valuation - but those similarities and why they may or may not make sense is better saved for a later column.

NOI is Net Operating Income. NOI is basically cash flow from a building, excluding debt service and income taxes (not real estate taxes). As an example, if we take the building from the above DCF Analysis and we assume a purchase price of $100 and an NOI of $10, the cap rate is 10%. [$10 / $100 = .10 or 10%]. In order to use the cap rate method to find out what to pay for a building, one only needs to understand two things, the expected NOI for the year after purchase and the cap rate for similar assets (and this usually means tenants) in the market. If you deconstruct this method it begins to look like a DCF valuation - but those similarities and why they may or may not make sense is better saved for a later column.
In commercial real estate, this is the most common method of quoting property prices or talking about valuations. Brokers will talk about buildings ‘trading at an 8 cap.’ That means that a building sold at 12.5x its first year NOI. Be careful to delineate between ‘in-place NOI’ and ‘projected’ or ‘pro-forma NOI.’ Also be careful to accurately predict capital contributions needed to keep a building leased or lease-able. Because cap rates only take in to account NOI, they often don’t differentiate between buildings that require massive amounts of capital and labor to keep up and ones that don’t.

In general, this is a great short-cut to decide if a building is worth doing more work on. Cap rate analysis is just a starting point in deciding what to bid for a property. But understanding market cap rates (or the average cap rate that assets have been trading for) is a very valuable metric. I would place this as the second best method for valuing real estate.

Replacement Cost Analysis

The replacement cost analysis is exactly what it sounds like. The replacement cost is the cost to recreate that exact asset in that exact location. A good replacement cost analysis will not only take in to account land values and building costs but also developer profit and carrying cost for construction debt.

Although brokers often say ‘this is going to trade below replacement cost’ it is often not the case and also, that is usually not a relevant metric. The replacement cost is a backward looking metric and one that doesn’t take in to account the most important thing, what the building will be able to earn right now. Remember, cash is king.

I will say that in general, this method is unhelpful. The argument that if you buy something under replacement cost, ‘you can only get hurt if no one ever builds here again’ is a shabby one. If you are buying in a vibrant market with high volatility, this argument could have some merit. But unless you are getting an off-market deal or there is some reason to believe that other informed buyers haven’t been made aware of the deal you are exploring, you should ask yourself why you can buy something at below replacement cost.

Comparable Analysis

This is the most important method for valuing any type of asset, but it is especially helpful in real estate. The comparable method or comp method is simply looking for assets in the market that are similar to the one you are acquiring and looking at what they have traded for on a per square foot, per acre or per unit basis. If you are paying more, then everyone else in the market, there had better be a good reason. And if you are paying less, figure out why.

This method is best for ‘hard to value assets’ like vacant buildings, land and residential homes. For those items, cash flows are non-existent or too difficult to estimate. Embedded in this method of valuation is a central theme, that of the efficient market. So long as there are ample bidders and relatively fair market disclosure the prices at which assets have been trading are probably the best indication of their value.

If you have more specific questions about another method or about something in this article, please do not hesitate to write me or post it to http://www.whatbubble.com.

J.S. Silver is a real estate investor and co-editor-in-chief at whatbubble.com. If you would like to post your own comments, or have any financial questions answered by an expert for free or if you would like to just read more on this subject please visit http://www.whatbubble.com. If you wish to re-publish this article, we request you retain all links.

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The summer home buying season is just around the corner and many people or already searching for a new home. When browsing the selection on hand, beware of the 10 to 20 year old homes.

Why?

Simple. The 10 to 20 year range is the time that most of the mechanical systems in a home are nearing the end of their life cycles.

The national average for people selling their homes is around 7 years. That means a lot of people are selling in their homes after living in them 10 to 20 years. There are many sellers who know that it’s about time to start replacing water heaters and HVAC units and they’d just soon the new buyer be stuck with those expenses.

Shingles also need replaced in this time frame. Just because your shingle has a 20 to 30-year warranty, doesn’t mean it will last that long. Besides, they have a pro rated warranty and chances are if it’s over 10 years old there isn’t much left on the warranty.

In the South, a 20 year shingle will normally last between 12 and 15 years before it need replaced, barring any hail storms or other natural disasters.

A professional home inspector can alert you to these costly components. Beware though, most state and national home inspection SOP’s do not require the mention of components at the end of their life cycle. Ask the inspector you hire if he/she mentions components that are at the end of their life cycle. Also ask the inspector if he/she will put the age of these components in the report.

Another item to watch out for is wood siding. Composition wood siding has had its issues also. I’ve even seen Cedar plank siding rotted after 13 years because it was never maintained. A fresh coat and some wood filler can make old rotted siding look pretty good from a distance. Buyer beware.

It’s a huge bummer to move into your ‘new’ 10 to 20 year old home only to find out that the furnace and roof need replaced this year and then next year the water heater and A/C go out. It happens every year, just make sure it doesn’t happen to you. You’ve been warned!

You have permission to reproduce, copy or distribute this article as you see fit as long it remains intact including the resource box below and all links remain live.

Donald Lawson is a Houston Texas home inspector. Licensed in Texas (#5824) and Oklahoma (#454), he currently owns and operates V.I.P. Home Inspections. You can also find more information on Houston Texas Real Estate by clicking on any of these links.

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