Recently, NBC Nightly News did a segment on smoke detectors discussing “ionized vs. photo-electric sensor” smoke detectors. You can view this video on MSNBC at any time but the main difference in the two detectors is that an ion- ized detector responds better to fast, quick starting fires while a photo-electric sensor smoke detector responds better to slow, smoldering fires. There are also “dual” smoke detectors that have both technologies. We encourage you to have both in your homes for your best protection. Should you have any questions, please contact McGrath Real Estate Services, Inc. (703)709-2264.

It was a very vocal year in the world of taxes with Congress taking the issues down to and past the end of 2012. As with any controversial subject, we find a wealth of good and helpful information but also plenty of inaccurate information circulating through the media. Here is a brief overview of a few of the provisions that you should consider as you review the tax impact of selling your home.

- 3.8% Medicare Surtax – Excise Tax on Investment Income (For Some, Not All!!)

• Of all the tax changes in recent years, this seemed to get the most publicity from the real estate investor crowd. The Medicare Surtax was placed into law as one of the major revenue raisers related to Healthcare reform. It comes in the form of an additional 3.8% tax on investment income for taxpayers who have total income in excess of certain thresholds. If you have investment income and your total income is in excess of $250,000 as a joint couple, you could pay an additional 3.8% on your net investment income. For single taxpayers the threshold is $200,000 and for Trusts and estates the threshold is only $11,650. That being said, the surtax does not apply:

1. To the gross sales price when you sell your property. This is not a sales tax or transfer tax and only applies if you have a taxable gain from the sale of your property. If you do not have a gain from the sale of your home or other investment income, the tax does not apply regardless of your other forms of income.
2. To gains that are excluded from income under the Primary Residence Exclusion (2 of 5 Rule.) If you are selling your primary residence and meet certain conditions, you can exclude up to $500,000 of gain if you file jointly. Single taxpayers can exclude up to $250,000. Also, for those in the military or state department, there is a possibility to extend this testing period for an additional 10 years.
3. To taxpayers if their total gross income (including the gain) is less than the threshold amounts. A single taxpayer makes $100,000 in wages and sells her investment home for a gain of $50,000. Because her total income of $150,000 is less than the single threshold amount ($200,000), she will not owe the additional 3.8% surtax on this gain. She will still owe her normal capital gain and state tax rates on the gain but avoids the surtax.

-Increased capital gains rate (For Some, Not All!!)

• If you are lucky enough to have a taxable gain from the sale of your investment property or even better, a gain in excess of the home sale residence exclusion amounts for primary residences then generally speaking, that gain is taxed as a capital gain. Long-term capital gains are taxed at a preferential rate of either 0%/15%/20% depending on what tax bracket you fall into. The 20% tax rate applies to the extent your taxable income is more than $400,000 for single taxpayers and $450,000 for those filing jointly. Remember the calculation of cost basis is complicated so be sure you work with a qualified professional to determine your maximum cost basis figure.

-Planning Opportunities – With the complexity of the new Medicare surtax and the increased capital gains tax, planning for the sale of your home is more important than ever. If you aren’t confident you have a good plan for how you purchase, operate and exit your property tax efficiently then we need to talk! Here are a few of the planning vehicles we use with our real estate investors (regardless of size and complexity) to maximize the benefits related to their rental homes.

• Like-kind exchanges
• Installment sales and timing of sales
• Primary residence exclusion planning
• Cost basis analysis
• Cost segregation and depreciation planning
• Passive loss planning
• Charitable Remainder Trusts
• Gifting and inheritance planning

A well-managed investment home continues to be a great investment alternative for those looking to diversify their portfolios and develop a long-term source of cash-flow. You have taken the very important step of using qualified professionals to assist in managing the operation of your rental. With intentional planning on the tax side of life, we can help you keep as much of your investment gain as possible! If you have questions related to any of the information provided above or regarding your tax situation in general, please do not hesitate to contact us at jnichols@hueyassociates.com or at 703-437-6269.

Credit Score

The number one indicator of a quality applicant is their credit score. Credit reports contain a history of how one pays his bills, how much open credit you have, and anything else that would affect your creditworthiness. Your credit score boils down all of that information to a three-digit number typically falling between 400-800. We go over the credit report with a fine tooth comb, evaluating how many accounts they have open, do they pay on time, have they had any judgments filed against them, bankruptcies etc. The credit report really shows us how a prospective tenant treats their financial responsibilities, which ultimately is of the utmost importance. We also compare high balances with credit limits. How much of their available credit are they using? If it is 90%, they may have a weak credit score despite no negative accounts. If it is 10%, they may have good credit score even with small number of accounts. We search for anything that would raise a red flag and cause concern for you renting to the applicant. On top of that, those who are financially responsible tend to show responsibility in the way they care for their homes and families, another good sign.

We use a different scale then the FICO recommended score as a way to secure an even higher quality tenant. The scale McGrath Real Estate works off the following:

EXCELLENT: +800 (anything approaching or above)

GREAT: +750

GOOD: +700

FAIR: +650 (further review advised)

POOR: +649 (anything at or below)

Employment & Income Verification

The second most important attribute of a prospective tenant(s), can they afford to pay the rent. We ask that all prospective tenants provide paystubs, a W2 or an offer letter that verifies income. Next we call their place of employment and speak to either their direct supervisor or their HR department to confirm they are still gainfully employed and they are in good standing at the company. Lastly we compare their income to our income qualifications. We use a qualification ratio of 31%. We want to make sure that the prospects can truly afford to rent your home. This rate is actually higher than some lenders work off. The math breaks down like this:

Monthly Rent = $2,000
31% Rent to Income Ratio
(2000/.31) * 12 = $77,419**
**This is a combined income qualification meaning will we add up to two incomes to meet this requirement, though no more than two incomes combined will be accepted to qualify

Current and Previous Landlord Verification

The last major item that we check is current and previous landlord references. McGrath Real Estate has found that the best reference actually comes from the previous landlord who has no reason to withhold any information regarding the tenants time there. We ask about payment history, if there were any issues/complaints during their tenancy, condition the property was kept in and if applicable pets and their behavior. If the applicant is a currently/previously a homeowner we confirm that they did own the residence via tax records and unless already disclosed, that the house was successfully sold or rented out.

Items NOT Disclosed

It is legal and recommended to use the above objective parameters in your decision to accept or not accept a prospective renter. Federal Fair Housing Law dictates that you cannot discriminate based on race, color, sex, religion, national origin, familial status, and handicap. Virginia also protects from discrimination based on elderliness and some counties in Virginia have also protected sexual orientation. We do not provide you with any of the protected classes information nor in many cases do we even know this information.

McGrath Real Estate wants to secure the best, most qualified tenant for your property as possible. While it truly is impossible to anticipate issues with everyone, digging into the information explained above has been proven very successful. In fact, McGrath Real Estate is proud to have a very low late rent statistic and almost no evictions the last five years! If you have questions regarding our application process please contact our Leasing Department at Leasing@McGrathRealEstate.com.

State (Virginia only)
Virginia continues to see strong improvements in the housing market, due in part to low unemployment in the state and the low mortgage interest rates. In November, the number of Virginia residential sales increased by 12% over the previous year. Historically there will be a drop in December and January with the market picking back up in February. During this same time period, median prices increased by approximately 2% to $235,000 according to the Virginia Association of Realtors. So how does Northern Virginia factor into this?

Northern Virginia (Loudoun, Fairfax, Arlington, Alexandria City, Fauquier & Prince William Counties)

The Northern Virginia area has continued to see a very strong recovery and ranks as one of the best metro areas in the nation for the housing market. In a report put out by the Real Estate Business Intelligence a part of the Metropolitan Regional Informational System (our area’s Multiple Listing Service) the end of year 2012 report shows a 6.94% increase in median sold price, much stronger than the state wide and a 5.12% increase in AVERAGE sold price, a better representation of housing prices than median. Days on market are down again and the percentage of List Price to Sold Price is very high, meaning sellers are getting exactly or very close to what they are asking. McGrath Real Estate has seen an increase in multiple offer scenarios which can result in sold prices even higher than the list price. While financing isn’t easy to get, interest rates being so low have allowed many younger, qualified first time home buyers into the market. Appropriately priced homes get snapped up quickly and inventory is low.

The Future – 2013

McGrath Real Estate as well as the Northern Virginia Association of Realtors all forecast the continued improvement of our local market. Three important national real estate provisions were extended that all help make home ownership more affordable/enticing including:

• The Mortgage Cancellation Debt Relief, which protects homeowners that have mortgage debt forgiven by a lender from paying a tax on the amount forgiven through 2013.
• The Mortgage Insurance Premium remains deductible for tax filers making less than $110,000 through 2013.
• Energy efficiency tax credit remains in effect allowing home owners who make energy efficiency improvements to be eligible for a 10% tax credit (up to $5,000) on such improvements in 2013 (must be primary residence, check out our program for energy efficient windows at a discounted price on our website.)

As discussed in a previous McGrath Quarterly, the metro expansion continues to be on track for a late 2013 opening of the Reston/Wiehle station and the continued expansion into Herndon and Loudoun counties in on schedule. More and more buyers are listing “convenience to public transportation” and “walkability” as main decision points in their home buying process. According to NVAR, 38% of Northern Virginia buyers cited convenience to public transportation as a factor in buying their home. With more towns like Reston, Tysons and the new “One Loudoun” designing their development and redevelopment around the “walkability” and mixed use neighborhoods we expect this to continue to be a trend over the next year or two. If you are interested in learning more about the sales market in your neighborhood or would like a no-obligation sales market analysis please feel free to reach out to McGrathSales@McGrathRealEstate.com.

Quick Search
While using ListingBook you’ll find that everything is clearly labeled, and there are many opportunities to customize searches and investigate the market. First and foremost on the top of the page you will see four tabs designating what type of listing you are searching for (Residential, Lots and Land, Rent- als, and Multi-Family). Most people will be searching in the “Residential” section, so we’ll start there. Next, let’s take a look at the “Status” tab. Most likely you’ll be most interested in the Active competition, but you can also include sold properties to see sales that have been achieved with the criteria you’re looking for. Analyzing these comps will give you a better idea of what value range you might expect for your property in the current real estate marketplace. An important note to keep in mind: “Achieved” refers to the net price the seller was able to receive for a property that has sold/rented in a closed transaction. This is important when looking at Active properties because they do not represent achieved prices, only asking prices.
Next, put in your criteria (area, property type, bedrooms, bathrooms, etc.) An interesting feature is the “Map” which allows you to choose an area on a map instead of by zip code. This can be useful if you’re concerned with proximity to transportation or wish to be close to a certain community or shopping center. While it can be tempting to narrow your search, you could be missing out on unique opportunities you hadn’t thought of before, so keep that in mind while you’re searching!
When looking at your results, note the key at the top of the page. You can order your results by “Status” to more easily see what is available versus what is pending or already been sold. When looking at a full listing, there are several useful tools to help you research the market. The tabs at the top include “Area Sales,” which allows you to research recently closed sales in the same neighborhood and the surrounding areas that are comparable to the property. This is especially valuable because it shows you the price the home was listed for and also the price it actually sold for. The “Loan Report” tab can give you an idea of what mortgage payments you might expect if you purchased the property (this is for quick reference purposes only and not guaranteed). Lastly, “Community Information” can give you valuable insight into the neighborhood, schools, and community make-up. This is extremely useful because this type of information cannot be supplied by your real estate agent (commenting on neighborhoods and schools is against Fair Housing Laws).
Another great use of ListingBook is to keep up with the rental market in your area. All the same searching tips from sales also apply here. You can use this tool to be more adept in the rental market and have a “real time” direct line to our local multiple listings. Seth Mosier, a client of McGrath Real Estate since 2007, says “The information provided by this listing service allowed me to confidently purchase a new townhome quickly. Having read the information available online and an analysis of my family’s finances, it was a quick decision to buy when the home we had our eyes on popped up on the market on a 3-day weekend I was in the region. Plus, thanks to McGrath’s great service, it was easy to get the new home rented out and under a lease.” We have other client success stories and testimo- nials in using ListingBook too! Please feel free to reach out to our Leasing department if you have further questions or comments on ListingBook!

There are certain tasks that all landlords must accomplish such as deciding at what price to advertise your home, determining maintenance to improve showing quality, coordinating showing the property, vetting possible tenants, creating and executing a lease, performing inspections, collecting rent, handling needed repairs and maintenance, preparing end-of-year tax forms, handling tenant requests and issues and determining security deposit issues. These are the basic tasks that all Landlords must accomplish, but what happens if your tenant does not pay rent? What happens if your previous neighbor calls to complain that the lawn is never mowed? What if the air conditioning goes out in the middle of a heat wave?

Choosing a property manager must be treated as a business decision. For a landlord, their home is likely the biggest investment they’ve made in their lives. For the renter, the property is the roof over their head, where their family comes home to everyday. Hiring a professional to balance the needs of both parties, all while acting in the homeowners’ best interest, could undoubtedly be the best decision any homeowner could make.

So you’ve decided to hire a professional, now what? Initial internet research gives you several firms in your area that work in property management. Perhaps you’ve read reviews online to see how others have felt about their services. Now it’s time to sit down and meet with each firm’s representative and decide who is the best pick for you. This is your opportunity to interview them on their firm and the services that they will provide. There are many important aspects of management that you need to know and to help you make your decision, we’ve compiled a list of questions you need to have answered.

General

• How long has your company been in business?
• How many properties do you manage?
• How many staff members do you have and what are their job functions?
• Where are most of the properties located?
• What other properties do you manage in my neighborhood/area?
• What professional organizations do you belong to/participate in?

Cost of services

• Fees – Leasing & Management Costs
• How much is charged for leasing the property?
• What type of advertising/marketing is included in leasing fees? What is charged in addition to the leasing fees?
• What is the management fee while the property is rented?
• Are there any fees charged when the property is vacant?
• What other services provided in the management of my property could be charged for?
• Are any expenses passed through to me? Examples may be legal representation, insurance claims, communication costs, fees for attending HOA meetings, costs for obtaining additional estimates, or fees for coordinating/overseeing major home improvements.
• What if I want to terminate/transfer services to another company? Are there any fees
for doing this?

Management Services

• What does your management service encompass?
• Look for a sense of mission in your discussion instead of a litany of tasks.
• The mission is to pro-actively serve your interest as defined by the terms of the lease
and within the framework of the management agreement.
• Tasks include:
• Establish a good rental rate for your property, and keeping it occupied.
• Collecting the rent in a timely fashion. What are your procedures when a tenant doesn’t pay?
• Handling maintenance or repair calls
• Handling of insurance claims
• Providing accurate periodic financial statements to you. How often?
• Inspection of property. How often? What do they look for?

Maintenance and Repairs

• When is an owner consulted before spending on repairs? Are their limits or policies on how to handle certain repairs and emergencies?
• How does the company ensure competitive pricing of repairs?
• Does the management company have a financial stake in any of the companies it uses for repair and maintenance?
• Does the management company evaluate and re-evaluate performance and pricing on the contractors they use? Do they compete bids?
• Ask if you can, or if you should, use your own, preferred vendors for the property

Documents

• Ask for copies of the various documents in which the management company uses including the Property Management Agreement, and lease forms. Read the management agreement with care and question any portion that is not clear to you. A landlord checklist or handbook can be very helpful in providing you clear expectations on what you need to do to prepare your property for success.

Marketing

• How do you determine what the rent on my property should be?
• Ask for a list of properties comparable to yours in terms of location, size, quality on which the company has rental information.
• The Multiple Listing Service (Previously MLS, now called MRIS) is the best method of outreaching to potential tenants, not only do you broaden your market reach, but you also reach a more qualified tenant pool. At what point does my property get listed on MRIS and what makes my property stand out more then my competitors?
• Does your company work with Foreign Embassies on finding stable, long-term tenants? What other information should I know about renting to foreign clientele?
• How many properties did you rent in the previous year and what were the average DOM (Days on Market) for all of those rented properties? This tells you if the firm is introspective and shows measurable results of their marketing program’s performance and effectiveness.
• In today’s internet savvy world with potential tenants looking for immediate satisfaction for their need to find a home, townhome or condo for rent – it is important that your property is effectively marketed on the web. There are a million real estate websites that do a million different things and reach many different audiences, but some websites are much more effective than others. Does your property management candidate use MilitaryByOwner.com to reach the military? Do they take advantage of CraigsList? Find out what web sites they use to leverage the power of the internet to find a good tenant for you!

Tenant Selection

• What measures do you take to ensure that you are getting a good tenant?
• Most companies verify employment and income, order a credit report as well as check with landlords and current employers.
• What are the income qualification ratios?
• How long does it take to process an application? (This can be a crucial factor in winning/losing applicants for your home over another).
• Ask to contact current or previous clients as references. Also ask for names of former clients who may have returned from their assignments and are now living in the area and could offer useful insight into their property management experience.

Other

• How does your company protect client information, data, and documents?
• Do you shred or throw away documents? How do you protect your computer system data (bank account information, etc.)?
• What measures are taken to ensure accurate accounting of escrow accounts?
• What is the most frequent area of friction that occurs between you and your clients?

The Magic Questions

• Is the firm introspective? What are they doing to measure and evaluate the metrics of success (for you, and for themselves)?
• What is the firm doing to improve?

Once you have determined who your property manager will be, find out what you can do to prepare them so they can be successful for you. Help establish your relationship. This is as important as anything else you can do. Be one of their favorite clients! Then you will have the most productive and profitable results.

Historically, the spring and summer are the busiest time of year in the real estate market. If you break it down, it makes sense; school is wrapping up or is done, it’s warm out making for better house hunting and moving weather and the holiday season is over meaning less traveling and more funds for security deposits or down payments. Rents are highest and days on market lowest at this time as there are more people in the market place searching for homes. After each cycle, McGrath Real Estate looks at the data and determines how the market fared and if we see any developing trends over time.

In 2011, rents rose by 8.5% approx- imately throughout the Northern Virginia area (Loudoun, Fairfax, and Arlington counties and Alexandria, Falls Church and Fairfax cities) and approximately a third of the population was renting. Days on market were down by an average nine days indicating a more competitive rental market. The sales market was finally starting to move with the Washington DC Metropolitan area leading the nation with a 4.5% rise in price gains in the first quarter (source Clear Capital a data and valuation firm). So how have things progressed since then?

The consistent theme thus far in 2012 is the dropping interest rates. Starting the year at approximately 4% interest rates for qualified homebuyers, this number has continued to drop and is currently as low as 3.25% for some buyers (30 year fixed loan). This has stimulated the sales market as purchasing in some areas is actually more affordable than renting. This has caused rent increases to slow over last year.

MCGRATH DOMINATES RENTAL MARKET METRICS– AGAIN: Thus far in 2012, McGrath Real Estate has achieved the lowest days on market across the Northern Virginia rental market for the seventh year in a row, averaging 20.5 days. The industry average was still lower than last year, at 27.3. The rental market is still healthy but has been slowing down in conjunction with the upswing of the sales market and the dropping interest rates.

McGrath also has averaged the highest achieved rents in Northern Virginia from January – September for the second year in a row. This has much to do with our aggressive leading approach to maximizing your annual cash flow through our “Activity Based Pricing” model, which you likely were introduced to during your first meeting with our Marketing Specialist. As a recap, the Activity Based Pricing model follows the fluidity of the market at its purest – as the name indicates, the model bases pricing on the activity and feedback in the marketplace. Understanding demand shifts in the marketplace is something McGrath Real Estate needs to pay close attention to and educate the property owners with our experience and current involvement in it. The recent market momentum leads McGrath to be more “bullish” in our rent projections and in the last few years we have pushed the boundaries of the rents in almost every neighborhood we have listed a property. Why should we price the same as the last one went for? Let’s try a higher price! The success of several years of rent appreciation combined with driving down the time on the market has changed Landlords expectations on what “normal” is. Put in perspective of a bigger picture, in 2005 (only 7 years ago) McGrath Real Estate had the lowest average days on market in our area with an average of 32 DOM. In 2011 we were the best in the same category with an average of 19 DOM. 13 days on average difference doesn’t sound like a lot, but it is more than a 40% difference! Compare our average to the “average DOM” on the rental market for all property managers (In 2005 that average was 47 DOM and in 2011 that Average was 29 DOM). The numbers can break down a lot of different ways, but from this we know that 2011 was much easier to rent a property than in 2005 and McGrath Real Estate continues to provide more value for our clients in the leasing process than any other firm out there.

What if you could reduce your single largest business expense by twenty per cent or more without affecting your revenue at all? When interest rates drop from 5% to 4%, the media reports the drop in interest rates of one percent. Looking from the perspective of a business owner we see it differently. If my rate is 5% and I can replace it at 4% that isn’t just a drop of 1%, it’s a drop of 20% of my largest expense. It has the same effect as a significant rent increase to my cash flow.

Let’s assume in our example that you purchased your house for $500,000 and put 20% down. $400,000 loan payable over 30 years at 5% interest creates a commitment of $373,023 worth of interest! Reduce the interest rate to 4% and you have reduced your commitment to $287,478 and your monthly cash flow has increased by $238 per month.

Virginia polling locations open at 6am and close at 7pm. Voters need to remember to bring a state issued photo identification with them.

Of course there are other issues being voted on, specific to each locality. If you are interested in finding out the issues that will be on your ballot, visit the State Board of Elections website and search by locality.

For more information on voting in Virginia visit the State Board of Elections main site.