Living and Working in Charleston SC

The days of 10% appreciation in Charleston are gone for now.  One of the best ways to get ahead in real estate  with your personal residence is to reduce your interest expense, especially if you have a second mortgage at 8-9%.  Let’s say you have a second mortgage for $40,000 at 9%.  That is exactly $300/mo in interest expense.  If you can discipline yourself to spend less, or earn more, or whatever you can do to get rid of  this expense.  If you have credit card debt, it goes without saying that this has to go first. 

One of the things I really like about companies that promote products related to paying off your  mortgage is that they demonstrate and dramatize that a better life is within reach, financially speaking.  When you actually see the numbers right in front of you that you could be debt free in 11 years, it’s a very appealing thought.  It’s true, you can be.  These programs will work especially well for familes with high interest credit card debt, because if you roll $10,000 of credit card debt into a 9% line of credit, and start applying your pay checks to the LOC, and pay your bills out of the LOC, you could be saving several hundred dollars per month.  So, by all means, visit http://www.u1stfinancial.com/ and watch the presentation.  Set up the LOC as they suggest.  And come up with a strategy to pay off your credit cards, vehicle notes, and line of credit.  Then, once you have the LOC paid off, each time you get rid of a payment, take that money and  put it toward your mortgage.  Use the calculator at http://www.bankrate.com/brm/popcalc2.asp , inputting your scenario.  Have a budget and a plan. 

Since I’m sending you to United First’s website, even though I AM suggesting using the LOC to deposit your paycheck and pay your bills, I also wanted to give you a few don’ts:

DON’T buy their program, unless they can prove that they can beat your strategy. 

DON’T roll your car loan into the LOC unless the interest rate on your car loan is higher than that for your LOC.  If they’re very close, you might be able to come out ahead rolling your car note into the LOC because of the tax advantage, since the interest on the Home Equity LOC is tax deductible.  Just make sure you’re calculating the tax advantage correctly. 

DON’T use the LOC to pay down large chunks of the primary mortgage.  Pay off the LOC at the higher interest rate. 

DON’T Set up the LOC unless you have high interest debt, OR you already have a higher interest second mortgage, or HELOC. 

And some more DO’s.

DO Put off the big screen TV, the new car, the big trip, etc until after you’ve reached one of your milestones.  Preferably until after you’ve paid off your LOC.

DO be very careful with your decisions regarding vehicles.  They’re the biggest cash hogs of all.

DO set up a LOC where you can depost your paycheck, and then pay your bills out of the LOC.  With a couple of qualifiers, IF you either already have a second mortgage OR IF you have high interest credit card debt. 

DO find a trusted advisor that can help you come up with a balanced plan for your future financial success. 

DO pay very close attention to your home purchase.  BUY LOW and SELL HIGH. 

DO put off upgrading to a more expensive home.  Selling and moving are also big cash hogs and just a pain in the neck. 

For now, we’re keeping the conversation to your primary residence.  Once you’ve built equity in your home, you can start looking for better ways to leverage your money.  You may want to continue paying down your mortgage, or you way want to use your equity to get into real estate as an investor.  Or you may want to invest in securities.  Or some combination of all.  The important thing to realize is, as long as you’re in debt and you owe more than you’re worth, you are not only working to enrich your employers, you’re also working to enrich you’re lenders.  When your balance sheet tips in the right direction, then your money is working for you. 

Delaying gratification, planning and discipline is the way to a better future.  Please let me know if I can guide you in any way.  And please let us know about your ideas and successes.  If you’ve found something that works for you, let us all know. 

Whatever your plan, the most effective principle is always to pay yourself first.  Using what’s leftover to invest in your future makes about as much sense as a business calling what’s leftover, their profits.  Professionally managed businesses have profit as their first line of expense, and you should consider growing your balance sheet your first priority.  Too many families are one paycheck away from disaster.  In 1998, I lost a job as part of a reorganization, and the money we had set aside kept us afloat as we got back on our feet.  Another thing that helped was that we chose a 15 year mortgage.  Things were tight sometimes, but it gave us a lower interest rate, and helped a great deal when we were going through tough times.  Cara and I now have our own businesses and the freedom that goes with it, and there is no way we could have made it if we didn’t have money set aside, and if we didn’t have considerable equity in our home.  We’re still getting through growth pains, as with any young business, but we have our foundation in place.  Now, we’re working on getting to the next level where we’re able to spend more time working on our business and less time working in it. 

 Begin with the end in mind.   Have a Plan.  Cara and I want to have the time and money to travel and simply enjoy life, and we knew that we wouldn’t be able to get there working for other people.  Our plan is to build our businesses, and get things in place so we can walk away for two weeks without having to answer our cell phones.  We’re not there yet, by any means, but we’re on our way.  We have a plan, and we’re working the action points in our plan every day.

My best advice is to buy less to start.  Everyone wants the house that is $30,000 more than they can really afford, Cara and I are no different.  When we were shopping two years ago, what we really wanted was $260,000, but we didn’t want to have to pay that much.  So we bought a 30 year old house in Kings Grant for $190k.  Figure that every $10,000 in price is going to cost you $60/month, so if you over spend by $30,000, that’s $180, plus the extra taxes, insurance and utilities. 

Now, that may mean that you don’t have the extra family room, so your kids can have their own area to hang out.  Or you might not have that formal dining room that you dreamed about.  Make sure you know the real costs of that extra 200-300 square feet by the time you look at the whole picture. 

My next best advice is to spend less.  I’m amazed at how many families have huge big screen TV’s, the kind that cost $2000, in addition to the two or three other regular TV’s they have through the house.  Talk to your investment counselor about what that $2000 will be worth ten years from now at 12% annual rate of return?  or 20 years.  If you spend less, you’ll be able to put more money toward your future, whether that’s paying down your mortgage, or working with your investment counselor on your portfolio.  Cars are the biggest cash gobblers.  Think and plan very carefully when it comes to how much you’re going to budget for transportation. 

Buy right for two big reasons You want to position yourself so that you aren’t going to have to move in five years.  Moving is expensive and a huge hassle.  Selling a $200,000 home costs about $15,000, and that doesn’t include getting your home in shape to compete with all the new homes on the market. So, renting for a little longer might be the best option, if it means that you’ll be able to buy the right house when you’re more ready.  The second part of buying right, is to take advantage of whatever the market conditions are.  Right now, buying right means finding a motivated buyer, so you can save $5000-$20,000 in the $150,000-300,000 range.  When the market is hotter, it’s more about timing and selection.  You don’t want the pace of the market to cause you to make a bad choice, so you need to spend more time discovering what you really, truly want.  Getting ahead in a hotter market means positioning yourself for maximum appreciation.  So picking the right house is even more critical.  So, whether you’re buying new or used, find a professional real estate agent that is capable of helping you make these decisions. 

Sell Right – Most of the programs on TV really distort how to make good decisions on improvements.  Be careful how you put money into your home.  I obviously have an agenda when it comes to whether or not to try to sell it yourself.  Just make sure that if you do, that you actually end up saving the commission, not just passing it on the savings to the buyer.  This is a subject in itself, so I won’t go on.  There is a lot to selling right, so I recommend picking a pro, not just someone that happens to have a real estate license. 

Paying  down your mortgage is the best sure bet you’re going to find.  Investing in the stock market sounds good, and it seems like investing at 12% makes more sense than paying down your mortgage that’s at 6%.  Everything is fine as long as the market doesn’t tank, which it could.  It might not, but then again, it might.  Who can tell.  We’re in a war right now that looks like is never going to end. 

Use the Charleston Market to Your Advantage  We’re recovering now from the “irrational exuberance” of 2005, and things are getting back to normal.  We’re on the ocean, have weather to die for, and can enjoy playing outdoors year round.  We may get hit by another hurricane, but it’s decidedly less likely that Florida or the Gulf Coast.  I think this is the best place to live in the world.  Having said all that, if you don’t make the best decisions, all this opportunity could pass you by.  Just because the average appreciation is 10% in a given year doesn’t mean that’s what you’re going to get.  You could get higher, you could get lower.   It depends on your decisions, and possibly on factors beyond your control.  If you don’t use your discretionary cash flow to your advantage, then you’ll do what thousands of Americans have done and refinance, taking the equity from your home to pay off your car loans and credit cards.  Or worse yet, hit a bump in the road and lose your home. 

This is a good time to reflect on what’s in the news and consider the decisions we’re making.  There are lot’s of people in trouble resulting from questionable decisions, often because they didn’t recieve the right advice, or got the wrong advice.  If you can’t count on other people for good advice, then your only recourse is to take it upon yourself to learn how things really work.  I hope you find that this information is a good start. 

www.jdpower.com   provides objective ratings for Charleston’s larger home builders.  They do not, for reasons I do not know, rate John Weiland in Charleston.  They do however, rate John Weiland fairly well in Charlotte and Atlanta. 

The biggest builder that didn’t fair so well is D. R. Horton.  They claim to have drastically improved quality processes, but apparently hasn’t materialized according to independent survey results.  KB homes also doesn’t look too good either.  Centex ranks the best in Charleston, although no mention is made of regional builders, Brentwood or Harbor Homes. 

Having watched  a few dozen home inspections, I can validate the survey.  I’ve not sold a Beazer home, but have sold several Centex built homes.  I refuse to even show KB homes having heard too many horror stories, and the one D. R. Horton home I sold had some finish issues that were basically un repairable without tearing the ceiling out in the master.  Nothing of any consequence has shown up in any of the inspections of Centex homes.  Same with Harbor.  I’ve sold three brand new Brentwood homes, just a fluke.  But their finish process is terrific.  Very responsive. 

A final note, and an admission of an open agenda, please hire a real estate agent if you’re buying new. 

Regardless of what the new contruction sales agent says, track homes are built with slab construction because it is much less expensive than  those built on a crawl space.  That doesn’t make it bad, it’s just that there are pros and cons of both.  Knowing the issues with crawl spaces can keep you one step ahead. 

 Slabs are better in that you don’t have to worry about moisture issues that can come up with crawl spaces.  Depending on site prep mostly, the way the site slopes away from the home,  your crawlspace could have a high moisture content, resulting in several problems.  Cupped floor boards, mildew, even rotting floor members can result if the moisture content under your home is too high.  This usually results from rain runoff collecting around or under the home.  The outside air humidity is already very high here in Charleston, so add just a little extra water, and the humidity is too high.  www.crawlspaces.org does an excellent job explaining the problems, and the most up to date remedies.  I’ll let you get the technical stuff here.  I’m a real estate agent, not a crawlspace expert, so my perspective is more from a real estate and home ownership viewpoint. 

There are a few reasons that make crawl spaces better.  Most importantly, the crawl space provides more curb appeal.  When you look at the house from the street, it sits up off the ground a few feet and has a more textured appearance.  Secondly, the home will be more comfortable in the winter because hot air rises, and the heat is coming from the floor, not the ceiling.  With a crawlspace, making changes to plumbing and electrical are easier, because the first floor is accessible from underneath.  Since our winters are fairly mild and short, this doesn’t come into play to a very large extent. 

Slabs require less maintenance, and make infestation very unlikely.  Having said that, keep an eye on any trim near the ground.  And you’ll want to make sure to keep your grass and bushes away from the house.  Brick moulding and door jambs nearer to the ground tends to rot quickly, so keep an extra coat or two of paint on any wood near the ground.  This holds true for both types of construction, but is more of an issue with slab homes. 

You can get some of the best of both worlds with an elevated slab.  You still have the air conditioning vents in the ceiling, but you have some elevation for curb appeal without the moisture and maintenance issues.  An elevated slab has a block wall that is then filled in with dirt, with a layer of concrete over the dirt. 

A friend of mine, Tom I’ll call him, was very excited about this new business opportunity that involved helping people pay down their mortgages, and significantly reduce their interest expense paying off their mortgages in as little as 8 years without changing their lifestyle.  Tom asked me to come by and watch a video, and we did a little paper and pencil work too.  I did, and told Tom that if I could satisfy myself that this product worked the way the video claimed, that I knew a lot of people that would also benefit.  As a real estate agent, I speak to a lot of people everyday, many of whom are current and past clients.  If the claims were true, they’d have to be fools not to jump right on it.  Not only would this allow me to help a lot of  people, I’d make a tidy commission from direct sales, and from recruiting other sales people. 

I was thinking, “I was a math major for three years at Virginia Tech, and a full time management consultant for two, if this product was really great, all I’d have to do was to see how the numbers worked, and I’d be home free.”  My struggle of starting my own business would be over.  Tom showed me some spread sheets, but the numbers were not all there that I needed to make it work.  I tried to cut and paste them into a spreadsheet, but the program wouldn’t let me do it.  I asked Tom to get the spread sheets for me from the marketing department and well, that was a couple of months ago.  http://www.u1stfinancial.com/ is the website, and there is a video you can watch there.  If someone could show me how this works, I’d love it.  I could really help a lot of my friends, and I’d really like this struggle to be over, you have no idea.  Maybe I’m outsmarting myself, I’ve done that before.  I do think that the ”Calculus of Several Variables” and “Moderan Algebra” classes I took before switching my major to Political Science fried a few brain cells. 

Let me explain how I’m puzzled.  The “interest cancellation effect” is part of the smoke and mirrors in my opinion because there is some truth to it.  We actually just set our equity line account up like this having heard this presentation.  If you have a second mortgage, like from an 80/20, if you depost your pay checks every month against your balance, and then pay your bills from your line of credit account, you can save a few bucks each month in interest, because it will lower your average daily balance.  This is true.  It just won’t save enough money to pay off your mortgage so many years earlier.  If you can lower your average daily balance by $5000, then at 10%, you can save $500/year in interest expense. That is not going to pay down your mortgage that early. 

Here’s another half-truth that makes the presentation convincing.  What can make a significant affect, which is where much of the savings comes from that are claimed in the spreadsheets, is that if you don’t replace your car until after your mortgage is paid off.

What is convincing is the anecdotal evidence in the video and the appearance of mathematical proof.  If, everytime you consider making a purchase, you calculate the effect if you took that same money to pay down your mortgage, you are more likely to put it down on your mortage.  Let’s say you’re looking at a $2000 treadmill.  If you calculate the effect of taking that same $2000 and putting it toward your mortgage, you’ll be much more likely to buy the treadmill, and much more likely to pay down your mortgage.  The compounding effect of is pretty significant.  So, I’m sure there are cases of people that purchased the $3500 program, and paid off their mortgages much earlier.  The question then becomes, did they need a $3500 program to do that?  Or could they have done the same thing with a spreadsheet calculator that could be made in ten minutes or that is available online. 

Also, you probably would be more inclined to not only drive a Toyota Camry or Prius, the four banger version, you’d probably try to hang onto it for ten years. 

Please, please, please, someone prove me wrong.  We’ll buy the program tomorrow, if someone can show me the spread sheet how it works in a real case, year by year.  I’ll be on the phone every day, calling everyone I know to help them with this great tool.  My lame brain just can’t figure out how you can use 9% money to pay down 6% money and come out ahead without smoke and mirrors. 

To clear the confusion, I’ll simply state that the term of the loan is essentially irrelevant to early mortgage pay off strategies, other than it determines the pre-programmed amount of principle paid down by your standard mortgage payment.  Interest is calculated by mulitplying the rate by the amount owed.  So, if you owe $10,000 at 9%, your interest expense is $900.  If it’s at 6%, then it’s $600.  By paying down a lower interest loan with a higher interest line of credit, you’re only increasing your interest expense, making it take longer to pay off your loan.

The purpose of United First’s MMA software is to tell you precisely when, and how much you’re going to write a check from your Line of Credit, to your primary mortgage to pay down the principal.  In fact, it’s a much more effective strategy to completely or nearly pay down the line of credit first, and then start paying down large chunks of principal on the primary mortgage.  But then, there would be no need for an expensive software program. 

Here is the sneakiest part of the whole thing.  If you buy their program and follow their recommendations, it actually will work the way it’s reported in the testimonials.  It’s really quite brilliant and convincing.  You can definately pay down your mortgage in 12 years, even less using their program.  You’ll have to drive the same car that entire time, which might be worth it.  What they don’t tell you is that you can come up with your own common sense plan that gets an even better result, and without buying a $3500 computer program. 

I’m aware that many of you are subscribers to Brad Rundbaken’s Charleston Market Report; www.charlestonmarketreport.com.  A commenter on this blog, Brett, had referred to it, and I’ve been hearing others throw out the same arguments.  You may have also heard the term, “Subprime slime.”, describing analysts possible exaggerations to the fallout from failed subprime lenders, as well as failing borrowers. 

 There’s no way I could keep up with Brad, with the knowledge he claims regarding the interconnection between financial and real estate markets, and I’m not going to try.  I would, however, like to stir up some dialogue out there to get some different perspectives.  I’ve been watching and reading commentary on this week’s housing report, and opinions seem to be all over the board.  What obvious conclusions can we draw, relative to Charleston?   Is there an impending meltdown?  Frankly, I’d sound like an idiot if I tried to present myself as someone that had the answers.  I just know that so called experts (Al Parish) have developed a following, and that perhaps we might want to be more careful about grabbing onto one perspective. 

I’ll be very surprised to see a real meltdown in the real estate market.  There is no question that two of the factors impacting the housing market are the lending industry, and the stock market.  I don’t have a house on the market, but I do have several MLS listings as a real estate agent, and I’d love to know what real estate sales are going to do three months from now.  I would think the answers would be here by then.  Here are my reasons why the market is softening, some of which I’ve already stated in other posts.  I’m definately bullish on Charleston and do not believe there is going to be a “Meltdown” but rather a return to normal. 

Money is definately an issue.  The cost of money has risen significantly even with recent reductions in interest rates.  We’re still higher than 2005 interest rates.  It’s harder to get money.

Sub-prime fallout It is harder to get financed now, which is probably a good thing.  I have not seen the actual evidence of foreclosures here in Charleston. 

Mt Pleasant prices rose to the ridiculous.  If you pull Mt. Pleasant numbers out of the average, you’ll see that it accounts for a very large proportion of the down side.  Interestingly, prices still continue to rise slightly, if you look at the hard data thoroughly. 

Katrina and Other Weather People are less likely to shrug their shoulders at being in a flood zone as they were in 2005.  We are not under a frigging lake here in Charleston, but the reality is, if we have another Hugo, a lot of homes are going to be flooded.  Who needs that? 

New Construction is a huge factor.  I’ve already beat this up pretty well in other posts.  New is nice, and home owners have less money to maintain their homes.  If you’re trying to sell a home in this market and you haven’t maintained your home, you could be in for a long ride.  People are looking at new, even if they aren’t going to buy it, so when they look at your home, they have a strong negative emotional reaction to cluttered, stinky, poorly maintained homes with family pictures all over the walls, and intolerable wallpaper. 

My Conclusion is that the clog is going to clear, especially in Dorchester County.  Mt Pleasant could possibly see prices go down across the board, but even this I don’t think is certain at this point.  Once things loosen up, sellers are going to become buyers, and the clearing will probably be connnected to new home inventory clearing up first.  There was a huge backlog of new construction fall thrus when the interest rates shot up, and new construction buyers had to walk away from their new home, because their old home didn’t sell.

The National Market Historically, 30% of the Charleston Real Estate Market has been from outside the area.  Given that other markets are in worse shape than Charleston, this is having an effect as well.