The FAFSA And Real Estate: When To Buy And Refi To Get The Most Aid For College

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The FAFSA And Real Estate: When To Buy And Refi To Get The Most Aid For College

Getting ready to fill out the dreaded Free Application for Federal Student Aid (FAFSA)? It’s the form that strikes fear in parents of college students and college students-to-be who have been cautioned about the tedious process involved, and the disappointing results. And while there is a ton of advice out there about how to properly prepare, what you need, and what to expect, there’s another layer of concern for homeowners and homebuyers: How does the FAFSA affect you if you’re in the market, already own a home, have investment property, or are thinking about refinancing? We’re breaking it down.

First, a little bit about the FAFSA for those who have not yet had the pleasure: “Based primarily on your family’s income and assets, the Expected Family Contribution (EFC) qualifies students for federal grants, loans and work-study programs,” said Bankrate. “The purpose of the FAFSA is to calculate your expected family contribution, or EFC – the amount the government believes your family can contribute for college that year.”

The good news for homeowners getting ready to fill out the FAFSA is that a principal residence is not reported as an asset. But, other real estate holdings may count as assets and may reduce your financial aid award.

Rental income

If you have a small business that is both owned and controlled by your family and has fewer than 100 full-time (or full-time equivalent) employees, it is not a reportable asset. However, income from a rental property cannot be included as a small business.

“Rental properties are a popular tax and investment strategy among parents, but they do not qualify as a family controlled small business asset that can be excluded from the FAFSA,” said Forbes. “Don’t make the mistake of thinking that you can just throw your rental properties in an LLC and exclude the value as a small business on the FAFSA.”

Real estate can be reported as an asset on the FAFSA as either investment real estate or business/farm assets. “For real estate to be considered a business asset, it must be used in the operation of the business, not incidental to it,” said Fastweb. “Sub-regulatory guidance published by the US Department of Education indicates that, ‘A rental property would have to be part of a formally recognized business to be reported as such, and it usually would provide additional services like regular cleaning, linen, or maid service. This is similar to IRS guidance concerning whether rental income from real estate must be reported on Schedule E or Schedule C of IRS Form 1040.'”

If you’re unsure of whether to report rental income as a business asset or investment asset, there are some rules of thumb that you can read about here, but the best course of action is to consult with your accountant or tax attorney. Keep in mind, though, that reporting real estate as a business or farm asset has “less of an impact on the student’s expected family contribution (EFC) than investment assets.”

Shifting assets

Because your principal residence is not a reportable asset on the FAFSA, it doesn’t matter how much equity you have in your home; whether the house is worth a mere $100 more than when you bought it or you have $300,000 worth of equity, it won’t count against you.

Paying down the balance on your home prior to applying for the FAFSA is one of the strategies recommended by financial professionals for those who need to lower their cash on hand and savings. “To get the most financial aid, consider shifting some assets from reportable categories into nonreportable ones before you sit down to fill out your FAFSA,” said TIME Money. “For example, you might use some money from reportable assets like bank accounts and mutual funds to pay down the mortgage on your home, which doesn’t count as an asset on the FAFSA.”

Refinancing

But, home equity can come in handy in another important way: tapping into it can be a smart move if you’re low on funds and need to find a way to pay for college, especially if the interest rate is lower than a federal Parent Plus loan or a private education loan.

Refinancing, and, especially a cash-out refinance, can be especially tempting if you have an interest rate that is higher than what is currently being offered. A cash-out refi would readjust your rate (hopefully to something lower than what you currently have) and give you money that could be used to pay for college tuition. But, there are issues associated with this type of refinance that may make you think twice, like the upfront disbursement.

“This yields a lump sum in advance, years before the money is needed,” said fastweb! “The interest rate may be very low, but the borrower will pay interest on the loan for many years before the money is needed to pay for college bills. Interest begins accruing from the date of disbursement. Another problem with a cash-out refinance is that the money will be counted as a parent asset until it is used, reducing eligibility for need-based financial aid.”

For this reason, a home equity line of credit (HELOC) is often the preferred refinancing method for those looking to use the funds for college.

“In a climate of lower housing interest rates, a home loan might seem like an attractive option for some parents to help shoulder the cost of paying for college,” said US News. “A HELOC is a type of home equity loan that allows borrowers to borrow a line of credit against the value of their home – it operates almost like credit card and usually has a floating interest rate. A borrower can limit the amount to just what’s needed under a HELOC compared with a home equity loan, which requires taking out a lump sum. The minimum amount for a home equity loan can range between $10,000 and $25,000 at lending institutions, home loan experts say.”

Be aware, though, that, a HELOC may be counted toward your EFC. Because of this, the timing of taking out the loan and filling out the FAFSA is critical. Waiting until after you file the FAFSA to take out the loan, or timing it so the proceeds of the HELOC do not hit your bank account until after you file, can protect these funds from being counted against you and having your need-based aid reduced.

Getting ready to buy a house

If you’re in the market and wondering you to manage the timing of your home purchase and FAFSA filing, you’ll be pleased to know that buying now will likely help you when it comes to getting money for college. In determining your need-based aid, any money you currently have set aside for your down payment and closing costs would be used to reduce the amount of aid awarded. Putting it into a home improves your financial picture, at least in terms of the amount of help you can get for college.

The FAFSA has questions that “ask about how much cash students and parents have in savings and checking accounts at the moment you are filling out the FAFSA,” said TIME Money. “But notice that there are no questions on the FAFSA about your debts or bills.” That means that sheltering your money in real estate, so long as that real estate is the only property you own and you intend to live in it, is a smart move.

Earmarking Reserves In Your HOA

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Earmarking Reserves In Your HOA

Most homeowner associations are entrusted with substantial common elements which must be maintained, replaced or renewed. All of this costs a lot of money. Borrowing said money is a very bad idea because it comes at a very high price in the way of interest and fees which must be repaid along with the principal. The cheapest and fairest way to pay for these expenses is to earmark a portion of the monthly, quarterly or annual fees and hold this money in reserve for future expenses. A properly done reserve study will inform the board how much the earmark should be so that all pay a fair share of a 30 year plan. If this is done, special assessments are never needed and the board has the money when needed.

But keep in mind that even the best reserve study has its limitations. While it predicts likely useful life spans and replacement costs, it can’t guarantee either one. A reserve study is based on assumptions that change over time. The climate, weather, soil conditions, maintenance, design and construction quality play a role in the aging process, causing some components to age differently than expected. The financial climate is also variable. Investment earnings and the inflation change. To keep the reserve study accurate, industry experts recommend (and state statutes often require) that the reserve study be updated annually.

How Much Do You Need? The reserve study will estimate how much money is needed for future projects and when the funds will be needed. For the typical garden style condominium, it is necessary to reserve 25-35% of the annual budget to meet future needs.

Communicate with Owners. For HOAs that are not currently contributing enough to reserves, the solution is to start contributing more by increasing the monthly fees. Lenders shy away from HOAs which have little or no reserves but it negatively impacts a lender’s collateral. Once the reserve study is completed, provide owners with a copy and encourage them to read it. Hold a special meeting and invite the reserve study provider to explain it. Make sure owners understand the reserve funding schedule and emphasize the relationship between the reserve level and property values. It is not just lenders that will be scrutinizing the HOA’s finances. Savvy buyers will be scrutinizing them as well.

Don’t Commingle Funds. Reserves should not be used to pay for ongoing preventive maintenance and repairs. Those should be paid out of the operating budget. Reserve funds should be segregated in a special bank account apart from operating funds. Typically, the portion of HOA fees earmarked for reserves is swept into this separate account monthly. Only reserve related expenses should be paid for out of this special account.

Borrow Reserves Funds Carefully. Borrow from reserves only in an emergency or because of seasonal high expenses like an insurance premium that comes due early in the year and not enough fees have accumulated yet to pay it. If you must borrow, document the board vote approving that decision, establish a reasonable repayment plan and stick to the plan.

Develop a Reserve Investment Plan. Reserve funds are typically placed in FDIC insured savings accounts, money market accounts and Certificates of Deposit. Most state laws don’t have specific reserve investment standards for homeowner associations. The governing documents usually give the board investment discretion. Boards should develop a written investment policy that defines the investment goals, establishes the objectives against which the investment performance will be measured, and identifies the boundaries within which investment selections will be made.

The investment policy should include:

Keep the reserves safe (don’t risk the principal).
Preserve earning power by choosing investments that match or exceed the inflation rate when possible.
Ensure that the funds are available when they are needed.

Other issues to consider include:

Consider working with an investment professional. This is particularly important when the reserve fund is large.
Remember that this is OPM (Other Peoples’ Money). Tread carefully.
Document the investment decisions in meeting minutes.
Diversify the investments (savings, CDs, etc.)
Focus on liquidity. Industry experts recommend holding 5% of reserves in cash for emergencies, another 10-15% in short term (six months or less) securities and the rest spread among varied investments with varied maturities. The reserve study provides the schedule for work and projected cost for investment planning.
Review your investment strategies annually to make sure they still match near and long term goals. Don’t let cyclical changes in the market alter the investment strategy which should remain long term.

Maintaining adequate reserves is a fundamental part of the board’s fiduciary duty. Make sure to earmark the budget for reserves.

For more innovative homeowner association management strategies, see www.Regenesis.net

Protecting Community Associations Against Money Loss

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Protecting Community Associations Against Money Loss

Qustion: I am the President of a 135 unit condominium association and have just read that a local Property Management company has been the victim of an embezzlement. I understand a lot of condominium money that was held by the Management Company may have been lost. What can our association do to protect ourselves against such events?

Answer: In my law practice, I have represented at least two property management companies that went out of business in this area, leaving behind a trail of unpaid bills and large losses from community associations’ reserve and operating accounts.

There are many ways in which to protect your association funds.

First, before you hire a property manager, make sure the firm is licensed in the jurisdiction where your property is located. However, not every state requires a license.

Second, check out the property manager carefully. Perhaps you should even obtain credit reports on the firm (and the property manager who will be servicing your project); this will, of course, require the permission of the manager, but they should not object if they want your business.

Third, keep control of your funds. Generally speaking, there are two pools of moneys in community associations: operating accounts and reserve accounts.

Regarding the operating account, set a dollar figure above which the property manager will need the co-signature of at least one board member on all checks going out of that account. This will, of course, create a burden on both the property manager and the board member who has to sign checks. But, in my opinion, if you want to serve on the board, you should be willing to assume those responsibilities which will protect the funds belonging to the unit owners who elected you — and yourself as well.

Clearly, there are routine checks that have to be paid on a monthly basis — such as water bills, insurance, and trash collection. If you set a dollar limit (such as $1,000), the property manager can write checks up to that amount without a second signature. But any checks over that limit must be co-signed by at least one board member. Your bank will give you signature cards and these requirements should be spelled out in those documents. Then, the bank will have to honor your request.

Regarding the reserve accounts, they should only be in the name of the association and only board members should be authorized to sign checks (or transfer funds) from those accounts. Community associations do not transfer moneys often from reserve accounts; it should not be a hardship on anyone to require that only board members be authorized to have access to those funds.

Fourth, make sure the property management company has adequate insurance covering your association in the event of embezzlement, fraud or other activities which may cause your association a loss. The insurance industry will write “third party coverage” bond insurance which will give you protection in the event of a loss. The amount of the policy will depend on the amount of the reserves you anticipate you will carry. Some associations have hundreds of thousands of dollars in reserve; clearly, third party coverage in the amount of $50,000, for example, is woefully inadequate for those associations.

Fifth, make sure that the management company has a fidelity bond in place covering any loss created by its employees.

Sixth, make sure that you (and not the property manager) hire an accounting firm to give you a full audit each and every year. Your association should give a letter of engagement to the accountant, and the accountant should report back to you — and not the manager.

Seventh, and perhaps most importantly, insist that the property manager give you and your board members a monthly financial status report, which will include copies of the actual bank statements received by the management company. Review these carefully every month within five days from receipt. Keep in mind that every board member has a fiduciary relationship to all the unit owners. Presumably you review your own bank statements on a monthly basis; you can do no less for the unit owners you serve. In recent years, it has been easy to access bank accounts on line. The association treasurer should have the password and must review the bank statement each and every month. If there is anything unusual, ask the property manager for an explanation.

Most property managers are honest and hard-working. However, one dishonest manager will unfortunately cast a broad brush of distrust on the entire industry. I do not believe that property managers will object to the various suggestions I have made, and indeed may have more recommendations of their own.

Several years ago, the United States Attorney in New York indicted a large number of property managers there. Clearly, not all were involved in community association management. However, the lesson to be learned from New York and from the two incidents in the Washington area is quite clear: when there is money there will be greed and corruption. Community association board members have the power to control — as best they can — the financial security of association funds, and steps should be implemented immediately, while it is not too late.

Real Estate Cyberfraud Continues. Is It Time To Return To Paper?

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Real Estate Cyberfraud Continues. Is It Time To Return To Paper?

Cybercrime continues to thrive in the real estate brokerage environment. By this, I don’t mean the kind of electronic skullduggery that results in stolen identity information or hacking into someone’s bank account. Rather, I refer to the business of fraudulently inducing a principal — sometimes even an escrow officer — into wiring funds to a bank account controlled by a hacker or someone in business with the hacker.

Here’s what can happen: the hacker gains access to the “network” of participants involved in a real estate transaction. His entry point may be through a real estate agent’s email account, or escrow’s, or any one of a number of affiliated services such as title or home warranty. Certainly, the hacking of an agent’s account seems the most likely. The hacker will monitor the transaction, learning all the names, phone numbers, and financial information involved. Then, at some point near closing, the hacker will send an email — posing as one of the relevant figures — issuing false instructions as to where money is to be wired. Too often, the people who receive the bogus instructions will comply.

More frequently, this kind of theft is occurring at the beginning of a transaction. One scenario is this: the hacker is monitoring electronic communication between the buyer’s agent and the seller’s agent (and between the agents and their principals). Shortly after a purchase is agreed upon, the hacker sends the buyer an email (appearing to have come from his agent) telling him where to wire the earnest money. That will be to an account controlled by the hacker.

The scam at the beginning of a transaction doesn’t generally yield as much money. It is deposit money, not a down payment. But it takes less time and saves watching an escrow that might fail anyway.

California REALTORS® have available to them a useful one-page document entitled “Wire Fraud Advisory.” We have discussed that in an earlier column (July, 2016) and need not review it here. Instead, it is important to focus on the use of the form.

Two things: (1) As the above scenario illustrates, the advisory — read “warning” — should be provided early on in the process. Just as agency relationships need to be disclosed and discussed prior to writing a purchase offer, so should the wire fraud advisory. (2) It should be given singular attention, not simply included in a pile of papers with “you should read these” instructions. The issue needs to be addressed.

Some companies have their own version of the advisory, which is fine — as long as they are provided in a timely and focused manner.

Indeed, some companies are now advising their clients to use cashier’s checks, rather than to trust the electronic handling of their funds. Is that just too impossibly retro for you? Well, it made sense to some of the people who recently attended the most recent meeting of the Directors of the California Association of Realtors (CAR).

The topic of wire fraud received extensive discussion; and one group was formulating a request for the Standard Forms Committee to revise its treatment of earnest money deposit in the standard purchase contract (Residential Purchase Agreement, RPA). As it is now, the default position in the RPA is that deposit funds will be provided by electronic transfer. (One can still choose an option of personal check or cashier’s check, or cash for that matter.)

Brokers initially loved the electronic transfer — and probably most still do — because it relieves them of the bookkeeping and procedures to follow when they have to handle checks. That relief now needs to be balanced against the risk of cyber fraud.

Speaking of which, it emerged in other discussions that brokers need to do a thorough assessment of their risks in this regard. It turns out that more than a few insurance policies that have an electronic fraud provision don’t, in fact, cover the kind of fraud and loss that has been discussed here.

A topic for another day.

Bob Hunt is a director of the California Association of Realtors®. He is the author of Real Estate the Ethical Way. His email address is scbhunt@aol.com.

Condo Renovations: Making The Most Of Your Space

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Condo Renovations: Making The Most Of Your Space

In real estate, nothing ever stays the same. In Toronto, the types of condo buyers are constantly changing, says real estate agent Cynthia Goodchild of Royal LePage Real Estate Services, Johnston and Daniel Division.

Many buyers are now families or young couples with a baby on the way. They don’t want to rent but can’t afford to buy a house. Or some, regardless of age, don’t have the time or inclination to maintain a home.

Condo suites are smaller than they used to be, so it pays to renovate to make the most of every inch and to make the space functional for everyday living and entertaining.

Designer Sabrina Bitton, an expert in all things space saving and clever, recently transformed her 825-square-foot suite into a showpiece of good, functional, flexible and space-efficient design. Her suite offers the clean-lined and less-is-more sensibilities today’s buyers want.

She embraces European design, with a dash of Frank Lloyd Wright (bringing the outdoors in while ensuring no space is wasted, she says.)

Her original two-bedroom suite had large windows in the living room and master bedroom, the rooms side by side at the end of the suite. Bitton removed the master bedroom wall and incorporated the square footage and windows into the living space.

She sealed up the doors to the walk-in closet and ensuite bathroom and lined the walls with floor-to-ceiling custom millwork. Instead of extending the built-ins to the end of the living room wall, she added open solid walnut shelving to provide an airy feeling and to offer a place to display treasured items.

Walnut is used for several features throughout the suite, bringing a touch of nature and creating a sense of flow between rooms.

The kitchen includes walnut shelving and a walnut island. To create maximum storage space, Bitton took advantage of the nine-foot-high ceilings and extended the built-ins to the ceiling. The high space is ideal for storing large boxes of out-of-season clothing and seasonal items that don’t need to be accessed on a regular basis.

Vents for heating and cooling are hidden behind cupboard doors and kick plates, with slits to keep the air circulating.

Storage space is always a challenge in condos, so finding creative ways of adding more makes the unit more functional. “I have so much storage space that some cupboards are actually empty,” she says.

A clever “Bitton trick” is a bar-height island on wheels that fits over the existing kitchen island so it doesn’t take up additional floor space.

When entertaining (be it for a sit-down dinner for eight, a buffet or a large cocktail party), the bar-height island can be wheeled out to provide a separate table. Or it can be used as buffet space, a place to enjoy cocktails or additional work space.

Downsizers who aren’t ready to give up their sit-down eating space find this a particularly welcome idea, Bitton says.

She chose bar stools with lower backs so when they’re tucked under the bar, they don’t obstruct the view from the kitchen. Bitton added a clear rectangular blown glass chandelier over the island to add drama without distracting from the view.

Seamless, clean-lined built-ins on another wall in the living/dining space include a fold-up desk, and a surprise. Instead of hard-to-reach cupboards at ceiling height, Bitton added pull-down rods so hanging clothes are easily accessible.

When renovating, figure out what you want, how to achieve and what you want to invest your money on. Bitton splurged on a comfortable sofa.

“Comfort is important. Also, since it’s a linear space, the curved couch adds a feeling of movement. You could also add an additional sleeping area by using a sofa bed.”

In the second bedroom, which is beside the original master bedroom, a door was added to provide access to the walk-in closet and ensuite bathroom. More custom built-ins were added in the closet.

In the bedroom, the original closet doors were removed and the closet space was lined with walnut to create a headboard/nook for her bed. The window seat was extended from 18 to 24 inches to create a cosy sitting area. Custom built-ins were installed below the window seat and extended along the wall. An unused alcove space was filled with shelves and glass doors to create a fun display space for Bitton’s fancy shoes.

Light-coloured floors are used throughout, chosen over dark, which shows dust and visually closes in a space. Paint and window treatments are different tones of the same creamy neutral colour family. Doors are painted light grey to complete the Zen ambiance.

Before buying a new condo, Goodchild says it’s important to speak to the builder to find out what changes can be made. You may not want the kitchen that’s there or would prefer to omit a wall, but the builder may not be able to accommodate your needs.

Few developers will allow preconstruction changes. In that case, choose the least expensive finishes for features you plan to remove, and then renovate with an eye to creating functional and multi-functional space, says Bitton, of Sabrina Bitton Interior Design. “It’s all about creating smart condos.”

Times have changed from 20 years ago, when condos were purchased primarily by retirees, Goodchild says. Now people in their 50s are buying too because they want less upkeep, more freedom and the ability to do more of what they want, including travel.

“Retirees still make up a large percentage of purchasers, but the under 35-year-olds find condo ownership appealing because they want to be downtown and be close to work. They want to have the ability to work, live and play in the same neighbourhood,” Goodchild says. “Then they have children and sometimes stay.”

Whoever the buyer, making the most of the space is key, says Bitton, who along with in-person service, offers Skype design consultation. A portion of her fee goes to charity.