by Scott Bertoglio - PHX Home Investors by Spark Asset Group

Delegating Authority

I had a professor who used to say you could summarize a manager's most important job role in two words: "making decisions." We often delegate our decision making authority to others, either directly or indirectly. 

For example:

"Which restaurant should we go to?" | "I don't know. You decide"

Who among us has not been on either (or both) sides of that exchange? Perhaps you were being polite and wanted to avoid conflict. Perhaps you didn't know the local options. Or perhaps you genuinely didn't mind because you just wanted to eat something in the next hour for under $20.

When buying or selling a home, most buyers hire an agent to represent them. Part of this representation is delegating decision making authority. This includes an inherent conflict of interest, and the stakes are usually much higher than a $20 lunch.

The Principal-Agent Problem

Also known as the agency problem, the principal-agent problem refers to a situation in which a person or entity (the principal) delegates decision-making authority to another person or entity (the agent) to act on their behalf. The challenge arises when the agent's interests may not align with those of the principal, potentially leading to suboptimal outcomes for the principal. 

Note that real estate professionals owe a duty of care towards their clients to behave legally and ethically. Even if an agent believes they are acting in a client's best interest (and indeed, if it cannot be proven otherwise), they may still not be reaching the best outcomes. This problem can be observed in real estate transactions in three ways.

1. Dual Agency

Dual agency occurs when a real estate agent represents both the buyer and the seller in a transaction. The agent is expected to negotiate the best deal for their client, but in dual agency, the agent may face challenges in impartially advocating for the best interests of both parties. For instance, an agent may be inclined to prioritize closing the deal quickly to earn the full commission from both the buyer and the seller, potentially compromising the negotiation process or failing to disclose pertinent information to one party.

This practice is not legal in several jurisdictions due to the inherent conflict of interest and inherent risk to consumers. If properly disclosed, dual agency real estate representation is legal in Arizona. I recommend consumers either avoid or treat such transactions with the appropriate caution.

2. Overpricing or Underpricing

In some cases, agents may be tempted to overprice or underprice a property. Overpricing may occur if an agent believes that setting a higher listing price will result in a higher commission. While this strategy may attract the seller initially, an overpriced property can languish on the market and may result in a lower eventual sale price. On the other hand, an agent may underprice a property to facilitate a quick sale and earn a commission faster, but this may not be in the best interest of the seller who may have received a higher price with adequate marketing and negotiation.

Studies show that real estate agents selling their own homes tend to have their properties listed for longer durations and receive higher sales prices. They probably aren't taking the first decent offer that comes along. This suggests that many agents do not put the same effort into selling homes for others as they do for their own. 

3. Steering and Kickbacks

Agents may be influenced by incentives offered by third parties, such as lenders, inspectors, or contractors, which can compromise their loyalty to the buyer or seller. For example, an agent may steer a buyer toward a particular mortgage lender in exchange for a referral fee, even if that lender may not offer the best terms for the buyer. Similarly, an agent may recommend specific contractors or inspectors who provide kickbacks or commission to the agent, even if there might be more qualified or cost-effective options available.

If you are hearing this and thinking that it oughta be illegal, I have good news for you: It already is! Kickbacks and compensation of value have very proscriptive law/policy and the penalties have real teeth. Thankfully, a consumer is unlikely to encounter that violation from an agent. They are instead much more likely to instead encounter the non-monetary version of this, recommendations based on speed and convenience.

An unscrupulous application of this to the lender example might be an agent recommending a lender because that lender happens to work in the same office complex and they're easy for the agent to get in touch with. Maybe the same unscrupulous agent recommends a home inspector who they suspect may not be thorough because they tend to rubber stamp all the homes they inspect.

Ask Why!

To mitigate the principal/agent problem in real estate transactions and other contexts, it is crucial for principals to carefully select agents, establish clear expectations, and maintain open lines of communication. Regulatory bodies and industry associations establish guidelines and standards of conduct to address potential conflicts of interest and protect the interests of consumers. Ask your real estate agent about them! Ask them why they are recommending the price they are. Ask them why they recommended that specific lender! Ask them why they like working with that specific home inspector!

You are the principal. It is your money. You have the right to know.

by Scott Bertoglio - PHX Home Investors by Spark Asset Group

Tax Benefits of Owning A Home

Home ownership brings many enriching and fun new experiences, such as standing in the plumbing aisle at the hardware store at 9 PM wondering if the 3/4" pipe fitting you need to fix the leak on your washer's water supply line is supposed to be a compression fit, NPT, or GHT threaded end. (spoiler: it's a standard 3/4" compression fit.)

A similarly thrilling experience for new homeowners may be when it's time to file taxes. There are several situational tax benefits to home ownership, but for most the largest is going to be the mortgage interest tax deduction. It also may not apply to you at all! Let's learn more.

Mortgage Interest Tax Deduction - History

The mortgage interest tax deduction is a tax benefit that allows homeowners to deduct the interest paid on their mortgage from their taxable income. This deduction has been a longstanding feature of the U.S. tax code and is credited with a significant role in promoting homeownership.

The mortgage interest tax deduction was introduced in 1913 when the modern U.S. income tax system was established (the same year the Philadelphia Athletics defeated the New York Giants in the World Series). Although we strongly associate this tax benefit today with households, it was initially intended as a tax benefit for businesses. Initially, all interest payments, including those on personal loans and credit cards, were deductible. As the tax code evolved, certain restrictions and limitations were imposed on the deductibility of interest expenses. Over time, the deduction became primarily associated with mortgage interest.

Mortgage Interest Tax Deduction - Today

Unlike the Giants and the A's, the mortgage interest tax deduction has stayed put. Homeowners who itemize their deductions on their federal income tax return can claim this deduction. Itemizing deductions requires more effort and record-keeping compared to taking the fixed-amount standard deduction. As of 2017 with the new, higher standard deduction, fewer homeowners are itemizing their deductions and thus not benefiting directly from the mortgage interest tax deduction.

The Tax Cuts and Jobs Act (TCJA, enacted in 2017) made significant changes to the U.S. tax code. One of the major changes was an increase in the standard deduction, making it more attractive for many taxpayers to opt for the standard deduction instead of itemizing. As a result, fewer homeowners now benefit from the mortgage interest tax deduction. A homeowner will not see the direct benefit of mortgage interest deduction if their total itemized deductions (including mortgage interest) fall below the standard deduction (in 2023, $27,700 for married couples filing jointly or $13,850 for single or married filing separately)

Under the TCJA, the mortgage interest tax deduction is limited to interest paid on mortgage debt up to $750,000 for married couples filing jointly or $375,000 for married couples filing separately and individual taxpayers. This limit applies to mortgages taken out after December 15, 2017. For mortgages taken out before that date, the previous limit of $1 million for married couples filing jointly or $500,000 for married couples filing separately and individual taxpayers still applies.

Different Levels of Impact on Homeowners

The mortgage interest tax deduction has been seen as a significant incentive for homeownership, as it reduces the overall cost of borrowing for purchasing a home. By deducting the interest paid, homeowners can lower their taxable income, potentially resulting in a reduced tax liability.

The impact of the mortgage interest tax deduction varies depending on individual circumstances. It tends to benefit homeowners with larger mortgages and higher tax brackets, as they typically have higher interest payments and, therefore, can deduct a greater amount from their taxable income. Additionally, homeowners who choose to itemize their deductions and have other deductible expenses such as state and local taxes, charitable contributions, and medical expenses may find the mortgage interest deduction more advantageous.

Nothing lasts forever. The mortgage interest tax deduction is subject to potential changes in the tax code as laws evolve over time.

Does This Matter For You?

There are so many if/then and conditional statements in tax law. The only way to know for sure is to consult with a tax professional. At PHX Home Investors by Spark Asset Group we have a CPA on staff with both personal and professional experience with tax solutions for homeowners and real estate investors. The other brokerages will couch their language with a big disclaimer to get tax advice from a professional. Not us, because we are the professionals. Contact us and see what we can do for you specifically to optimize your wealth as a homeowner or investor.

by Scott Bertoglio - PHX Home Investors by Spark Asset Group

The great novelist Oscar Wilde once said "A cynic is a man who knows the price of everything, and the value of nothing."  The renovation and remodeling industry tells you that customizing your space will improve your life, express your personality, and add value to your home. How much value is actually being added by those renovations? There are three things to consider: difference in preferences between buyer and seller, what is the current value, and what value will you get from it daily.

Different preferences between buyer and seller

Price and value are often used interchangeably in the world of real estate, but they are slightly different. Value is a subjective measure that varies from person to person, while price is a number that a buyer and seller agree upon to change ownership. 

Buyers have different needs and tastes, and will almost always value things differently than the seller. Suppose I spend $40k for a full kitchen renovation done by a qualified and licensed contractor, changing out the fixtures, appliances, granite countertops, and cabinets. I expect this will add some value when it comes time to sell my house. It will almost certainly not add an extra $40k to the selling price. Why is that?

When I’m planning a kitchen remodel, I have an absurd number of choices to make. For cabinets I have material, size, style, color, fixtures, layout and lots of room for customization (wine rack, sliding spice rack drawer, lazy susan corner cabinet, etc). For counters, I have material, edge finishing, color, and sink mount style. Same goes for appliances and fixtures, you get the idea. When I am selecting these features, I am choosing what appeals to my impeccable taste and preferences. I’m also buying some extras and paying upcharges to get the thing that I really want. The value I’m getting out of my cool new kitchen is greater than or equal to the $40k I’m spending, or else I wouldn’t be buying it.

In the words of the poet Kanye, "there’s a bunch of yous, there’s only one of me." There’s only one of me, and if someone else were to go spend $40k on a kitchen remodel today on this same kitchen, it would almost certainly look different. They probably would have chosen at least one thing different in the literally hundreds of options I looked through, possibly at no additional cost. Maybe they would have kept the cabinets and repainted them? Instead of admiring the mosaic portrait of Dolly Parton tiled into the backsplash, they’re wondering how much it would cost to remove it.

Bottom line, people like different things than you do and they could have spent the same amount of money to get something they like better.

What is the current functional value?

We must also consider the value of what you are removing or replacing. In my kitchen remodeling example, I may have been replacing a perfectly functional but dated looking kitchen or I may have been starting over with a kitchen that no longer fulfills my core needs. Or similarly, removing a two year old eucalyptus tree to add a cactus garden is a very different starting value point than removing a healthy, half-century old walnut tree. Another great example of value add is converting an attic or basement from an unfinished space full of boxes of holiday decorations to a finished space that humans can occupy and use.

Bottom line here is to prioritize your renovations on replacing things that currently have little to no useful value.

What value will I get from this daily?

Google co-founder Larry Page uses what he calls the toothbrush test when evaluating an acquisition target company's product. Is this something, like a toothbrush, that I'm going to be using two or more times a day? Forget about the next buyer, what's in it for me? The best renovations are the ones you choose because it enhances your experience living in that home. If you spend an hour every weekend tending your grass lawn and replace it with a nice, low maintenance xeriscape lawn you are buying back an hour of time to spend doing something else every week. Converting an infrequently used guest bedroom to a hobby/craft/art studio space gives you the space you need to do the things you enjoy. If you enjoy baking as a hobby, consider making your kitchen fit your needs rather than work around the limitations. 

Bottom line: change your house because that is the house you want to live in.

Pulling it all together

• The next buyer won't love it like you do. Get the thing that you want. Use the "safe" or "better resale" option only as a tiebreaker between two options, otherwise we end up with everyone having a "greige" kitchen and driving the same white colored cars.
• Focus on function. What is this space doing for me or not doing for me today?
• (mostly) Forget about resale value. Change your living space because that's the space you want to live in.

by Scott Bertoglio - PHX Home Investors by Spark Asset Group

When does your home value matter?

Your dishwasher can send you mobile alerts. Your doorbell has a camera that delivers live video of the pest control salesman in a polo shirt to your phone.

I don’t know who asked for all these things, but we love monitoring things in real time. We also like looking at our home values, putting our address into Mint or getting Zillow emails to watch number go up. How much does it really matter?

There are two times it really matters

In an asset’s life the value really matters twice: when you buy it and when you sell it. Put another way, your home value matters when money is changing hands.

When you buy it

This one’s intuitive. How much are you actually paying for the property? Did you overpay? Did you get a great deal buying under market value? Does your lender agree with your valuation and will lend you money for the property? You’re taking a loan for 30 years to buy this thing, you want to be at peace with what you are paying. 

When you sell it

This is equally important as the purchase price. It has possible tax implications for capital gains (unless it was your primary residence for 2 of the last 5 years). Several entities are depending on this to get paid. Your agent and the buyer’s agent probably are being paid a percentage of this. The lender holding your note needs the proceeds of the sale to cover the outstanding balance on the loan. The other people involved transactionally get paid when this transaction goes through.

Other times it matters

Remember how your home value only matters when money is changing hands? There are a few other times money changes hands where it matters.

Refinancing

If you are refinancing your home to take advantage of better rates or a modified repayment schedule, the lender will base their risk assessment on the asset value of the home today, rather than years ago when you bought it. This also applies for home equity loans and other times when a home is used as collateral. It may also apply if you purchased a home with less than 20% down and must pay a mortgage insurance premium and years later would like to remove it.

Insurance

This product and industry exist to make owners whole in case of catastrophic loss. If such a loss occurs, the insurance company wants to know what it would cost to replace it. They base their expected payouts on this value, which impacts their rates and pricing.

Property taxes

This rarely matters for homeowners. The county tax assessor uses some extremely conservative estimates of market value (read: low estimates of market value) as the baseline from which they determine their assessed value from which they determine the taxes assessed. Homeowners can appeal their assessed value if they believe the assessor is missing a specific element that affects the property’s value. Suppose a homeowner bought at the peak of a market before a major housing crash (like in 2008), and homes exactly like theirs in the same neighborhood are now going for 60% less than what the homeowner paid. They should expect their assessed value to decrease and can appeal to the tax assessor for a reevaluation. Or maybe something adversely affected the market value of their specific home, like a uranium mine, rendering plant, or rubber chicken factory opening nextdoor. The market value for your property will significantly decrease, thus also should the assessed value and property taxes.

So why does this rarely matter for homeowners? In the long run, real property tends to appreciate. This means that the assessor is probably not overcalling the assessed value, and I expect that very few appeals are filed by homeowners because they believe they are not being taxed enough.

Expert Valuation

Valuation when buying and selling is too important to be left to rules of thumb and chance. Know when to get help from an expert.

At Spark Asset Group, we include the services of experienced experts you need to make the right investment decisions for your home or investment property. Both new and seasoned homeowners and investors will benefit from our on-staff Certified Public Accountant and on-staff Real Estate Attorney, giving you guidance and insights that other real estate agents cannot provide.

by Scott Bertoglio - PHX Home Investors by Spark Asset Group

"How much money do you make?"

This can be an awkward question to ask someone, but if you're paying the agent's commission you have a right to know. An ethical agent would never deceive you if asked these questions, but you'll see why they may not be eager to bring it up.

1. Commissions are negotiable (and most other things are too)

Ask the average real estate agent what real estate commissions are, they might say 5% or 6%. Ask the agent why the rate is that number, they’ll tell you it’s because it’s split with the other agent, both sides’ brokers, to pay for marketing and expenses, etc. All of those are true, but doesn’t actually answer the question. Why 5% or 6% instead of 2% or 30%?

The real answer is that it just depends on local custom and what the seller agrees to upon listing. There is no “standard” as defined by law, nor is there a standard agreement for members of the various professional associations (and such an agreement would likely not be lawful). Commissions can be almost any value in almost any form. Let’s talk about how commissions work in the State of Arizona.

2. Agents can never be paid directly

Every item of value (including compensation and commissions) must flow from that agent’s broker. There are all kinds of rules around that set forth in statutes and Real Estate Commission rules (available online, for those who would like some extremely dry reading.) The takeaway is that the most likely place where commission rates get written out first is when an agent and a seller agree to have the agent (and the agent’s brokerage) list a home for sale. 

The contract will lay out terms for what duties the agent will perform for the seller, including taking photos, marketing the property, listing on an MLS service, providing transaction support, handling funds, and negotiating on their behalf when offers come in. The contract will also spell out when, how, and how much the agent’s brokerage will be paid. Under the traditional model, this will be a percentage of the sale price, and will probably include language that permits the broker to share that commission value with the cooperating brokerage representing the buyer. The brokerage then pays the agent out, with the broker keeping a portion of it for expenses based on the agent’s agreement with the brokerage. There are many different ways an agent can arrange that with their broker, but they are not relevant to the buyer or seller in a transaction. What they care about is that top line number, how much total commission is being paid by the seller to the agencies involved.

3. A seller's agent gets paid double if they represent the buyer also

Remember how the listing agent will agree to split commission with a buyer's agent? If the buyer's agent is the same agent as the seller's, there is no other broker to split with. This is called a "dual agency" situation. An agent owes a duty of care to their clients to negotiate and get them the best possible deal. For a seller's agent, this means maximizing price. For a buyer's agent, this means minimizing price. Can you see the inherent conflict of interest? This conflict of interest is so problematic that many states have laws against the practice of dual agency. Not in Arizona. Dual agency is legal, but with very specific disclosures and guidelines that must be followed. Even so, buyer and seller should both be very cautious in such an arrangement or avoid it entirely.

This can also happen if a buyer is unrepresented in the process

Takeaway: Read the contract!

There are so many papers, forms, disclosures, contracts, and other things to sign in a real estate transaction. Read them all the way through! Know where your money is going and what you're committing to before signing.

Most agents are not licensed to practice law, and cannot interpret the provisions of the contract for you. Consider hiring an agent whose brokerage has a real estate attorney on staff that you can contact directly, like Spark Asset Group. 

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