110. Concepts of Homeownership

All right, we're going to go over the concepts of homeownership in this episode and there are four primary headings. There's a home ownership, there's tax benefits, there's insurance, and there's affordability. So those are the four main headings that we're going to cover. And so under homeownership we have advantages of ownership, responsibilities and disadvantages, housing types, and desirability features. So let's go ahead and get started. So when we talk about home ownership, there's a couple of ways you can look at it. You can look at it in terms of an individual or a family accomplishing something through hard work by being able to buy a house. Some people, for some people, that's a life stream being able to buy a house and then live in it and then pay off the debt. Another way to look at it is securing a base for raising a family. Another is long-term investment and I think when we talk about home ownership, while it is an investment, it's not the same type of investment. We don't run through the same analysis that we do for an income producing property. And it can also be an asset that can be passed on to children or passed on to errors. Home ownership offers many advantages compared to renting, but there are also disadvantages and then there are responsibilities with homeownership. So you've got to balance that out to determine looking at all the pros and cons of whether it's worth your while. I think buying a house is one of the biggest financial decisions an individual makes in their lives. So one of the keys going into that transaction or into that process of buying a home is to be able to look at the big picture, look at everything around it. And so that includes some of these items we're going to talk about here. The real estate agents or brokers role should be assisting the homeowner in evaluating the advantages and disadvantages as they go through the home buying process. So a couple of advantages that come into play, we've got pride of ownership, the fact that you own something and you can say that's my house and there's an identity associated with it. In terms of the house that you buy fits with your personality or fits with your style. You can paint the house, paint the trim, paint the front door, you know, ad landscaping, plant trees. It gives you some permanency. It gives you some independence because you own this piece of property, you own this, that has a house on it. You can park your vehicle in the driveway and maybe even park it in the garage if it's not full of your storage items. And you can look at that when you make the mortgage payment each month, there's a part of it or to a certain extent there's a purpose behind what you're working towards. Second item is control. To a certain extent that home ownership gives an individual certain degree of control. Renders are always going to be subject to the landlord and the landlord's rules and regulations. And to a certain extent to their neighbors. A lot of what we call production home neighborhoods, the homes are built very close to each other. But you at least have some space and you can, we've got privacy fences and you can put up plant landscaping and you can do other things to minimize some of those sound or noise. But in an apartment setting as a renter you're kind of subject to your neighbors. You have very little control over what they do. And to, you know, within the limits of the law, you can do whatever you want to to that house. But the exceptions on, you know, the federal state and local level and then also private regulations through restrictive covenants. There's another item is stability, you know, ownership last forever and I'll put a nastric on that. But that's different than renting. Renting usually have a short term lease, usually, you know, six, nine, 12 months. There are some leases that may go two years or more, but you know, landlord generally doesn't want to sign a long term lease because the market's always changing. So they don't want to be locked into a long term lease. But the ownership, if you have a level payment mortgage, you're going to make the same payment on the, you know, paying down that mortgage each month. You know, the things that are so to change, I'll talk about in a minute are the increases in taxes and insurance. But for the most part, there's no expiration date until you decide you want to sell the property or the property is passed on to your ears. And so where you're in an apartment, apartment is generally going to have rent escalation tied into the rent. So it's going to increase based on the market conditions and then also again, no, no interference by the landlord if you own your property. Another item is, you know, from an investment standpoint, you know, homeowners will build up equity in that property. And equity is the difference between what one can sell the home for and what one owes on the mortgage. So the value of the home minus what is owed on the home and that gives you your equity. You know, so that's where from an investment analysis on a residential home, that's what we look at as the equity. And then the first item, the value of that home, you know, we expect that property to appreciate and value over time. And so that value continues to go up while the debt that is owed goes down and so you continue to build up equity over time. And then under an investment perspective, you also can get tax deductions. We'll talk about that in a little while, which allows a homeowner to reduce his or her tax burden. And, you know, if we look at renters, there are some advantages to renting. You know, main advantage for renters is just basic shelter. That's just, you know, that you get a roof over your head. But when we talk about, you know, from a homeowner standpoint, you've got the right to sell the property, you have the right to lease it, you've got to write to mortgage it, to pledge it as a security interest. You've got to write to pass it onto your airs. You've got to write to encumber it. So there's a number of items or a number of elements that you can do as a homeowner that you can't as a as a renter. So the main main element for a renter is just basic shelter. But we'll talk about some of these as we go, but you know, one of the things that we look at with the home ownership is, you know, we look at the responsibilities and disadvantages. We've got taxes and cost of ownership and then compliance with the law. And so from a tax standpoint, you know, local property taxes are one of the biggest expenses that a homeowner will pay in relation to that home. And then, you know, close second would be probably be insurance outside of repairs and maintenance. And so the taxes are going to be based on the assess value of that property and the tax base of the taxing jurisdictions where that property is located. And so, you know, depending on where you are in the San Antonio market or where that property is located in the San Antonio market, you know, that tax that that ratio could be about 2.6, 2.5, 2.4, 2.7, depending on where that property is located. And so as your assess value or your valuation increases, so does your assess value. And then you multiply that by the ratio. And then that will determine what you owe in taxes. And that ratio or that multiplier, I should say. And that multiplier is made up of the tax rates of the taxing jurisdictions that govern where that property is located. So taxes are pretty big expense. When you rent an apartment, those taxes are factored into the rent. And so a rent or never, you know, there's not a breakdown that the rent or gets a bill for rent, which is this part goes to taxes and this part goes to insurance and this part goes to maintenance. And so forth, it's just all lumped in together. So there's an economies of scale that come into play. So if a homeowner's taxes go up, you know, year over year, that can be a pretty significant hit to that homeowner. Whereas if the taxes go up on an apartment project that based on the economies of scale, it's not as harsh. course of a month. So you've got a cost of borrowing money to buy the house. So there's going to be an interest rate and you may have your origination fee and your other upfront costs associated with financing the purchase of that home. And so there's a cost associated with that. And then until you pay that mortgage off until you pay that debt off, there will be an interest payment generally each month. You've also got improvements and repairs as part of the cost of ownership. And again, on the multi-family project side, on department complex, again with the economies of scale, that can be absorbed a little bit easier than if you had to do significant repairs or improvements to your home. The compliance with the laws, the third one, their local ordinances are generally going to have the most significant impact on property ownership. So you've got local ordinances such as zoning or plating or nuisance laws that are going to impact your use of that property. And then we've got private regulations called restrictive covenants or CCRs, covenants, conditions and restrictions are also known as D restrictions. And so the homeownership is subject to those D restrictions. And that's a whole nother conversation. But you've got people that love them or hate them. And what you generally have is people tend to say they don't like them. But there is a benefit to them. If you've been sure as your neighbor most of those are her yard, and your neighbor is not going to paint their house hot pink. And you know, bring down the value of the properties around that property. So there are some benefits to having the CCRs and the income of property or neighborhood. When we look at housing types, so we've got a list here of different types of housing. And we start off with the single family residential. That's just a single family home. You know, generally what we think of, if you're to buy a house to live in, it's generally going to be classified as a single family residential. We also have multifamily and under the multifamily umbrella, we have the duplex, the triplex, the fourplex, the semi detached house, and the apartments that will fall under the multifamily heading. We have a condominium. And the condominium is a form of ownership. And there's two, I think, two primary things. Yeah, three primary things, I guess, really, to know in relation to condo ownership. One is that the land on which the home sits belongs to someone other than the condo owner. So the land on which the home sits belongs to someone other than the condo owner. And so really the condo owners, the second thing, really the condo owner, owns the inside four walls of that unit. So that's the space that when you buy a condo, that's what you're buying is the space within the inside the four walls of that unit. And there are some obligations that do extend beyond those four walls, but that doesn't relate to ownership. So the ownership is within the four walls. So when you get into maintenance, for example, you've got electrical and plumbing behind the walls. If there's a electrical plumbing issue, then you may be responsible for that. But based on what the declaration provides, the declaration is a governing document for the condominium development. And it's, think of it like the rule book. And so if you're a condo owner, you own the inside four walls, but you've got ducting that runs through the ceiling, the AC unit may be in the ceiling, and then also the other half of it outside. And so if the AC unit goes out, even though it's not inside your four walls, the declaration will provide that you're still responsible for that. However, the third item is that the condo owner has an undivided interest in the common areas as a teneting common. So you've got the right to drive on the streets within the condo development. You've got to walk on the sidewalks, you've got to right to use the pool, as long as you're in good standing with the condo association. And then generally you have a signed parking or parking spaces, one or more parking spaces, as part of that undivided interest. So those are the three things with regard to a condominium. So it's a form of ownership, but the land on which the condo sits belongs to someone other than the land owner. The condo association itself owns that land and the common areas. And the condo owner owns the inside four walls of that unit, but may have some responsibility that extends beyond those four walls. And then the condo owner has an undivided interest in the common areas as a teneting common. A cooperative is another form of ownership. It's generally a unit within a larger structure, and residents own shares of stock in the cooperative, and then have a lease, like a proprietary lease, to a particular unit. So the cooperative will have bylaws and then likely rules and regulations as well, that govern the operation of that cooperative in terms of real estate ownership. So it's a right to a unit, one or more units within a larger structure, and then the residents will own shares of stock in the cooperative, and then have a lease to a particular unit. A townhouse is a property that's connected to one or more similar units, and the land there, one of the distinctions there, is that the land under that townhouse is owned by that townhouse owner. And so usually you have the, with a townhouse, you've got a shared party wall, and so let's say you've got a row of eight townhouses. So each of those townhouses will have a shared party wall between each unit. And then in terms of the yard and then the ground on which that townhouse unit sits, the owner of that townhouse unit will also own that land. There may be common areas, just like I mentioned with the condominium, in which the townhouse owner may have an undivided interest in as a tenant in common. So for example, you may have a road to access the townhouse development. You may have sidewalks, you may have a pool, you may have recreation facilities, and so those may be owned by the association, home-owned association, and then the townhouse owner has a undivided interest as a tenant in common in those common areas. A planned unit development, or PUD, is a type of subdivision in which the owner's belonged to an HOA. So membership is automatic and non-severable, so that means that whenever you sell, whenever a property is sold from the current owner to the next owner, that next owner automatically becomes a member of that HOA. So you can't, when it says non-severable, you can't separate that requirement belong to the HOA from that property. And then each owner will pay mandatory HOA assessments. We've got a retirement community. This is a group of residential units joined with amenities and then opportunities. If we look at the Delweb Retirement Communities, there's restrictions on age in terms of an age requirement for individuals to live in that community. And then they generally have activities and amenities that are associated with individuals at a given age. Mixed Use Development. This is, I've got a definition from ULI, Urban Land Institute. Somebody used their definition. So mixed use development, their mixed use development definition, characterizes mixed use development as one that number one provides three or more significant revenue producing uses. So examples would be retail, an entertainment office, residential, hotel, indoor civic, cultural, recreation. So three or more revenue producing sources such as those. Number two, Foster's Integration Density and compatibility of land uses. So as opposed to a large, you know, a planning and development where you've got a significant amount of acreage and you've got a lot of properties over an area that spread out. You're generally going to have more dense construction. So maybe some high-rise units with, you know, retail on the ground floor. And number three, creates a walkable community with uninterrupted pedestrian connections. So, you know, I can think, let's look at the rim, for example. So over at the rim, you have a lot of property. have multifamily. You can walk from the multifamily to a restaurant. You can walk to the bowling alley. There's other entertainment venues that you've got. There's retail businesses you can go shopping. So there's a number of different revenue sources there. I don't think there's any office over there yet. Manufactured housing. So there's I've got manufactured housing, modular housing, and then mobile homes. So manufactured housing is factory factory built unit on a permanent chassis, which is transported to a home site for installation. So think of this like a mobile home. It's just the modern day version. It's the modern day definition. So we call it manufactured housing. It's either permanently or semi permanently affixed to a foundation. And depending upon whether or not you affix it, if you do not affix it, then it's personal property. If you affix it to a foundation, then it becomes it can become personal or it can become real property. And then that part of that ties into how it's financed. Texas Law defines manufactured housing as a HUD code manufactured home constructed on or after June 15th of 1976. So remember that June 15th 1976. So any basically any mobile home built after June 15th 1976 is called manufactured housing. And it includes plumbing, heating, air conditioning, and electrical systems. We've got mobile homes and mobile homes are basically the same thing. It's just a mobile home under Texas law is a structure that was built prior to June 15th of 1976. So now we just we refer to them as manufactured housing. Modular housing is a factory. It's a it's construction where you've got factory built components. And then those components are sent out to the site and then put together. And they're built to the same standard as stick built homes. The issue you're going to run into with the modular housing is that they they look you know on a scale if you have manufactured housing or mobile homes. If you have manufactured housing on one end and then residential site what we call site built or stick built homes on the other end of the spectrum on a scale of 1 to 10 manufactured housing to 1. And then a site built home is a 10 that that modular housing tends probably to fall on the scale of of a 4. So it's it's almost in the middle between the two. The amenities. I mean the amenities you see manufactured housing are sometimes consistent with what you see in residential homes. It's just the overall construction is is generally not the same. You know it's a it's a lighter construction build compared to a site built home. But if you take a mod you know modular housing you know in a certain in certain instances you know for certain developments you even have the certain components of a site built home that are manufactured in a factory. You've got the trusses you know the trusses are one and with with certain types of residential new home construction you know the walls may be even may be manufactured off site and then delivered to the construction site and put together. And the you know the thing there is that you're you're putting the the walls together so to speak and a controlled environment so you know outside of the weather so if it's raining or if it's bad weather you're you're not that's not interfering with putting together the components of this this house. And then that's much more controlled environment and so then you can take it out to the job site and then start to put everything together now it doesn't always fit together like a like a perfect puzzle piece of sometimes you still take it apart and put it back together. And make some cuts and put it back together however I think the distinction is that when you look when you look at a modular house that you can look at and go out that that looks a little bit more towards the spectrum of on the spectrum looks a little bit more towards the the mobile home side or manufacturing housing side than it does of what we consider traditional residential site built home. And you know the pitch of the roof is often a different slope much different slope than a traditional site built home with with pre manufacturer trusses so so there are certain of my whole point telling you all this is that there are some subdivisions that in the CCR's the Covenants Conditions and Restrictions or D restrictions require you know residential use only and site built home only and they will reject a modular home because it's a very important thing to do. And then the last thing I have is a time share and a time share is ownership in a time it's generally a week one or more weeks of a year and then the owner of that time share owner gets to use that that property based on that time that they purchased and then there's also an generally you see this associated with vacation resorts there's there's also a maintenance fee that the time share all the time share owners pay on a monthly basis to cover the the property expenses on an annual operating expenses. And so there are also when it comes to time shares you know different levels of of a time share ownership based on you know which week you purchase so you know if you've got a July 4th or a week then encompasses July 4th at a vacation resort then that's probably going to be the best week you know in one of the highest that time share will have the highest value compared to a week at a lake in January when it's when it's cold and everybody's back in school and so people do save up their time share they'll bank their time and roll it over and then and then use that time elsewhere so not necessarily at the resort where they bought the where they bought into the time share. And then another one that's really not tied into housing because it's not really a form of ownership but it's more of a license and that's what I'm starting to see a lot of instead of the time share model it's more of a license model whereas with the time share that that interest is deeded to the time share owner so that time share owner actually receives a deed. And if the if the time share owner for example has a mortgage or and they don't pay that mortgage then that that that property can be foreclosed on if they have the main as fee requirement they don't pay the main as fees then they can be foreclosed on just as you would with the with a residential house you know where you've got a deed but a license is there's no ownership and then where the time share ownership continues on in perpetuity. And perpetuity until it's transferred to another party that that license usually has an expiration date say 40 years out so it may be assigned you know say to the to the air to the children but it has a termination date. Another element when we talk about concepts of ownership is desirability features so we've got location aging condition appearance and appeal neighborhoods and appreciation prospects so when we talk about location you know one of the things they say in real estate is it's location location location and why why all that has been. That mantra has held true there are so many other factors now however that location location location is still very relevant you know when you look at where people want to live they want to live where they have a good schools where it's close to work you know ease of transportation access to government services shopping entertainment. You know the you know the an area that's going to meet the objectives for that homeowner what they're trying to accomplish when you look at aging condition the age of a house and physical condition contributes to you know individuals wanting to buy and live in that house and then it also has an impact on the pricing or the value of that property. Parents and appeal you know when we talk about the both the interior and exterior you know we're looking at landscaping exterior decoration has the house been updated curb appeal you know when you drive by to go oh my gosh that house needs a lot of work or that's a cute house and same thing on the inside you know has it been updated or does it need it need a significant update that will have an impact on the pricing of that property. And then the neighborhood you know we look at economics stability in that neighborhood and in that area in that region we want to we want our property to appreciate and value and so we don't want to buy into an area that's going to where our property is going to depreciate or we're going to do everything we can to do. take care of our property, but our neighbors are not. And so what they do has a direct impact, or sometimes indirect impact on the property value, your property value. You want well-regulated growth in that community. You want thoughtful zoning in terms of how that city is laid out and is there a harmony that's created by that zoning regime? The overall appearance of the neighborhood and then neighborhood amenities. What does the neighborhood have? Does it have playgrounds and does it have a pool? And walking trails and green spaces. And then we look at appreciation prospects, based on population growth in that community. That's significant. If people are moving in, then people need a place to live. And they're either going to buy a house or run an apartment. Another important impact is there's been studies that show there's a direct correlation to appreciation based on high quality of schools in the area. So that's significant, high quality of school in the area. Employment opportunities. And then just overall prosperity in the region is important. We look at tax benefits now associated with home ownership. We had some significant change to the tax code back in 2017 that went into effect in 2017 called the Tax Cuts and Jobs Act of 2017. And one of the things homeowners were able to do was to, you had your itemized deductions. And at that point in time, they were, I don't remember what they were for a single filer. They, I want to say it was below $10,000. And then for a married couple, I want to say it was around $12,000 maybe. Don't quote me on that. But so you could, if you got above that dollar amount, then you could itemize your deductions. Know what, without me sitting here guessing. I'm gonna look it up. That's the beauty of. The internet. It looks like. Yeah, that's right. I think so. I think for married couple, for single filer, $63.50, that seems maybe like it's still kind of low. And then for married couple or a couple of filing jointly, it was $12,000. So that's, that's down to right. And then so that, the change in the tax code had a significant impact on it. Because if you were able to, to get above those dollar amounts, then, then you could itemize your deductions. And I mean strike that you could, you could get above that standard deduction and then itemize your deductions. That's right. And so I'm looking here. Yes, so filing status was $63.50 and then married was $12,000. So, so, if you, if you had your, your mortgage interest was one item. If you bought a house, there were certain expenses on the front end of that purchase that could be included in that dollar amount. And then, and then paying taxes. And so generally with, with those two or three elements, you could end up exceeding that standard, that standard deduction amount. And then you could start itemizing. And then anything else that you added on was included in that was part of your deduction for tax purposes. And so one of the significant changes that took effect with the tax and jobs, tax cuts and jobs act to 2017, is that the itemized deductions for single-filer jumped to $12,000 and itemized deductions for a married couple or $24,000. So until you get to $24,000, then you're not itemizing your deductions. You're just going with the standard deduction. So to a certain extent, I can be some of benefit, but then people lost, as part of, that was a benefit of homeownership, lost that, that, that, that, that was one, hey, I'm a homeowner and I get to, deduct my mortgage interest in my taxes, when I pay taxes. And so now you, you know, you've lost that as a homeowner. But however, your standard deduction has gone up to $12,000 or $24,000, if you're a single-filer or a married couple-filing jointly. The other thing, the other issue, is that the, there's a limit on the deductible amount for property taxes now and that's $10,000. So where, you know, it'd be interesting to do a research study here in Texas, I've not seen any statistics on this, to see how many property taxpayers fall below or how many people, individuals, property taxes fall below that $10,000 amount. But it's a significant number. The individuals that were complaining the most about this were the individuals on the East and West Coast, where their taxes, even though they've got lower property taxes in terms of what they're paying based on their SES value and their, their, the multiplier, they were still paying more in taxes. You know, if they own a million-dollar property or a multi-million-dollar property, they're gonna owe more than $10,000 in taxes and then here they were capped at $10,000. In relation to what they can deduct if, if, for, for, for itemization purposes. And then another thing interest on the mortgage can be included up to $75,000, up to $750,000 mortgage on a first or second residence. And then if there is a debt up to a million dollars was deductible if the loan was taken out or under contract before December 16th of 2017 and then the home purchase closed before April 1st of 2018. So there, there were some limits put in place on certain homeowners. So where individuals may have gotten more of an advantage and I would say that's a smaller percentage. They no longer get that. There's mortgage, there's a mortgage credit certificate which gives a dollar for dollar tax credit up to $2,000 on the mortgage interest for a first time home buyer that that first time home buyer pays each year. And that can be claimed without itemizing. So that's a pretty significant benefit. So when we talk about a tax credit, that's different than these other expenses that were allowed again if you're, because they're a factor when it comes to reducing from your just a gross income to determine what your tax liability is. But in this case, it's a dollar for dollar tax credit, which means you're getting a $2,000 tax credit based up to $2,000 based on the mortgage interest for a first time home buyer. So that's pretty, that's very significant. And then the capital gains exclusion has not changed fortunately that did not, that was not impacted by the change in the tax laws. And so, a gain, so under the capital gains exclusion, a gain on sale is defined as the difference between the amount realized from the sale of a house and the adjusted basis of the house. So let me say that again. The gain on sale is defined as the difference between the amount realized from the sale of a house. And then the adjusted basis of the house. So the amount realized is the selling price minus the cost of selling. And then the adjusted basis is the original cost of the home plus the value of any capital expenditures, any capital improvements. And so there's a couple of required elements that come into play here. One is that the house must have been used as a primary residence for two out of the last five years. And it doesn't have to be two years consecutive. You could live in one house for six months and then another house for six months and then aggregate that time period. But it must have lived in it as your primary residence for two out of the last five years. And then a single filer has a gain exclusion up to $250,000. And a married couple has a gain exclusion of up to $500,000. So what that means is you buy a house, and that house, let's say you buy a $250,000 house. Let's say, let's do it this way. Married couple, you buy a $500,000 house. You live in it and you go to sell it. And it's appreciated significantly in value. So you take your selling price or the amount realized which is your selling price minus the cost of selling. And so let's just factor in and that's gonna be about roughly 8%, maybe less on a house that price. And so let's just get us to back to a million. So let's say your amount realizes a million. And then you've got your adjusted basis plus any capital expenditures. So let's just say there were no capital expenditures. You bought the house, you lived in it, you're selling, you bought it for 500 and you're selling it and your your amount realized is going to be a million. Then you've got a $500,000 gain exclusion. So in many instances, if you were selling asset that has improved in value, appreciated in value like that, that you would owe taxes on that amount realized or on that gain. Not the amount realized right there, but the gain. But in this case, the tax code allows you a gains exclusion. So you don't have to pay tax on that $500,000 or if you bought a $250,000 house that appreciated a $500 and let's just say your gain was $250,000 as a single-filer, then you don't pay tax on that $250,000. So that is a great way to create wealth is by buying a house, living in it for two years, selling it, buying another house, living it for two years, fixing it up, selling it and so on. Next item we're going to talk about is homeowners policies, homeowners insurance policies. So there's there's what's called a package policy and the package policy includes coverage for the dwelling, for personal property, for other structures, for loss of views, for personal injury and medical payments. So when you buy that that insurance policy includes those coverage of those items. When we talk about coverage for the dwelling specifically, the policy will pay for damage to the house covered by loss. So if there's you know as part of the dwelling coverage under that policy, the policy with dwelling coverage pays for damage to the house covered by loss. For personal property it pays for items in a house damage, stolen or destroyed. For other structures it pays, the policy pays for structures not attached to the house such as a storage shed or a detached garage. For loss of views, the policy pays for additional living expenses for a temporary move resulting from damage from a covered loss. For personal liability it pays for costs and damages in case of legal liability for someone else's injury or property damage. And then for medical payments it pays for medical bills of people hurt on the property. So when you have a package policy it includes coverage for all of those items. And then if we look at the types of coverages, we've got coverage for fire, lightning, aircraft, vehicles, vandalism theft, explosion, riot, smoke, windstorm, hail, hurricane, and sudden and accidental water damage, which does not include flooding. So if we look at exclusions, we've got flooding, earthquakes, termites, insects and rodents, frozen plumbing and unoccupied dwellings, wind and hail damage to landscaping, wear and tear, vacancy, mold, and water damage from sea pitch. There's two policy types. There's the all-risk and there's the named perils. And with the all-risk, which is also known as a comprehensive policy or an open perils policy, it offers the broadest protection unless specifically excluded unless there's something specifically excluded. So an all-risk policy also known as a comprehensive policy or open perils policy offers the broadest protection unless specifically excluded. And this is the HOC policy in Texas. We have the HOA, HOB and the HOC. And this is this would all-risk or the comprehensive policy or the open perils policy is also the HOC policy in Texas. And it will cover, it provides the broadest protection unless specifically excluded. The named perils cover policy covers only the causes of law specifically named in the policy. So you've got to read that policy to determine what it will cover. And then it won't cover anything else. There are two types of claims. There's the replacement cost and then there's the actual cash value. The replacement cost is the cost of rebuilding or repairing based on current construction costs. So it's not the market value and does not include the value of the land. The actual cash value is the cost of rebuilding or replacing the property minus depreciation. So the replacement cost will cover the cost of rebuilding, repairing based on current construction costs. The actual cash value, the cost will pay the cost of rebuilding or replacing the property minus depreciation. So the actual cash value often does not pay enough to completely rebuild a damaged or destroyed home. So out of those two, the replacement cost is the better policy. There's going to be a higher premium associated with that. So you've got to take that into consideration. Insurance companies use a process called underwriting to decide whether to sell a policy and at what rate. So insurance companies use a process called underwriting to determine whether to sell a policy and at what rate. And the factors that are included in underwriting are the home's age and condition. The home's replacement cost, the location of the home, they build availability of local fire protection. So how how close is the home to a fire station or to a fire hydrant. The claims history for that property and then the insured credit score. And insurance companies will use the comprehensive loss underwriting exchange or clue to review claims history. So companies will use clue or the comprehensive, comprehensive loss underwriting exchange to review claims histories for properties. Under flood insurance, home under policies generally do not cover damage caused by flooding. And so in certain circumstances, a lender may require flood insurance based on where the property is located. So for example, if the property is in a special flood hazard area, which has a that's an area that has a 1% chance of flooding in a given year, then the lender will require flood insurance. And then a separate flood insurance policy will be required. Most flood insurance policies in Texas are sold through the National Flood Insurance Program. And then we have Tweeta, which is the Texas Windstorm Insurance Association. And Gulf Coast residents must purchase flood insurance to be able to or to be eligible for a Tweeta policy. So this applies to properties constructed, altered, remodeled or enlarged on or after September 1st of 2009. And the property must be located in specific flood zones determined by the National Flood Insurance Program. And then flood insurance coverage is available through the National Flood Insurance Program. So residents must purchase the flood insurance in order to be eligible for a Tweeta policy. And so with with windstorm and hill insurance, most insurance policies do not cover windstorm or hill damage, especially properties in the 14 coastal counties of Texas, parts of Harris County and parts of Galveston Bay or and Galveston Bay. And so Tweeta sells policy specifically for that coverage. So again you got to buy the flood insurance and then you can buy the Tweeta policy. Windstorm coverage may not be purchased once it hurricanes enters the Gulf of Mexico. So by the end it's too late. You can get earthquake insurance coverage by purchasing an endorsement. And so depending upon where you live that may be necessary. You can get extra coverage that would be through in one or more endorsements for for items that are not covered or items that exceed the dollar amount of coverage in the policy. So the policy will generally say it will cover personal property items but only up to a certain dollar amount for jewelry. You know it won't exceed a certain certain dollar amount or a certain percentage of that total coverage for personal property. So if you've got expensive jewelry or significant jewelry collection, art collection, camera equipment, items that are excluded, sewer damage, foundation damage, motor remediation, water damage, you can buy extra coverage through and then those will be added onto the policy through endorsements. Another thing to consider is a personal umbrella liability insurance policy and these are generally one or two million dollar umbrella policies that provide additional coverage over and above what your primary policy covers. There's you know terms of getting insurance for a condo. You know you're ensuring the inside four walls of that unit plus the mechanical electrical plumbing and then the insurant the part of your condo association dues will generally include liability insurance for the condominium grounds, the common areas and and then for the exterior property. So if there's damage to the roof then the condo associations insurance policy will cover that. There's specific insurance for mobile homes or manufactured housing. There's insurance for farming ranch. There's different elements that come into play there based on crops, cattle, If you've got a couple of six-figure farm implements or farm equipment, your general policy is not going to cover those. It's going to be a different type of insurance policy. Finally, we look at affordability. We've got pricing and expenses. We have mortgages and we have qualifying a borrower. Under pricing and expenses, affordability is primarily going to be based on price. It's also going to take into account the expenses that that homeowner is going to have to pay. Also, their ability to pay. The purchase price is just one of many expenses at a homeowner will pay. You've got taxes, insurance, association dues, utilities, maintenance, repairs, interior decorations, furnishings, pest control. Anything else you can think of, that furniture that falls under furnishings. You move into a house and you want to put in a new flooring and buy a new furniture and new window treatments. That can get really expensive. You want to put in a deck and so forth, put in a pool. There's a lot of expenses that can come into play. The maintenance is also going to be a big one. It costs money to maintain a property properly. Under mortgages, there's many different types of financing. We're not going to cover that comprehensively here. The main thing to note is that the mortgage payment or AMorgas payment typically includes PITI, which stands for principal interest taxes and insurance. Then in terms of qualifying a borrower, generally a real estate agent should have that borrower pre-qualified through a lender or mortgage broker before starting to look at properties because that way they can determine what amount that what price of a house they can afford. Under qualifying a borrower, this determines whether a borrower has the ability to pay. You look at the principal interest taxes and insurance and then all the other stuff. There's two types of ratios. There's the income ratio or also called the front end ratio and then there's the debt ratio or also referred to as the back end ratio. The income ratio is the monthly housing expense, so the PITI, divided by monthly gross income. The debt ratio is the monthly housing expense plus the monthly debt obligations. Generally these are short-term debt obligations or strike that. These are obligations that are not going to be paid off in the short term. There you go. Car payment, student loan payments, things like that. There's also going to look at the job history, the residence history, their looking for stability, income stability, income growth potential. Are you in a job where there's opportunity for growth or are you going to make $20,000 a year and that's all you're going to make ever. That comes into play. The borrower is net worth and then also the lender will evaluate. So that concludes our review of concepts of homeownership.