SoFi

You’ve probably used an Automated Valuation Model (AVM) without even realizing it. When you open up your favorite real estate site, type in a street address, and instantly see an estimate of what the property is worth, you can thank an AVM. This data tool, which has proliferated in recent decades, uses software, algorithms, and existing information to calculate an estimated value for a given piece of property.

AVMs may have made it easier to estimate the sale price of a house you have your eye on, but they have their limitations, too. Below, we’ll dive into how AVMs work, how they’re used — and when you might still need to rely on a human appraiser.

What Is an AVM?

Pinning down how much a home is worth is a process known as property valuation — and has historically been a job for human property appraisers. But as computers proliferated and software evolved, eventually, AVMs were created. They’ve been around for a while now: Zillow launched its Zestimate product, which functions on an AVM, in 2006. It’s now possible to get a basic understanding of what your home is worth in mere seconds.

How AVMs Work

AVMs allow big companies like Zillow — as well as lenders, real estate agents, and shoppers — to get a quick estimate of a home’s value at a glance. These software products use a matrix of existing data (more on that below) to spit out a good guess as to what a home might be worth.

AVMs are also helpful because they’re updated in real time based on ever-changing market factors. For instance, if one property on a block sells for a higher price than expected, that sale price will begin factoring into the AVMs for the other homes on the block as soon as the information is public. In other words, the information is far more dynamic and constantly up-to-date than a human appraiser could offer with a single study.

Recommended: The Home Mortgage Interest Deduction Explained

Key Components of AVMs

AVMs utilize a collection of different data sources and statistical algorithms to build their estimates. There are several different AVM companies that offer these programs to clients who use them, and they each have their own proprietary way of computing home values.

Some of the most common information that automated valuation models rely on includes:

•  Public records that can include information like property sales and tax history

•  Multiple Listing Service (MLS) data, which offers pricing information on other, similar properties (known in the industry as “comps”)

•  Information about the property, such as its age, size, and tax assessment, which may be pulled from public record

Using machine learning combined with algorithms created by the professionals coding the software, AVMs can use these pieces of information to generate an up-to-date estimate for just about any property in America — though its level of accuracy may vary.

For example, with newly constructed properties, there may not be many perfect comps available in the area, which could lead to a less accurate AVM estimate. There are other situations where AVM accuracy might be lacking, too — we’ll dig into that below.

Applications of AVMs

Automated valuation models are useful in a whole host of situations — from mortgage lending, where lenders can use the information to make better informed underwriting decisions, to portfolio management, which can help investors understand the current value of their real estate assets.

And as anyone who’s ever quickly looked up the price of an eye-catching house can attest, AVMs are very useful for property shoppers, too. As long as the estimate is treated as just that — an estimate rather than an exact price — having access to AVM information can help browsers understand which homes they can afford to make an offer on or how much financial preparation they’ll need to do to be able to afford the house of their dreams. (They won’t, however, give you a complete picture of how much it will cost to own the home. For that you need a mortgage calculator with taxes.)

Advantages and Limitations of AVMs

Like everything else in life, AVMs have both advantages and limitations to keep in mind.

Advantages of AVMs include:

•  Speed. Even the very fastest human property appraiser can’t update every property’s valuation every few hours like an AVM can.

•  Cost-effectiveness. While appraisals must be paid for on a per-appraisal basis, factoring in the appraiser’s time working and expertise, companies may pay for AVM software once or as an affordable subscription service.

•  Scalability. Since AVMs rely on algorithms, they can offer thousands of valuations based on less overall work than the bespoke human appraisal process.

On the other hand, their drawbacks include:

•  Potential for inaccuracy. Any algorithm is only as good as the data fed into it, and mistakes in public records do happen. Records can also be outdated — not reflecting an HVAC upgrade, for example.

•  Inability to assess intangibles. There are some factors (such as property condition) that can affect a home’s value that don’t easily translate to a database. In these instances, a human appraiser still has the edge.

AVM Accuracy and Reliability

As we’ve seen, although AVMs can offer a lot in terms of speed and cost-efficiency, they can sometimes lag behind human appraisers when it comes to accuracy. You might hear the phrase “AVM appraisal” but a valuation isn’t truly the same as an appraisal that you would get from a professional. Newly constructed or non-traditional properties can be more difficult to assess for value based on comps (since there aren’t many or any good ones), and intangibles like property condition don’t always show up in the data these algorithms draw from.

Fortunately, some AVMs also offer confidence scores, which can help those using the estimates to understand how likely it is that the value offered is accurate (or close to it). You could also check with a knowledgeable real estate professional to get their take on whether a given estimate hews closer or further from the truth.

Impact on the Real Estate Industry

AVMs have already changed the real estate industry by making home value estimates widely and readily available to the general public. Along with helping buyers shop in what can sometimes feel like a confounding market, AVMs also make it easier for those who do own their home to understand how much equity they’ve built — or how much they might stand to gain by selling.

While a human appraisal and home inspection continue to be common parts of most real estate transactions, over time, as they increase in accuracy, AVMs may reduce the need for such services, potentially saving money for those on the market. They could also help speed up the underwriting process for home mortgage loan lenders, as well as making it easier for real estate agents to offer their clients home showings in their price range.

The Future of AVMs

Although AI has been all the rage the last few years, we’re still just at the very beginning of this new line of technology — which has the potential to evolve at an exponential rate. While many AVMs are already incorporating machine learning and other high-tech methods, technological developments along with the continued progress of AI and big data could see these valuations becoming far more accurate and accessible over time.

Recommended: Are Property Taxes Included in Mortgage Payments?

The Takeaway

Automated valuation models, or AVMs, have already changed the real estate industry — and have the power to continue to do so as technology improves and advances. However, human appraisals still have an irreplaceable role in today’s market, ensuring the best accuracy for tax assessments and sales.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

How do AVMs compare to traditional appraisals in terms of accuracy?

Generally speaking, AVMs are not as accurate as a traditional appraisal. While AVMs are both speedy and cost-effective, their estimates are only as good as the data fed into the program — and, of course, sometimes that data can be inaccurate. AVMs also often can’t evaluate property conditions and other intangible elements that a human appraiser could easily spot.

Can AVMs completely replace human appraisers?

As is true in all parts of technology, as advancements continue, the jobs those technologies make easier may change. For now, human appraisers are still an important part of the real estate market, offering their expertise and individualized focus on a property rather than relying blindly on computer algorithms and data.

How do AVMs handle unique or recently renovated properties?

Nontraditional, newly renovated, or newly constructed properties can be challenging for AVMs, since they utilize publicly available information about comparable properties, or “comps,” to make their estimates (and these types of properties may not have very good comps available). AVMs also assume the same level of condition for all homes, which means they might overvalue a home in disrepair — or undervalue a newly renovated one.

Are AVM results accepted by all financial institutions?

Because AVMs can not (yet) match the accuracy and reliability of a human appraisal, many mortgage lenders still require human appraisals to be part of the purchase process. AVMs are new enough that legislation is still actively being made to regulate their use and ensure they comply with nondiscrimination laws and avoid conflicts of interest. Over time, more lenders may allow AVMs to replace human appraisals, but that’s not the market we have today.

---

Photo credits: iStock/miniseries

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOHL-Q424-003

Read more

Investing in real estate has the potential to build your assets and make you money for years. Turnkey properties are real estate investments that are designed to be “turnkey” — in other words, ready to rent immediately, with little effort needed from an investment owner. If you’re interested in direct ownership, but don’t want the hassle of renovating a property or finding a tenant, you may want to look into turnkey investing. We’ll break down what it is, what to look for, how to finance it, and what alternatives you have for investing in real estate.

Definition of a Turnkey Property

Turnkey properties are rent-ready homes that are typically new construction or fully renovated. They’re often associated with a turnkey company that has completed the renovation and may already have a paying tenant in the rental unit. It might even have property management services in place.

Turnkey rental properties are most common in areas where homes sell at a lower price point but have high rental rates. Outside investors are often targeted for these investments, which can be both a good thing and a bad thing. There are some key considerations you’ll need to make if you decide to invest in one.

Key Characteristics

Some key features of turnkey rental properties include:

•   Newly built or renovated

•   New systems, such as electrical, HVAC, roofing, and plumbing

•   New flooring, paint, countertops, and cabinets

•   Ready to rent or tenant in place

•   Rent is coming in as per the lease agreement

A turnkey property is meant to have no gaps in monthly rent for the investor, which is a major positive when you’re getting started.

The Difference Between Turnkey and Traditional Properties

The major difference between a turnkey property and a traditional property is there’s usually a middleman involved to make sure turnkey homes are truly “turnkey.” The turnkey company’s role is to buy a property, rehabilitate it, get a tenant in place, and then sell the property for a large profit. Some turnkey companies also provide property-management services.

With a traditional property, you would go through the purchase process with a real estate agent and then do a lot of the leg work yourself. You would have to find a property management company, contractor, cleaner, attorney, accountant, and more.

Recommended: The Ultimate Moving Checklist

Types of Turnkey Properties

Turnkey properties come in all shapes and sizes. What’s available depends on what has been renovated by a turnkey investment company. You’ll see a lot of single-family homes, but you’ll also come across some multi-family units and commercial properties that are ready to go.

Turnkey Investment Process

Investing in a turnkey property is a straightforward process, much like buying any other property. The hardest part of the process is in the research. Here’s what you’ll want to investigate:

•  Markets: You’ll want to find an area with high affordability, high rental rates, and a high rental population. You’ll also want to research neighborhoods to ensure you’re buying in an area where people feel safe renting.

•  Turnkey and property management companies: Read reviews or talk to people who have worked with the property management company before.

•  Individual properties: Look for quality renovations, desirable neighborhoods, and numbers that work. No matter what, you’ll want to see it in person.

Once you find a property you like, you’ll make an offer on a home, get a loan, go through escrow, and sign on the dotted line.

What may be different about a turnkey property is it may not be listed by a real estate agent. You might be buying directly from the company that renovated it.

Advantages of Investing in Turnkey Properties

Turnkey real estate has a number of benefits:

•  Immediate rental income: With a turnkey property, they’re either ready to rent or already rented, which provides immediate rental income. It’s also possible rental procedures and management have already been set in place.

•  Minimal effort: You don’t have to find contractors or put in elbow grease to get the property ready to rent. It has already been done for you.

•  New or renovated: Since turnkey rental properties have been recently updated, they probably look pretty great and can easily rent out.

•  Geographical diversification: If you’re priced out of your own market, you might like investing in another area that’s more affordable. A turnkey property can help you invest without needing to live in that area.

It’s also important to look beyond the fully renovated home to possible drawbacks.

Potential Drawbacks of Turnkey Investments

There are considerable drawbacks to turnkey investment properties, not the least of which may be that all the opportunity for profit may have already been squeezed out of the deal. Consider these possible problems:

•  May be overpriced: Turnkey investment companies aim to get top dollar from investors. There’s little headroom for a property to appreciate when it is priced at the top of the market. And if you are paying top dollar for the property, a significant amount of the rental income can go toward covering a mortgage, not to mention keeping up with repairs.

•  Turnkey companies make the majority of the money: In addition to charging top dollar for the property itself, many turnkey companies also serve as property managers and may charge fees for maintaining and renting out the property.

•  May not be in the best neighborhood: When you’re not a local investor, it can be hard to tell if a property is in a desirable area or not.

•  Rental income numbers may be too optimistic: When you buy a turnkey property from a company, its estimate of rental income may not account for vacancies or missed payments. Run your own numbers.

•  Renovation may not be high quality: Companies that complete renovations may not be putting in the highest quality materials, and pictures won’t capture how good (or bad) the renovation might be.

•  May be difficult to sell at a profit: If the property is turnkey and priced at the top price point, it may be difficult to get top dollar again from another buyer.

Recommended: How Much Is My House Worth?

Who Should Consider Turnkey Properties?

Turnkey properties are often lower-priced properties marketed to out-of-state investors who may be priced out of their local market. This can become a problem if the investor doesn’t know the neighborhood or values of homes in the area. Others who might consider a turnkey property:

•   Investors who don’t have time to assemble a team or rehab a property

•   Investors willing to sacrifice some profit margin for the convenience of a turnkey property

•   Investors who don’t want to manage a property

•   Investors who can find a good deal

•   Investors who want to enter a new market

How to Evaluate a Turnkey Property

Not every turnkey property is going to work for you, and quite frankly, not all of them are “turnkey” as the name suggests. You’ll want to look at the following factors in evaluating a turnkey rental property.

•  Location: Is the home in a desirable neighborhood? Ideally, you want your investment to appreciate or generate cash flow (sometimes both). If the neighborhood isn’t one you’d want to live in, or isn’t kept up very well, that will affect your property’s value. If you’re serious, you’ll want to get on a plane and walk the streets where you want to invest.

•  Property condition: Even with renovated properties, you’ll want to ensure the major systems are in good working condition. It’s easier to get things fixed before you buy the property, so a home inspection is important.

•  Financials: Learn to run your own numbers and analysis to make sure you’re getting a good deal. You don’t want to rely on the number provided to you by the turnkey company. Start with a mortgage calculator with taxes and from there, look at cap rate, ROI, and cash flow.

•  Valuation: Don’t overpay for a property because you are unfamiliar with the market. You can find the fair market value from an appraisal or a BPO (broker’s price opinion).

•  Turnkey company: Thoroughly vet the turnkey company. Talk to people who have used the service. Post questions in online real estate forums and look at reviews online.

•  Management company: Talk to the management company and people who have worked with the management company. You don’t want a company that only does the bare minimum for your property while charging a premium.

Financing Turnkey Properties

Financing turnkey real estate is typically done with traditional home mortgage loans. Financing may be easier to qualify for since properties are in good condition. Typical eligibility requirements for financing include:

•  Credit score: 620 or greater

•  Debt-to-income ratio: No greater than 45%

•  Cash reserves: Three months of cash reserves

•  Mortgage insurance: Required for loans with less than 20% down payment

•  Down payment: At least 15% for one unit, 25% for two or more

•  Maximum loan amount: $806,500 for a single-family home in most areas

Depending on your property, you may need a different loan type, such as a multifamily, portfolio, or apartment loan.

Tax Implications of Turnkey Investments

You get all the tax benefits of ownership with turnkey investments. You’ll be able to deduct certain expenses since you’re paying for them directly. The IRS lists these as:

•   Mortgage interest deduction

•   Property tax (often, property taxes are included in the mortgage)

•   Operating expenses

•   Repairs

•   Depreciation

Comparing Turnkey Properties to Other Real Estate Investments

If you’re interested in real estate investing, but don’t think turnkey homes are right for you, there are other options.

Fix-and-flip

A fix-and-flip property is a property purchased at a discount, renovated, and then sold for a profit. Buying a foreclosed home that needs repairs is a great example of this, but you’ll need to assemble a team to renovate and rent it.

REITs

A REIT is short for “real estate investment trust,” which is a trust that owns income-producing property (often commercial real estate) for the purpose of making a profit for investors. Investors own a share of the trust. It’s considered a passive investment where investors don’t need to make day-to-day decisions. You can buy a REIT on a stock exchange if they’re publicly traded or find the right broker if they’re not publicly traded.

Traditional rentals

You can work with a real estate agent to buy a property to rent out, either residential or commercial. Traditional rentals may need a little work to be ready and you’ll need to find your own team to be able to make it work.

The Takeaway

Turnkey properties sound convenient, but you need to do your homework to make sure the investment is a good one. You’ll also be buying at full retail price, which means there won’t be much room for the property to appreciate. On the flip side, it’s pretty appealing to walk into an investment property without having to fix it up. If you’re looking for direct ownership of real estate without the headaches, turnkey homes might be the way to go.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Are turnkey properties good for first-time real estate investors?

Each investor will need to evaluate the pros and cons for themselves. If you want to be as hands-off as possible, even at the cost of possible profits and upside, turnkey real estate investing might be the right fit. If you want to understand and work in your real estate business, you may want to look at the full range of investment options.

How much do turnkey properties typically cost?

Turnkey properties are typically sold at full market value, if not more. Most real estate investors look for properties below market value to get the benefits of appreciation and cash flow, and turnkey properties have a much smaller upside.

Can I visit a turnkey property before purchasing?

Yes, you can and should visit a turnkey property before purchasing, even if the company selling it is giving you assurances that everything looks good and is in working order.

---

Photo credit: iStock/Vesnaandjic

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOHL-Q424-007

Read more

A blue tape walkthrough is a surface-level inspection of a new home where issues are flagged with blue painter’s tape by the buyer. It’s a normal part of the process for homeowners buying a new-construction home. You’ll complete the final blue tape walkthrough 5 to 7 days before you close on the home, and any issues you draw attention to should be fixed by the builder.

It’s incredibly helpful when you know what to look for. This guide can help you complete the blue tape walkthrough with confidence.

Understanding the Blue Tape Walkthrough

You might hear a blue tape walkthrough called “blue tape inspection,” but it is not, technically speaking, a full home inspection. You’re the one walking through, and you’re not expected to have specialized knowledge. But a blue tape walkthrough is the perfect time to flag cosmetic or functional issues such as paint touch-ups, a door that’s sticking, or tile grout that needs to be cleaned up. Flagged items will be added to the “punch list,” which is a list your builder has of all the items that need to be completed before a homeowner moves into the new construction home.

Taking care of all the punch list items you find is the builder’s job and will make moving into your new home smoother.

Definition and Purpose

The blue tape walkthrough is an opportunity for you to go through the house with your construction manager before you close on your home mortgage loan. You’re ready to get through the closing and focus on your moving checklist — you don’t want to also have to worry about fixing a bunch of things around your new home, so the more you find, the better. After all, you aren’t buying a foreclosed home or a historic home built in the last century. You’re paying for new construction and should make sure you get your money’s worth.

Origin of the Term “Blue Tape”

Blue tape refers to the blue painter’s tape used to visually mark where an issue needs to be addressed. Blue painter’s tape has only been around since 1988, so the origins are fairly recent.

Recommended: Mortgage Calculator with Taxes

Blue Tape Walkthrough Process

The blue tape walkthrough process is pretty straightforward. Here’s when it happens, who does it, what tools are used, and what to expect:

Timing of the Walkthrough

You’re well past the point of making an offer on a home when you take this step. The blue tape walkthrough occurs 5 to 7 days before you’re set to close. It’s not intended as a home inspection. Ideally, that has already been completed. It’s a final walk-through designed to flag minor issues and point out what’s missing or not working.

Participants Involved

The blue tape walkthrough is completed with the new homeowner and a representative from the builder, such as a construction supervisor or community superintendent. The buyer’s real estate agent can also accompany the buyer, as can any other professional the buyer invites.

Tools Used

You don’t need specialized tools to complete a blue tape walkthrough, but you’ll likely want the following:

•  Blue painter’s tape. You’ll likely be given this by the builder, but you can bring your own. You’ll tear off a piece when you find something that needs to be addressed.

•  Measuring tape. If something doesn’t feel quite right or looks off-center, you can use a measuring tape to check.

•  Level. A level can help you check alignment if your eye tells you something seems off.

•  Flashlight. For those hard-to-see areas.

•  Camera. Take pictures of the defects you find. Make sure anything you asked to be fixed previously has been fixed.

•  Notepad. You’ll want to take notes, either on paper or on your device.

Recommended: How Much Is My House Worth?

Common Issues Identified During a Blue Tape Walkthrough

Don’t know what to look for? Unless you have experience, you won’t really know what to look for. It’s helpful to walk through with someone who has construction experience (builder, architect, or designer). Even after an inspection and blue tape walkthrough, it’s normal to miss things.

Hopefully, a home inspection has taken care of the major issues for you, and you’ll be looking for more minor, common issues on your own. Here’s a blue tape walkthrough checklist of what to look for in the interior and exterior spaces of the home.

Cosmetic Defects

You’ll likely see some cosmetic defects, including:

☐  Cleaning. Note areas that need cleaning, especially in the front yard and entrance after construction has been completed. Look for stains in the carpet or scratches on appliances or countertops.

☐  Chipped paint. Mark spots that may have a different sheen or need some paint touch-up.

☐  Drywall. Check for uneven surfaces, gaps, nail holes, or inconsistent texture.

☐  Missing or bad caulk job. Caulk smooths over a lot of edges. There are likely a few places where the builder missed, including sealing in new doors, windows, trim, tubs, toilets, sinks, and more.

☐  Paint overspray. You might see tiny splatters on tile, cabinets, or flooring.

☐  Gaps or visible seams. Mark any gaps you don’t like, such as transitions from one floor to another, a window to a wall, or visible seams along trim work.

☐  Dead grass. If landscape is included in your package, have the dead spots of grass addressed.

☐  Fence damage. Check for broken slats, areas where pests can enter, and uneven installation.

☐  Poor workmanship. Bad tile jobs, sloppy window installation, messy caulk, etc.

Functional Problems

Functional problems are those where something isn’t working the way it should. You may want to check the following:

☐  Working hardware. Check knobs and locks for functionality.

☐  Electrical fixtures. Outdoor lighting and interior lights should be installed and working. Ceiling fans should be installed securely and working.

☐  Drawers and cabinets. Make sure drawers run smoothly and cabinet doors lay even. They may need an adjustment or need hardware installed. Make sure the shelves are there.

☐  Windows. Test all the windows and make sure they open and close properly and smoothly. Make sure they lock securely.

☐  Doors. Both interior and exterior doors need to function properly. If they stick, they may need a slight adjustment. If you can see light through the sides of an exterior door, it may be missing weather stripping or need an adjustment.

☐  Plumbing. Run every faucet in the home and look for leaks. Make sure you have hot water. Flush all the toilets. Make sure you have water pressure. Make sure everything drains properly. Make sure you can find the water shut off.

☐  HVAC. Turn on heating and cooling mechanicals. Does your thermostat work? Take a look at the filter on the cold air return as it likely needs to be changed after construction has ended.

☐  Appliances. Make sure appliances that were included in your home purchases are installed properly. The dishwasher is often installed incorrectly. Use the oven or cooktop and make sure each burner works. Run the microwave for a bit.

☐  Garage door. Check to see if the garage door is operational.

☐  Grading. Make sure there’s a proper grade away from the house so water doesn’t settle around the foundation.

☐  Sprinkler system. Check the sprinkler system for leaks and errant spray.

Missing Features

The blue tape walkthrough checklist is longer still. Next step: Make a note of any feature that was promised, but has not yet been installed. Common issues might include:

•   Dishwasher, washer and dryer, or stove vent hood.

•   Dryer vent not installed.

•   Wiring for a TV or other electronics.

•   Upgrades you paid for.

•   Safety features, such as a fire alarm, carbon monoxide detector, or safety rails.

Importance of the Blue Tape Walkthrough

A blue tape walkthrough can help with quality assurance, help protect your investment, and ensure accountability on the part of the builder.

But perhaps what’s most important about a blue tape walkthrough is it helps take care of issues before you move in. When something comes up after you move, it’s much more of a hassle to fix than if it had been caught during an inspection or blue tape walkthrough.

Preparing for Your Blue Tape Walkthrough

If you’re working closely with your home builder, it’s likely you’ll have more than one blue tape walkthrough. You might be visiting the site all along and have noted issues that needed to be addressed when you saw them.

If this is your first blue tape walkthrough, here are a few tips to prepare:

•  Visit the home frequently (where possible). You may notice and flag issues that can be fixed before your last blue tape walkthrough with the builder.

•  Communicate with your construction manager. A good construction manager will likely flag issues better than you can. Good communication can help ensure issues are fixed in a timely manner.

•  Print out a checklist and take it with you. When you’re going through the house, you may forget what to look for. Take a checklist with you.

•  Ask for advice from experts. It’s hard to know what to look for, but you may have people in your network that are willing to help prepare you for a blue tape walkthrough.

•  Create your own punch list. You’ll want to be sure you have your own punch list to help the builder follow through.

After the Blue Tape Walkthrough

After you’ve completed your blue tape walkthrough, there are a few follow-up items to take care of:

•  Share your punch list with the construction manager. While they have their own punch list, just make sure you’re on the same page with what issues need to be addressed.

•  Set a timeline for repairs. On that same note, communicate with your construction manager about when you want repairs to happen. It’s not uncommon for a builder to say they’ll come fix something after your loan is closed, but they might be more inclined to fix something quickly if they haven’t been paid.

•  Follow-up with inspections. You’ll want to visit the property again to ensure the issues have been cleared up.

Blue Tape Walkthrough vs. Final Walkthrough

When you’re comparing a blue tape walkthrough vs. a final walkthrough, the major difference is the purpose. The purpose of a blue tape walkthrough is to flag minor issues the builder needs to address before closing. The purpose of a final walkthrough is intended to ensure the home remains in the same condition as when you wrote the contract and contractual obligations have been met.

The Takeaway

You play an important role in the blue tape walkthrough — don’t be afraid to take the time you need to flip every light switch and run every appliance to ensure that the details of your new home are taken care of before you move in. With a little blue painters tape, you can visually communicate to the builder what needs attention and where it is located.

You don’t need special knowledge, but it can be beneficial to bring along someone who can flag potential issues with you. The more that’s addressed before you move in, the less you have to stress about after you’ve moved into your new, beautiful — and fully functioning — home.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Why do real estate agents use blue tape?

Real estate agents or a home builder’s representative use blue tape, also known as painter’s tape, to mark walls and other areas because this tape is specially made so that it does not damage painted surfaces.

What is a blue tape inspection?

A blue tape inspection is not a true home inspection but rather a buyer’s walkthrough of a newly built home to identify anything that needs to be fixed before the closing. The buyer and a builder’s representative will walk through the home to look for cosmetic issues (such as dents or chipped paint) or functional issues (non-working appliances, for example) that need to be addressed.

---

Photo credit: iStock/Seth Cortright

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOHL-Q424-004

Read more

IRS Form 5498 is used to report IRA contributions to the IRS. The financial institution (often referred to as the trustee or custodian) that manages your IRA should send a 5498 tax form to the IRS on your behalf each year that you make contributions. They’ll send a copy of the form to you as well.

This form is designed to be informational for taxpayers and you don’t need to file a copy of it with your tax return. However, it’s helpful to know how to read IRS Form 5498 if you’re using it to keep track of your annual IRA contributions.

What Is IRS Form 5498?

IRS Form 5498, IRA Contribution Information is an official tax form that’s used to report individual retirement account contributions to the IRS. This form is issued by your IRA trustee or custodian and is sent directly to the IRS each year that you make contributions to your account.

You’ll also receive a copy of your Form 5498 in the mail, but the form is purely informational. You won’t need to file it with your federal or state tax returns. However, it’s a good idea to keep a copy of it with your tax records for the year.

💡 Need a refresher? Check out our guide: What Is an IRA?

What Does Form 5498 Cover?

A 5498 tax form is used to report information about the annual contributions you make to your IRAs, including traditional IRAs, Roth IRAs, SIMPLE IRAs, and SEP IRAs. You should get one form from each IRA custodian that you have accounts with. You may also be issued a Form 5498 for certain other transactions that are IRA-related, such as rollovers and required minimum distributions (RMDs).

Your IRA custodian or trustee must file Form 5498 with the IRS by May 31 following the year in which the contributions were made.

IRA Contributions

The 5498 tax form is used to report IRA contributions. The information is recorded in different boxes on the form, depending on the type of contribution it is.

•   Box 1: IRA contributions

•   Box 8: SEP IRA contributions

•   Box 9: SIMPLE IRA contributions

•   Box 10: Roth IRA contributions

When you receive your 5498 tax form, it’s a good idea to compare the contribution amounts listed there to the amounts you reported on your tax return. If you spot any errors, you can reach out to your IRA custodian to request a corrected form.

Form 5498 records both deductible and non-deductible IRA contributions. If you’re using a Roth IRA to save for retirement, for example, tax deduction rules don’t allow you to write off those contributions. But you’ll still get a 5498 tax form showing what you contributed for the year.

Type of IRA

As mentioned, Form 5498 reports contributions to different types of IRAs. So, you may receive this form if you make contributions to any of the following:

•   Traditional IRA

•   Roth IRA

•   SEP IRA (Simplified Employee Pension)

•   SIMPLE IRA

Box 7 of Form 5498 will identify the plan type that contributions are being reported for. You won’t see any contributions to other types of retirement plans, such as a 401(k) or 403(b), listed here.

Contributions to taxable accounts are not reported on Form 5498 either.

Conversions, Rollovers, and Recharacterizations

If you convert traditional IRA assets to a Roth account, roll over funds from one account to another, or recharacterize IRA contributions — which is the transfer of contributions plus any earnings from one IRA to another — you can expect to receive a Form 5498 reporting those transactions.

Here’s where those amounts will be listed on your form:

•   Box 2: Rollover contributions

•   Box 3: Roth IRA conversion amount

•   Box 4: Recharacterized contributions

You’ll also see information about the fair market value (FMV) of the account listed in Box 5. If applicable, Box 6 notes any life insurance cost included in Box 1.

In terms of the difference between a rollover IRA vs. traditional IRA, a rollover is simply the movement of money from one retirement account to another. For instance, you might roll money from a 401(k) into a traditional IRA if you change jobs. Or you could roll assets from one traditional IRA to another if you switch to a new IRA custodian.

Withdrawal/Distribution Info

Form 5498 is primarily used for reporting contributions to IRAs, but it is also used for listing RMDs. If you have a traditional IRA, you must begin taking RMDs at age 73 (assuming you turn 72 after December 31, 2022). The amount you’re required to withdraw is determined by your age, life expectancy, and account value.

RMD information is included on in these boxes on Form 5498:

•   Box 11: Only checked if an RMD is required

•   Box 12a: RMD date

•   Box 12b: RMD amount

Even if taking RMDs on an IRA is years away for you, it’s important to know what’s required. If you fail to take required minimum distributions on time each year, you may incur a tax penalty equivalent to 25% of the amount that you were supposed to withdraw. (The penalty might be reduced to 10% if you make a timely correction.)

Distributions from other types of retirement accounts such as pension plans are reported on Form 1099-R. Similar to the Form 5498, the IRS gets a copy so it’s important to make sure the withdrawals you’re reporting on your taxes match up.

Who Needs to File a 5498 Tax Form?

Your IRA custodian or trustee is required to submit a Form 5498 to the IRS on your behalf if you have a qualifying IRA transaction for the year. Again, that includes IRA contributions, IRA rollovers, recharacterizations, conversions, and required minimum distributions.

You don’t need to file this form with your tax return. However, you will need to report the appropriate information relating to IRA contributions you made, rollovers, RMDs, conversions, or recharacterizations on your tax return.

Different Kinds of 5498 Tax Forms

There’s more than one version of Form 5498 that you might receive, depending on what kind of accounts you’re funding during the year. In addition to the 5498 tax form for IRA contributions, you may also be issued either of the following:

•   Form 5498-ESA: This form is issued if you make contributions to a Coverdell Education Savings Account (ESA) on behalf of an eligible student. Distributions from a Coverdell ESA are reported on Form 1099-Q.

•   Form 5498-SA: This form 5498-SA is used to report contributions to Health Savings Accounts (HSAs), Archer Medical Savings Accounts (MSAs), and Medicare Advantage MSAs.

Form 5498 Due Date

The Form 5498 due date is generally May 31 of each year. So, for IRA contributions made in 2023, for instance, IRA trustees or custodians had until May 31, 2024 to send 5498 tax forms to the IRS.

You should also get a copy of the form, but if you don’t and you believe you should have, contact your IRA custodian or trustee to ask where it is. Remember, if you didn’t make any IRA contributions for the year or complete any other qualifying transactions, such as a recharacterization or rollover, you won’t get a Form 5498.

Entering a 5498 on a Tax Return

You don’t need to enter information from Form 5498 on your tax return. In fact, because of the timing when these forms are sent out, you should have already filed your return by the time you receive the 5498.

You will, however, need to enter your IRA contributions on your tax return. If you contributed to a traditional IRA, some or all of those contributions may be tax-deductible. Contributions to both traditional and Roth IRAs may qualify you for the Retirement Saver’s Credit, assuming that you’re within the accepted income threshold for your filing status.

You’ll also need to report contributions to SIMPLE IRAs and SEP IRAs on your tax return.

The Takeaway

Starting an IRA online can help you build wealth for retirement and potentially enjoy some tax breaks. A traditional IRA allows for tax-deductible contributions, while a Roth IRA allows you to take tax-free distributions in retirement. If you contribute to either type of IRA, or if you contribute to a SEP IRA or a SIMPLE IRA, you should get a Form 5498 each year. The form is informational only, and you are not required to file it with your taxes. Your IRA custodian will send a copy of the form to the IRS.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help build your nest egg with a SoFi IRA.

FAQ

Do I have to report Form 5498 on my tax return?

No, you do not have to include or report Form 5498 on your tax return. The 5498 tax form you receive from your IRA trustee or custodian is informational only. The IRA custodian is required to send the form to the IRS.

What is the purpose of Form 5498?

Form 5498 is used to report IRA contributions to the IRS. IRA custodians are required to send this information to the IRS on behalf of each account owner who makes IRA contributions. The form is purely informational for taxpayers.

Who must file Form 5498?

IRA custodians, not individual taxpayers, are required to file a 5498 tax form with the IRS. If you get a Form 5498 in the mail, that means a copy of the form has also been sent to the IRS on your behalf.

---

Photo credit: iStock/shih-wei

SoFi Invest®

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOIN0323008

Read more